On 1 January 2015, a new Franchising Code of Conduct (Code) came into effect. The Code is binding on all franchising participants and applies to franchise agreements entered into, renewed, extended or transferred on or after 1 October 1998.
The most significant change to the Code is that the Australian Competition and Consumer Commission (ACCC) can now issue infringement notices for penalties of up to $8,500 for non-compliance with the Code or seek a court order for penalties of up to $51,000 for a breach of certain provisions of the Code.
Other key changes include:
- A statutory obligation to act in good faith – there is now an obligation on both parties to act reasonably and honestly in their dealings, including during pre-contract negotiations. While the Code does not define the nature and extent of the obligation to act in good faith, acting honestly and not arbitrarily will be a key consideration. Importantly, acting in your own legitimate commercial interest will not amount to a failure to act in good faith.
- Pre-contract disclosure requirements – it is now necessary to provide prospective franchisees with an information sheet outlining the risks and rewards of franchising including as unexpected expenses, risk of insolvency, economic impacts and franchisor’s rights under the franchise agreement.
- Transparency requirements regarding marketing funds and online sales – franchisors are now required to disclose detailed information regarding availability of goods or services online as well as information regarding contributions and management of marketing or other cooperative funds. Franchisors also need to update franchisees on matters which are ‘materially relevant facts’ (i.e. facts likely to affect franchisee’s business) such as changes to ownership of the franchisor, certain court proceedings or judgements against the franchisor.
- Liability for franchisor’s costs in resolving disputes – agreements must not contain a clause requiring the franchisee to bear the franchisor’s costs in relation to settling a dispute. Such a clause in current agreements will have no effect.
- Reducing the enforceability of restraint of trade clauses – where an agreement expires in circumstances where the franchisee had sought to extend the agreement on substantially similar terms, a restraint of trade clause in the agreement, or associated document, will have no effect as against the franchisee.
While the ACCC has indicated a moratorium period on actions for non-compliance, its enforcement priorities under the new Code will include “failure to act in good faith, failure to provide a disclosure document, refusal to attend mediation, and the unlawful termination of a franchise agreement.”
If you have not implemented changes to your business to comply with the Code, you should do so immediately, including:
- ensuring that your franchise agreements comply with the new provisions of the Code;
- providing prospective franchisees with the required information sheet on the risks and rewards of franchising and other necessary disclosure documents; and
- undertaking any necessary compliance training to ensure you and your team are familiar with the Code.