Franchise agreements and disclosure documents will need to be reviewed and substantially updated as a result of the finalised amendments to the Competition and Consumer (Industry Codes – Franchising) Regulation 2014 (the New Code), which will commence on 1 January 2015.
In April 2014 we reported on the draft amendments to the Code, which are largely similar to those in the final version. This article will provide a summary of the key changes introduced by the New Code and the impact they will have on both franchisors and franchisees.
What changes have been introduced by the New Code?
With the objective to strengthen its effectiveness and reduce red tape, the New Code has introduced a range of amendments, the most significant including:
- the introduction of civil penalties up to $51,000 per breach and infringement notices resulting in liability of up to $8,500 per breach;
- new statutory good faith obligations;
- requirements to provide a new franchise information statement;
- changes to disclosure obligations;
- removed requirements to disclose some matters relating to master franchises;
- new ongoing requirements to disclose materially relevant facts;
- restrictions on the imposition of significant capital expenditure requirements;
- new requirements to maintain separate accounts for marketing fees and advertising fees;
- new dispute resolution provisions;
- updated provisions for termination under ‘special circumstances’;
- restrictions on restraints of trade;
- new record keeping obligations;
- further disclosure of former franchisee details; and
- new rules relating to the jurisdiction of agreements.
In October 2014 we reported on the amendments to the Competition and Consumer Act 2010 that will result in the Australian Competition and Consumer Commission (ACCC) receiving increased powers from 1 January 2015 to enforce harsher penalties on parties to franchise agreements.
- Civil penalties – The breach of a number of provisions in the New Code will trigger civil penalties of up to $51,000. These provisions relate to the obligation to act in good faith, a range of disclosure obligations and the provision of certain documents, termination in certain circumstances and the dispute resolution process.
- Infringement notices – Where a civil penalty provision has been breached, the ACCC can issue an infringement notice with a fine of up to $8,500.
Statutory obligation of good faith
The New Code introduces a statutory obligation on the parties to a franchise agreement to act in good faith. The obligation commences when parties propose to enter into a franchise agreement (including negotiations). ‘Good faith’ is not defined in the New Code, but rather relies on the common law concept. In determining whether a party has acted in good faith, the New Code provides that a court may have regard to whether the party has acted honestly and not arbitrarily, and whether they have cooperated to achieve the purposes of the franchise agreement.
It is not possible for the parties to contract out of the obligation to act in good faith and a party may be liable for a civil penalty if it breaches this obligation. Parties to franchise agreements are subject to this good faith obligation from 1 January 2015.
While some burdensome disclosure requirements have been removed (such as summarising many of the provisions of the franchise agreement and the requirement that master franchisors provide a disclosure document to sub-franchisees), a number of additional administrative and procedural disclosure requirements have been introduced.
- Information statement – Franchisors will have to provide prospective franchisees with an information sheet (set out in the New Code) that outlines the general risks and rewards of franchising as soon as practicable after the prospective franchisee applies to become, or expresses interest in becoming, a franchisee.
- Disclosure obligations – The New Code prescribes one new form of disclosure document to be used by all franchisors. Franchisors will need to cease using their old format disclosure document, and create a new format document that complies with the New Code.
- Ongoing requirement to disclose materially relevant facts – The New Code requires franchisors to disclose certain material matters if they arise and have not been mentioned previously in a disclosure document. In addition to disclosing information regarding events affecting the franchisor, a number of these provisions have been expanded to include events affecting ‘associates’ and ‘associate directors’. These disclosures must occur within 14 days of the franchisor becoming aware of the event.
- Online activities – Further details of the franchisor’s, or any of its associates’, online trading activities need to be set out in the disclosure document, including the impact of these activities on the franchisee territory and any profit sharing arrangements that apply to goods or services made available online that would affect the franchisee.
- ‘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.
When will they take effect?
The New Code will come into force from 1 January 2015 and will apply to conduct after 1 January 2015 for parties to franchise agreements entered into on or after 1 October 1998.
Transitional measures will be in place for some provisions of the New Code so that franchise agreement clauses prohibited by the New Code will continue to be effective in the current franchise arrangement (e.g. restraint of trade, capital expenditure and dispute resolution clauses). These exceptions will not apply once the current agreement is varied or transferred.
Existing franchisors will have until 31 October 2015 to update disclosure documents.
It is important for franchisors to be aware that the new civil penalties can be imposed on conduct from 1 January 2015 regardless of whether the franchisee in question entered into the franchise agreement before or after 1 January 2015.
What does this mean for you?
As a franchisee, the New Code primarily contains benefits for you by strengthening your rights. It should also mean that you are kept more informed.
From 1 January 2015 you will also have to act in good faith in your dealings with your franchisor.
With the introduction of the New Code, franchisors will face increased administrative duties and penalties.
First, information statements will need to be provided to any prospective franchisees that contact you.
Franchise agreements will need to be reviewed to make any necessary amendments and your disclosure documents will also need to be changed to the form specified by the New Code.
What do you need to do?
As a franchisor, it is critical that you have a document updating strategy. The updating does not need to start immediately but you must have a plan to be compliant by 1 January 2015 (for new franchise agreements) and 1 November 2015 (for disclosure documents).