On 2 April 2014, the Commonwealth Government released for public comment a draft of the revised Franchising Code of Conduct ('the Code') and a bill to amend the relevant franchising provisions of theCompetition and Consumer Act 2010 ('the Act').
The changes are significant. The proposed new franchise laws bolster the rights of franchisees and, while some “red tape” requirements have been removed, the additional disclosure requirements will likely increase the compliance burden on franchisors. In addition, if the new laws are enacted, franchisors and franchisees will also be potentially liable for civil penalties of up to $51,000 if they breach certain sections of the Code.
It is currently proposed that the new franchising laws will take effect from 1 January 2015. The deadline for submission of comments on the draft legislation is 30 April 2014.
GOVERNMENT IMPLEMENTS REVIEW FINDINGS
The revised Code and the proposed amendments to the Act follow on from the 2013 review of the Code conducted by Mr Alan Wein (“the review”). Click here to see Corrs’ previous summary of the review recommendations.
The Government has stated that the draft legislation broadly addresses the issues identified in the review. Given the extensive consultation that occurred during the review, the Government has also expressed the view that the impacts of the reforms have been thoroughly explored and it is now only seeking comments on the technical details of the draft laws. The Government does not propose to reconsider the policy underpinning the reforms which the new legislation implements.
MORE OR LESS RED TAPE?
The Government has stated that it has made a concerted effort to reduce the compliance burden posed by the Code. However, based on our preliminary review of the proposed legislation, it appears that only relatively minor amendments have been made to reduce the “red tape” associated with conducting a franchised business in Australia.
As franchisors will be well aware, considerable time and resources are spent producing up to date disclosure documentation and complying with a number of procedural requirements set out in the Code. The majority of these requirements remain under the revised Code, although the following welcome changes have been proposed:
- No need to reissue disclosure documents – franchisors will not need to reissue disclosure documents in order to comply with their disclosure obligations if minor changes (or changes to give effect to a franchisee’s request) are made to the franchise agreement after the franchisor has first issued the disclosure documents.
- Removal of summary of obligations in disclosure document – franchisors no longer need to summarise the franchisor’s and franchisee’s obligations under the franchise agreement.
- Removal of double disclosure requirement – master franchisors do not need to comply with disclosure requirements in respect of sub-franchisees (as such disclosure is already made to the sub-franchisees by the relevant sub-franchisor).
- Documentation and signatures can be given electronically – there is express recognition in the Code that any requirements under the Code to provide notices and documents in writing (including any requirements to provide signed documents) can be complied with electronically unless the other party has advised otherwise in writing (that is, the default position is that electronic provision of documentation and signatures is acceptable).
However, the following additional requirements are proposed to be introduced which increase the regulatory burden on franchisors:
- Information Statement – franchisors must provide prospective franchisees with an information sheet (set out in the Code) which outlines the risks and rewards of franchising.
- Online activities – further details of the franchisor’s (or any of its associates’) online trading activities need to be set out in the franchise disclosure document, including the impact of such activities on the franchisee territory and any profit sharing arrangements that apply to goods or services made available online. Also, if the franchisee is permitted itself to sell goods or services online, details of:
- whether the franchisee must sell goods or services sold by the franchisor (and the applicable terms and conditions of doing so);
- the extent to which such online sales may be supplied outside the territory of the franchisee; and
- any third party websites that such goods or services can be sold through and the applicable terms and conditions.
- Marketing – franchisors must provide further disclosure on the types of expenses marketing funds are being used for and must maintain a separate bank account for receipt of the marketing and advertising fees contributed by franchisees.
- Record keeping – if the new Code requires or allows a franchisee to give something to a franchisor in writing, the franchisor must retain it (or a copy of it). Also, if a franchisor makes a statement or claim in a disclosure document and relies on a document to support that statement or claim, the franchisor must keep that supporting document.
