The Government has now introduced the revised Franchising Code of Conduct. The revised Code applies to the conduct of franchisors, franchisees and potential franchisees on or after 1 January 2015. Significant changes include:
- an express obligation to act in good faith,
- new disclosure requirements, and
- release of post franchise agreement restraints in some situations.
As franchisors and franchisees should know, the ACCC now has the power to impose new civil penalties of up to 300 penalty units (currently $51,000) for breach. Franchisors and franchisees should now review their documents and conduct to ensure that they comply with the new Code. However:
- franchisors can continue using current forms of disclosure documents until 31 October 2015, but must update before that date to comply with the new disclosure requirements,
- the new Code will not apply to conduct after 1 January 2015 that is done in order to discharge an outstanding obligation under the old form of Code, and
- the new Code will not apply to conduct in relation to a franchise agreement entered into before 1 October 1998, and certain sections of the new Code will not apply to arrangements entered into during particular periods, but will apply once those arrangements are varied or transferred.
Revisions to Franchising Code
The updated Franchising Code of Conduct is largely similar to the discussion draft released earlier this year.1 The updated Code implements the recommendations of Mr Alan Wein’s independent review and introduces an obligation on franchisors and franchisee to act in good faith in relation to the franchise relationship, as discussed in our earlier articles.2
The new Code will not apply to conduct in relation to a franchise agreement entered into before 1 October 1998, There are some exceptions for franchise agreements entered into under forms of the Code that applied from 1 October 1998, but these exceptions will no longer apply once the agreements are varied or transferred
- For agreements entered into between 1 October 1998 to 1 March 2008 (when the last changes to the Code were made), the prohibition on requiring a franchisee to give a waiver of representations does not apply.
- For all agreements entered into from 1 October 1998 until 1 January 2015, the exceptions in application are the provisions of the Code that:
- introduce new requirements around how parties may agree arrangements in relation to the jurisdiction in which a dispute or mediation may be held, and the cost of such dispute or mediation, and
- make restraints of trade ineffective in particular circumstances.
There have been some additional changes made to the form of the Code since the discussion draft was released.
Extension of application of civil penalties
The additional changes to the Code since the discussion draft (breach of which may trigger civil penalties of up to 300 penalty units (currently $51,000) include:
- A franchisor may not update a disclosure document where one or no new franchise agreement was entered into during a year, and the franchisor does not intend to enter another franchise agreement in the following financial year, as set out in the discussion draft. The Code has been further amended to provide that if requested by a franchisee, a franchisor must still update the disclosure document.
- Rather than disclosure in the disclosure document, the new form of Code requires a franchisor to disclose within one month after execution, or occupation of relevant premises, details of incentives or financial benefits the franchisor or associate is entitled to receive in connection with a lease or agreement to lease, including the name of the business providing such benefit.
- If a disclosure document is updated (as required) within 4 months of a financial year, and a statement or declaration in relation to financial solvency, or financial reports then comes into existence, the franchisor must give to a proposed franchisee a copy of that document as soon as reasonably practicable and prior to the parties entering into a franchise agreement. This requirement commences in relation to the first financial year for a franchisor beginning on or after 1 January 2015.
Existing forms of disclosure documents may continue to be given up to 1 November 2015, but must be updated before then.
New record keeping obligations
The discussion draft flagged that franchisors would be subject to new record keeping provisions in relation to written documents given by franchisees, and documents supporting statements and claims made by franchisors in disclosure documents. The new Code now requires these to be kept for six years from creation.
Restraint of trade now also of no effect in ancillary agreements
The discussion draft provided that a post termination restraint of trade clause in a franchise agreement would have no effect in particular situations. The new Code has extended this to restraint of trade clauses contained in other documents incorporated into franchise agreements (either by reference or by attachment).
Franchisor cooling off right in relation to requests for consent to transfer
The new Code allows franchisors 14 days after giving consent (not deemed consent) to revoke consent to a transfer of the franchise agreement by a franchisee, in writing and by giving reasons. While the Code does not permit franchisors to do so unreasonably, it provides that it will not be unreasonable to revoke consent where consent is revoked for a reason for which consent may have been withheld.
Franchisors should now, if they have not already commenced doing so following the release of the discussion draft, look over their disclosure documents, disclosure systems and franchise agreements and review whether they comply with the new Code. Franchisees should consider whether they need to make changes to their systems to evidence that they are acting in good faith towards franchisors.