In August 2013 we took you through the Federal Government’s response to the Wein Review of the Franchising Code of Conduct. While the Government accepted most of the review’s recommendations, it was still unclear how the amendments would be implemented. Now we know.
On 2 April 2014, the Government released exposure drafts of the amended Code and of the relevant provisions of the Competition and Consumer Act (CCA) for a 3 week public consultation.1 The amendments aim to:
- ensure franchise participants act in good faith when dealing and negotiating with each other;
- introduce infringement notices and penalties for breaches of certain Code provisions;
- prevent franchisors unreasonably restraining franchisees after the franchise relationship ends;
- recalibrate the imbalance in franchise agreements between franchisors and franchisees; and
- improve disclosure procedures, including by removing unnecessary disclosure double-ups and other red tape.
The changes will apply to franchise agreements entered into on or after 1 January 2015 or renewed on or after that date. This means that, while existing franchisors do have a grace period, they should nevertheless ensure that their disclosure materials and franchise agreements are updated to comply with the new requirements for any renewals set to occur on or after 1 January 2015.
If they are enacted in their current form, the new rules mean that franchisors should:
- review their franchise agreements to ensure that the new requirements regarding non-renewal of agreements and dispute resolution are adequately addressed;
- amend their disclosure documents to ensure they comply with the new content requirements; and
- ensure they have systems in place to distribute the new mandatory information statement to franchisees.
Under the amended Code, each party to a franchise agreement will be obliged to act in good faith in its
dealings with other parties. The obligation also extends to parties negotiating entry into a franchise agreement.
“Good faith” will not be exhaustively defined, although the Code does give the concept some colour: parties must “act honestly and not arbitrarily”, and “cooperate to achieve the purposes of the franchise agreement”. Importantly, the good faith obligation cannot be limited or excluded by the franchise agreement.
Infringement notices and penalties
The CCA amendments give the Australian Competition and Consumer Commission power to issue infringement notices of up to $8,500 for certain Code breaches (for example, a breach of the good faith obligation or failure to provide a disclosure document) without having to seek a court order. The ACCC can also seek penalties of up to
$51,000 against a party in court.
Franchisors will not be able to enforce a restraint of trade clause against franchisees once a franchise agreement ends if:
- the franchisee wants to renew the agreement and has not breached the agreement or infringed the franchisor’s intellectual property;
- the franchisor does not agree to the renewal; and
- the franchisee is not genuinely compensated for the non-renewal, or the agreement does not allow the franchisee to claim compensation for non-renewal.
Of course, this should not prevent a franchisor from prohibiting the franchisee using the franchisor’s intellectual property or confidential information after the expiry/non-renewal of the franchise agreement.
In “The Future of Franchising” statement which accompanies the Government’s exposure drafts, the Government referred to “consistent anecdotal evidence of questionable behaviours in franchising”. One reason suggested for this questionable behaviour is the power imbalance between franchisors and franchisees, stemming from franchisors’ often superior economic position. Several Code amendments try to address this perceived imbalance:
Franchisors will be prevented from imposing significant capital expenditure on franchisees unless:
it is disclosed in the disclosure document given to franchisees before entering, renewing or extending a franchise agreement;
the franchisee agrees or the majority of franchisees in the franchise agree; or
the franchisor considers it necessary and is able to justify this in a statement setting out the rationale, anticipated outcomes and benefits of the expenditure.
This makes it all the more important for franchisors to ensure that their disclosure documents deal adequately with future capital expenditure requirements. Combined with the more onerous requirements regarding non- renewal of franchise agreements (see above), inadequate disclosure with regard to future capital expenditure requirements could leave franchisors in a very difficult position.
To the extent that a franchisor operates a unit of their franchised business, the franchisor will be obliged to contribute marketing and advertising fees to the marketing fund on the same basis as franchisees.
Franchisors can no longer require franchisees to bear the costs of dispute resolution under the franchise agreement, or require franchisees to conduct dispute resolution outside the state in which the franchisee operates its franchised business.
Franchisors are not permitted to interfere with prospective franchisees’ freedom to associate with other franchisees (or prospective franchisees). This ensures prospective franchisees have the opportunity to obtain more information about the franchise before making a decision to sign up to the business.
The Code will no longer allow short-form disclosure. Franchisors will be obliged to provide all prospective franchisees with a full disclosure document which complies with Annexure 1 of the Code.
The amendments remove several of the disclosure obligations that effectively required disclosure documents to contain summaries of parts of the franchise agreement. In our view, this is a positive step from all parties’ perspectives as it should reduce the length and complexity of disclosure documents, without depriving franchisees of relevant information.
It does mean, however, that franchisors will need to revisit their disclosure documents in detail to ensure that they meet the amended requirements of the Code.
Master franchisors will be exempt from the disclosure requirements in relation to sub-franchisees, thereby avoiding unnecessary duplication of disclosure materials (sub-franchisees receive a disclosure document from their sub-franchisors anyway).
In addition, franchisors will have to give prospective franchisees a standard form 2-page information statement – the content of which is set out in the Code -
which provides general background about franchising and the risks associated with being a franchisee. A franchisor must provide the statement “as soon as practicable after it becomes apparent to the franchisor that a franchise agreement will be, or is likely to be, entered into by the prospective franchisee”. In practice, this is likely to mean that the information statement must be given at some point earlier than the disclosure document is given.
The Code and CCA amendments are good news for franchisees. In general, the changes strengthen and protect franchisees’ position vis-à-vis franchisors. Franchisors will need to carefully consider the adequacy of their disclosure and arrangements for compensating franchisees who contribute to the franchise, lest they find themselves unable to require franchisees to outlay funds on a new or updated fit-out or to prevent former franchisees from competing with the franchise. All parties – franchisees and franchisors alike – will need to be mindful of their continuing obligation to act and negotiate in good faith. Again, however, in practice we see this as an amendment more likely to favour franchisees than franchisors.
Submissions on the Government’s draft amendments close 30 April 2014. We’ll be making our submissions – why not make yours?