On Monday, 3 November 2014 the Federal Government released the final version of the new Franchising Code of Conduct, which will replace the old Franchising Code with effect from 1 January 2015. For a detailed analysis of all the features and application of the new Code, please see our previous legal update here.
The new Code includes transitional provisions meaning that it isn’t mandatory to update your franchise agreement and disclosure document by 1 January 2015. You can find some further detail on the transitional arrangements in our previous article.
However, whether or not you update your documents, some obligations under the new Code apply from 1 January 2015. We have summarised these below, together with some reasons for updating your documents sooner rather than later.
Practical steps you must take now
From 1 January 2015, you must start taking some practical steps, whether or not you elect to update your franchise agreement and disclosure document by 1 January 2015.
Some of these steps are set out below. It is important to be aware of the positive steps that you need to implement, given the new penalty provisions in the Code, as they could easily fall through the cracks:
- Marketing funds: franchisors are required to establish a separate bank account into which all marketing fund contributions are made. Franchisors must also contribute to the fund in respect of any corporate stores or outlets that they operate, on the same basis as franchisees (see clause 31 of the Code).
- Information statement: franchisors must provide an "Information Statement" to a prospective franchisee as soon as practicable after the prospective franchisee formally applies or expresses interest in a particular franchise, such as by completing an application form or paying a deposit. The Information Statement is to be in the form set out in the new Annexure 2 to the Code. See clause 11 of the Code.
- Record keeping obligations: the Code imposes new record keeping obligations on franchisors. These include requiring a franchisor to keep each document (or a copy) that it receives from a franchisee or prospective franchisee in accordance with the Code, and any document that supports a statement made in its disclosure document. See clause 19 of the Code.
- End of term notifications: if a franchisor is "extending" a franchise agreement, when giving an "end of term notice" it must include a statement advising the franchisee that it may request a disclosure document under clause 16 (see clause 18 of the Code).
- Site and territories: the franchisor is required to provide a copy of any lease or agreement to lease and details of any incentive or financial benefit that the franchisor or an associate of the franchisor is entitled to receive as a result of a lease or agreement to lease (see clauses 13 and 14 of the Code).
- Copy of financial statements: under clause 17 of the Code, a franchisor must provide to a prospective franchisee the franchisor's current financial or audit statement (if not attached to the current disclosure document), once prepared, as soon as practicable and before the franchisee enters into the franchise agreement.
A number of other requirements will be in force from 1 January 2015, and apply to the conduct of parties after this date. For example, the requirement that parties to a franchise agreement must act in good faith towards each other.
The benefits of updating now, rather than later
If you have a compliant disclosure document as 31 December 2014, you are not required under the Code to update it again on 1 January 2015. You in fact have until October 2015 to do this. However, there are a number of benefits to updating your disclosure document and template franchise agreement now.
From 1 January 2015, unless you specifically disclose certain practices, you may not be able to continue with them for new franchisees, or their continuation may be practically difficult. For example, under the new Code marketing funds may only be used to pay “legitimate marketing or advertising expenses”, the reasonable costs of administering the marketing fund, costs agreed to by franchisees, or costs disclosed under section 15.1(f) of the disclosure document. Some franchisors use the marketing fund to pay for activities beyond pure advertising or marketing, or to pay indirect costs such as employee salaries, overheads, or trade mark registration costs. The most straightforward way to continue such practices is to specifically disclose the use of funds for these purposes in the disclosure document.
Another key issue for some franchise systems is the capacity to enforce restraint of trade clauses at expiry of the term of the franchise agreement. Under the new Code, a restraint of trade clause in a franchise agreement entered into on or after 1 January 2015 will have no effect in circumstances where:
- a franchisee has requested, but not obtained, an extension of the term of the franchise agreement; and
- the franchisee is not entitled to compensation at the end of the term, or has requested but not been granted genuine compensation; and
- the franchisee has satisfied certain other criteria.
Many franchise agreements include a provision stating that no compensation is available to franchisees at the expiry of the agreement. If this clause remains in an agreement, executed on or after 1 January 2015, the restraint of trade clause is potentially unenforceable. Indeed a franchisee may even be able to orchestrate a situation where the restraints were not enforceable at the end of the term, even if a franchisor wanted to offer compensation. This scenario could be avoided by updating the restraint of trade provisions now to take account of the new Code’s requirements.
What we recommend
- We can assist you to develop a strategy for the review and update of your documents, taking into consideration the specific provisions of your agreement, and your intentions in relation to issues such as marketing funds and restraints. It may also be appropriate for you to start thinking about the implications of the revised good faith requirements and the proposed introduction of a prohibition on unfair contract terms that may be enacted in late 2015.
- We can assist you to update your franchise agreement to comply with the Code by 1 January 2015, or early in 2015. It is possible to do this without updating your disclosure document if you do not make material changes to the franchise agreement, but some changes may be advisable.
- Consider updating your disclosure document. It may be that, after seeking advice and considering the application of the new Code to your business, that you wish to delay this until later in 2015.