New changes to the Franchising Code of Conduct

On Friday 4 June, the Minister for Small Business – Craig Emerson – announced the Australian Government’s official response to recent reports into the franchising sector.

The changes to the Franchising Code of Conduct, which apply to all franchise agreements entered into on or after 1 July 2010, are intended to provide greater protection and certainty to franchisees in their dealings with franchisors, according to Mr Emerson.

Whilst an updated version of the Code incorporating all the amendments is yet to be made available by the Government, the Amendment Regulations dated 3 June 2010, identifying all changes which are to be made, have been released.

What does this mean for Franchisors?

The effect of the Amendment Regulations is that Franchisors will now have less than a month to familiarise themselves with the changes and ensure their documentation and processes comply with the updated Code.

The key changes which Franchisors will be required to incorporate into their Disclosure Documents include the following:

• The prescribed statement to appear on the front page of all Disclosure Documents must include an express warning that the franchise or franchisor could fail
• Franchisors will be required to provide details of all payments that are within the Franchisor’s knowledge or control, or which are reasonably foreseeable by the Franchisor, which franchisees must pay to persons other than the Franchisor or its associates
• Franchisors must disclose details of any “unforeseen significant capital expenditure” which franchisees will be required to undertake
• Franchisors will be required to disclose details of the process to apply at the end of a franchise agreement, including:
  • whether the franchisee will have rights to renew or enter a new franchise agreement and what processes the Franchisor will use to determine whether to grant the renewal or new franchise agreement
  • whether the franchisee will have rights to an exit payment and how this will be determined
  • what arrangements will be made regarding unsold stock and assets
  • whether the franchisee will have the right to sell the franchised business and whether the Franchisor will have a first right of refusal to purchase it
  • whether the Franchisor will require any amendment to the franchise agreement upon its transfer or novation
• Franchisors will be required to notify franchisees whether or not they intend to renew the franchise agreement at least 6 months before the agreement expires (or at least one month prior if the franchise agreement is for a term less than 6 months).
• Franchisors will be required to disclose details of all unilateral variations made to franchise agreements in the preceding 3 financial years (this provision will apply in stages between 1 July 2010 and 1 July 2013) and must identify the circumstances under which a franchise agreement may be unilaterally varied by the Franchisor in future
• Details of any confidentiality obligations imposed on franchisees will be disclosed.

Other changes to the Code include the insertion of additional definitions, a provision confirming that the Code does not limit existing legal obligations upon the franchising parties to act in good faith, and a list of behaviours which constitute evidence that a party to a dispute has attempted to resolve the dispute in a reconciliatory manner.

In addition to the Code changes, the ACCC has been granted new powers to conduct random compliance audits of Franchisors.

The updated Code will create far more onerous obligations for Franchisors than initially anticipated. As a result of the changes, Franchisors will need to make comprehensive amendments to their Disclosure Document, and will be required to consider and provide additional, franchise specific, information each time a Disclosure Document is issued to a prospective franchisee.

For further information please contact one of our Franchising lawyers.

Author: Esther Gutnick