This month’s franchising update focuses on what documents should be kept by franchisors to both ensure compliance with their legal obligations and also to respond to any claims about the existence of unfair contract terms in standard form contracts when certain circumstances arise. Specifically, this franchise update will cover documents:
- required to be kept pursuant to the Franchising Code;
- that may be requested by the ACCC when franchises are issues with an audit notice; and
- that would be prudent to keep in anticipation of changes implemented by theTreasury Legislation Amendment (Small Business and Unfair Contract Terms) Bill2015 to extend the unfair contract term regime to standard form small business contracts in order to defend claims seeking to void unfair contract terms.
DOCUMENTS TO BE KEPT TO COMPLY WITH THEFRANCHISING CODE OF CONDUCT (FRANCHISING CODE).
Clause 19 of the Franchising Code contains requirements for franchisors to keep certain information and documents.
If the Franchising Code requires or allows a franchisee or prospective franchisee to give something to the franchisor in writing, the franchisor must keep this, or at least a copy of it.
These documents include:
- confirmation of receipt of disclosure document (cl 10(1));
- professional advice statement (cl 10(2));
- marketing fund audit votes (cl 15(2));
- request to transfer franchise to third party (and any additional information provided regarding the transfer) (cl 24(1) and (2));
- request for disclosure document (cl 16);
- notice of dispute (cl 38(1) or 40(1)); and
- request not to disclose former franchisee’s details (cl 32).
If a franchisee provides a document electronically the franchisor is still required to keep the document but it is up to the franchisor whether they keep an electronic or hard copy.
If a franchisor makes a statement or claim in their disclosure document and relies on a document to support the statement or claim then the franchisor must keep the document. As an example, if a franchisor provides a franchisee with summarised historical earnings figures as part of the disclosure document, they must keep the documents used to arrive at those figures.
The franchisor must keep the written information/document for at least 6 years after it is created.
DOCUMENTS TO BE KEPT BY FRANCHISORS FOR AN ACCC AUDIT
The ACCC has the power to issue ‘audit notices’ under section 51ADD of theCompetition and Consumer Act 2010 (Cth).
The explanatory memorandum for the Code explains that the purpose of these provisions is to allow the Australian Competition and Consumer Commission (ACCC) access to the necessary documents when conducting its audit and enforcement functions regarding the Franchising Code.
In recent years, the ACCC has intentionally targeted franchises to determine whether they have complied with the Franchising Code.
The ACCC has the power, when issuing an audit notice, to compel a franchisor to produce any documents that they would be required to produce and maintain under the Franchising Code. These documents include those listed above and:
- any documents that support claims made in a disclosure document (e.g. any if you provide a prospective franchisee with projected earnings for the franchised business, you must keep the documents that support those figures);
- marketing fund audit statements;
- copies of leases; and
- third party supply agreements disclosed in the disclosure document.
DOCUMENTS TO BE KEPT UNDER THE COMPETITION AND CONSUMER ACT UNFAIR CONTRACT TERM REGIME
In recent updates we have outlined the proposed changes introduced by the Treasury Legislation Amendment (Small Business and Unfair Contract Terms) Bill 2015, and its effect on small businesses – including, potentially, franchises.
Should the Bill pass, franchisors are encouraged to keep certain documents in order to defend claims seeking to void alleged unfair contract terms, particularly if the claim is advanced that the term is a reasonable term included in the legitimate business interest of the party seeking to enforce it.
While the Australian Consumer Law does not mandate any specific documents that should be kept, there are certain documents that would enable a franchise to better defend itself from unfair contract claims.
- disclosure documents and franchise agreements;
- documentation of any discussions held between the proposed franchisee and franchisor, especially any negotiations held or amendments made at the request of the contracting parties, copies of variations agreed to or amendments made; and
- a contract where the upfront price doesn’t exceed $100,000 or, if it has a duration of more than 12 months, $250,000;
- board minutes, proposal papers, legal advice obtained in respect of clauses identified as potentially being the subject of unfair contract term claims;
- procedure manuals, codes of practice or policies in respect of application of potentially unfair contract terms;