Without much fanfare last week Australia’s new, but long awaited, Franchising Code of Conduct was published. Since it is to take effect on 1 January 2015, Australian franchise systems need to work fast to make sure that their documents and processes are in order before the new year.
The current code will be repealed on 31 December 2014 and the new Code will apply to both new and existing franchise agreements.
There are a few transitional exceptions for some provisions of the new Code so that some of the franchise agreement clauses prohibited by the new Code will continue to be effective in current franchise agreements (or at least until those agreements are transferred or varied). Provisions which require disputes to be heard in another state or territory to where the franchisee’s business is located or which allow the franchisor to recover costs of settling a dispute from a franchisee will be prohibited and void in any new franchise agreements. However these clauses will still be effective if included in an agreement signed before 1 January 2015.
The other main transitional concession is that franchisors can continue to use their current disclosure document after 1 January, potentially up to 31 October 2015.
However the new Code has a number of new requirements that take effect straight away such as with respect to the operation of marketing funds and what the funds can be spent on. Prospective franchisees must receive a new Information Statement in particular format and there are now strict record keeping requirements for franchisors. These matters all take effect from 1 January 2015.
It is important also for franchisors to realise that the new Code has new civil pecuniary penalty clauses (24 in total) for breaches of the new Code including failing to act in good faith, failing to repay money to franchisees who terminate in the cooling off period, terminating without the proper notice and other matters. These penalties will be able to be applied to conduct from 1 January whether or not the franchisee in question entered into a franchise agreement before or after 1 January.
The penalties are potentially quite significant especially where there are multiple breaches. For each breach of a civil pecuniary penalty provision the ACCC has the power to either:
- Issue an infringement notice - 50 penalty units for a company (i.e. currently a fine of $8,500) / 10 penalty units for an individual ($1,700); or
- Seek a court order for a civil pecuniary penalty of up to 300 penalty units - $51,000.
Therefore while there is an ability to keep using the old form of disclosure document into 2015, the fact is that franchisors will need to immediately review their template franchise agreement for any prohibited terms, review their procedures and the franchise application process, make sure their marketing fund is compliant with the new requirements and their record keeping is watertight.
With the new penalty regime taking effect from 1 January franchise systems must start this process straight away if they do not want to risk a penalty or fine from the ACCC.