The Federal Government yesterday released the amendments to the Franchising Code of Conduct (Code). These changes follow from the Joint Committee report into improving conduct in Australian franchising, various expert panels and significant industry consultation. The changes will take effect from 1 July 2010.
The amended Code imposes additional disclosure obligations on franchisors which will benefit potential and current franchisees. The amendments, together with the current disclosure requirements in the Code, are important to ensure that franchisees are well informed before making significant financial investment into a franchise system which in turn should reduce franchising disputes. However, no amount of changes to the Code or additional disclosure requirements for franchisors will guarantee that franchisees will achieve business success.
In addition to a number of minor amendments aimed at increasing consistency and formatting within the Code, there are some significant changes that franchisors need to be aware of including:
- A requirement to inform franchisees, at least six months prior to the end of the franchise agreement, of the franchisor's decision either to renew or not to renew a franchise agreement (except in the case of franchise agreements within a term of less than six months, which require at least one months notice).
- A requirement to disclose all payments that a franchisee may be required to make to third parties, where the expenditure is within the knowledge or control of, or is reasonably foreseeable by, the franchisor (currently a franchisor is only required to disclose payments to, or collected by, the franchisor or an associate of the franchisor).
- Franchisors must disclose whether the franchisor will require the franchisee to undertake any unforeseen significant capital expenditure that was not disclosed by the franchisor before the franchisee entered into the franchise agreement.
- A requirement to disclose the circumstances in which the franchise has unilaterally varied a franchise agreement in the last three financial years (however there is no requirement to disclose unilateral variations that occurred before 1 July 2010) and the circumstances in which the franchise agreement may be unilaterally varied in the future.
- Franchisors must disclose details of the process that will apply in determining arrangements to apply at the end of the franchise agreement.
- A requirement to disclose whether the franchisor will amend the franchise agreement on or before transfer or novation of the franchise.
- Increased disclosure of confidentiality requirements.
The Government has not included a new statutory good faith obligation, instead clarifying that nothing in the Code limits any obligation imposed by the common law on the parties to a franchising agreement to act in good faith.
Minister for Small Business Dr Craig Emerson said that in addition to the amendments, the ACCC had been given new powers to conduct random audits of franchisors. There was no mention of the short form plain English guide proposed in previous announcements.
Franchisors must now amend their franchise agreement and disclosure documents to reflect the Government's changes. The changes will also impact on the business practices of franchisors including the process of updating the operations manual and contemplating store upgrades.