The federal government has released its much anticipated proposed amendments to the Franchising Code of Conduct (the Code).

The Minister for Small Business, the Hon Bruce Billson MP, also released a statement outlining the reforms, which are in response to the 2013 Wein Review of the Code. If the reforms proceed as proposed, the amendments to the Code will come into effect from 1 January 2015, and will apply to new franchise agreements entered into on or after 1 January and existing franchise agreements that are renewed on or after 1 January, subject to some limited exceptions.

Reform proposals generally

For the first time, financial penalties of up to $51,000 will be imposed for breaches of the Code. In addition to these penalties, parallel amendments in the Competition and Consumer Act will give the ACCC power to issue infringement notices up to $8,500 for breaches of the Code.

Further changes include: the introduction of an obligation to act in good faith, changes to disclosure requirements, removal of unnecessary red tape and reforms to achieve a better balance between franchisors and franchisees.

Penalties for breach

The proposed maximum penalty of $51,000 will apply to a number of breaches of the Code, including:

  • failing to provide a disclosure document;
  • failing to disclose materially relevant facts;
  • failing to act in good faith;
  • failing to indicate the franchisor’s intention to renew a franchise within the required timeframe; and
  • terminating a franchise otherwise than as permitted by the Code.

The ACCC will also be able to issue infringement notices, without having to seek orders from a court, of up to $8,500 for breaches of any civil penalty provisions in the Code.

Good faith obligation

The proposed amendments include a new obligation that would require both franchisors and franchisees to act in good faith towards each other in relation to the franchise agreement and the Code. This obligation will apply during negotiations, throughout the agreement, in dispute resolution and as part of renewal discussions. The parties will not be able to be limit or exclude the good faith obligation in the franchise agreement.

The Franchise Council of Australia (FCA) has voiced its concerns about the proposed good faith obligation. The FCA suggests that the new obligation will create unnecessary legal uncertainty and may lead to disruption in the franchise sector as lenders may not be able to determine the enforceability of a signed franchise agreement.

Clearer disclosure

In addition to the current disclosure document, franchisors will now be required to provide prospective franchisees with a short information statement that gives an overview of the risks and rewards of franchising. The statement (to be contained in the new Annexure 2 to the Code) must not exceed two pages and must be given to a prospective franchisee as soon as it becomes apparent that the franchisee is likely to enter the franchise agreement.

Importantly for many franchisors, further disclosure will also be required in relation to their online trading activities. Franchisors will have to disclose whether they, their associates, the franchisee or other franchisees are able to make goods available online and, if so, to what extent those goods will be available in the territory of the franchisee.

In an attempt to cut down the length of disclosure documents, the Code has been amended to remove the disclosure obligations in relation to summarising provisions of the franchise agreement. Additionally, master franchisors will no longer have to provide disclosure in relation to a sub-franchise agreement.

The short form disclosure document previously available for small franchise systems in Annexure 2 to the Code will also been removed.

Balance between franchisors and franchisees

The government has also proposed to make several changes to the Code to address the ongoing issue of imbalance between franchisors and franchisees. These include:

  • strengthening protections for franchisees against significant capital expenditure imposed by franchisors;
  • ensuring franchisors contribute to the system’s marketing funds in relation to franchises they themselves own;
  • preventing franchisors from requiring franchisees to conduct dispute resolution outside the state where the franchisee’s business is located and preventing either party from allocating their costs in dispute resolution to the other party; and
  • preventing franchisors from unreasonably imposing restraints of trade on former franchisees.

Sector response

Interested parties have until 30 April 2014 to make a submission to Treasury on the changes to the Code.
The new amendments will require franchisors to review and amend their franchise agreements and disclosure documents for compliance or face hefty penalties come 1 January 2015.