The Government has released for public consultation an exposure draft of amendments to the Franchising Code of Conduct.

On 2 April 2014, the Government published its “Future of Franchising” statement outlining the specific changes it will make to the Franchising Code of Conduct (Code). The Government also released exposure draft legislation to give effect to the proposed reforms. The proposed implementation date for the revised Code is 1 January 2015. Prior to that date, franchisors will need to update their disclosure document, review their franchise agreement and prepare information statements to provide to prospective  franchisees.

The exposure draft contemplates important reforms to the Code, including:

  • Introducing a statutory duty of good faith on franchisors and franchisees during their dealings with each other. Acting in good faith includes an obligation to act honestly and not arbitrarily and to co-operate to achieve the purpose of the franchise agreement. The obligation will apply in all dealings that the franchisor and franchisee will have with one another, including during negotiations, the term of the agreement, in resolving disputes and as part of renewal discussions. This obligation does not prevent a party to a franchise agreement from acting in its legitimate commercial interests.
  • Introducing civil pecuniary penalties. The ACCC can now seek civil penalties of up to $51,000 from the court for breaches of the Code. These penalties can be issued for offences such as not acting in good faith, not following the correct form of disclosure document, not giving the disclosure document 14 days before signing, not giving a copy

of the lease to the franchisee within 1 month of signing the lease, not giving a copy of the audit of the marketing fund to franchisees within 1 month,

not notifying a franchisee of whether a franchise will be renewed, not refunding money in the event a franchisee terminates during the cooling off

period, not giving required notices for breach, disclosing a former franchisee’s details contrary to its request and failing to attend mediation.

  • Increased enforcement powers of the ACCC. The ACCC can now issue infringement notices of up to $8,500 without seeking a court order, for breaches of civil penalty provisions of the Code. The ACCC will also be allowed to use its audit powers to obtain documents that the franchisor has relied upon to support statements made in the disclosure document.
  • Introduction of Information Statements. In addition to the existing disclosures required under the Code, franchisors must provide franchisees with an information statement in prescribed form containing an overview of the risks and rewards of franchising. This will include information on unforeseen capital expenditure, the importance of education and conducting due diligence and the prospect of franchisor failure.
  • Restrictions on forcing franchisees to undertake significant capital expenditure. Franchisors are prevented from imposing ‘significant capital expenditure’ on franchisees unless: the expenditure was disclosed in the disclosure document; or a majority of franchisees in a system agree to the expenditure; or the expense is considered necessary capital investment by the franchisor and can be justified by a statement which provides the rationale, costs and anticipated benefits associated with making the investment.
  • Restrictions on imposing restraints of trade on former franchisees. Franchisees may avoid restraint clauses in circumstances where the franchisor elects not to renew a franchise agreement but the franchisee was not in breach of the agreement and the franchisor did not genuinely compensate the franchisee.
  • Online Trading Disclosure. If the franchisor supplies goods or services online, the new form of disclosure document requires disclosure of the extent to which those goods or services may be supplied in the territory of the franchisee or made available via a third party’s website. Disclosure is also required in relation to the details of any profit sharing arrangements that apply in relation to goods or services made available online.

The Government has sought comments on technical aspects of implementing the legislation by 30 April 2014. It has expressly indicated that it has no intention to reconsider the underlying policy on which the legislation is based.