- Extensive details of associates must be disclosed – in addition to outlining each corporate associate of the franchisor (which is already currently required by the Code), the disclosure document will also need to include:
- a description of the relationship with the corporate associate and the relevance of the relationship to the franchise system and franchise;
- details of current proceedings and specific previous proceedings and offences relating to associates (including directors of any corporate associates); and
- the number of businesses similar to the franchised business which are owned or operated in Australia by an associate of the franchisor.
- No renewal statement – if the franchisee does not have the option to renew the franchise agreement or extend the term of the franchise agreement, the disclosure document must include a prescribed statement intended to alert the franchisee to this risk.
Franchisors will need to make a number of changes to their disclosure documents to take account of these new requirements.
RIGHTS OF FRANCHISEES TO BE BOLSTERED
The amended Code bolsters the rights of franchisees in a number of significant respects, including as follows:
- Restraints on former franchisees not enforceable in certain circumstances – a restraint of trade clause in a franchise agreement (e.g. an obligation on the franchisee to not conduct a similar business following termination of the agreement for a certain duration and in a certain territorial location) will not be effective if:
- the franchisee had sought to renew the agreement on substantially the same terms and was not in breach of the agreement;
- the franchisor does not renew the agreement; and
- either: (1) the agreement did not allow the franchisee to claim compensation in the event that it was not renewed; OR (2) the franchisee claimed compensation for non renewal but it was merely a nominal amount and did not genuinely compensate the franchisee.
Since it is common for franchise agreements to prohibit the franchisee from claiming compensation at the end of the term, many restraints are likely to be unenforceable.
- Capital expenditure – subject to a few exceptions (such as where it is disclosed in the disclosure document or agreed by a majority of the franchisees), a franchisor must not require a franchisee to undertake significant capital expenditure during the term of a franchise agreement. Franchisors will not be able to require significant capital expenditure (e.g. renovations to premises) without careful planning.
- Marketing contribution by franchisors – if a franchisor operates one or more units of a franchised business, the franchisor must pay marketing fees on behalf of each unit on the same basis as other franchisees.
- Disputes – franchisors cannot include a clause which attributes the cost of dispute resolution to the franchisees, and franchisors cannot require franchisees to conduct dispute resolution outside the State where their franchised business is located (unless otherwise agreed at the time of the dispute).
OTHER KEY CHANGES
Some of the other key proposed changes to the franchising laws are as follows:
- Obligation of good faith – the Code introduces an express obligation on parties to a franchise agreement to act towards another party with good faith. Rather than incorporating the common law definition of “good faith”, the Code includes a statutory definition of good faith which (in summary) requires the parties to act honestly and not arbitrarily, and to cooperate to achieve the purposes of the franchise agreement in respect of any matters arising in relation to the franchise agreement and the Code. The inclusion of a statutory definition of good faith introduces a further level of uncertainty for franchise participants as it is not apparent how this good faith requirement will be construed by the courts.
Further, parties may be liable for civil penalties if they fail to comply with the good faith obligation in the Code.
However, there is express recognition in the Code that:
- the obligation to act in good faith does not prevent a party from acting in accordance with their legitimate commercial interests; and
- if a franchise agreement does not include a clause allowing the franchisee to renew the franchise, this does not mean that the franchisor has not acted in good faith in negotiating the agreement.
- New powers for the ACCC to seek pecuniary penalties and issue infringement notices –a number of civil penalty provisions have been included in the Code and the ACCC will be able to apply to a court to seek pecuniary penalties for breaches of those civil penalty provisions (the amount payable for a breach can be up to 300 penalty units (which is $51,000 at the time of writing)). In addition, the ACCC will have the power to issue infringement notices (which are akin to fines) for lower amounts of up to $8,500 for breaches of those civil penalty provisions. If a person pays the amount set out in an infringement notice, no proceedings may be brought against them in relation to the alleged contravention of the Code. If, however, a person does not pay the amount set out in the infringement notice, it takes the risk that the ACCC may seek to have the matter heard in court which would potentially expose the alleged wrongdoer to the higher civil penalty amounts.
- Removal of short form disclosure document – there will no longer be a short form disclosure document option that can be used by franchisors for lower value franchised businesses.