NEWS

The recommendation on amendments to the Franchise Code of Conduct

The Franchise Code of Conduct (“the Code”) formed under the Competition and Consumer Act 2010 (Cth) (“the CCA”), regulates the conduct of franchisors and franchisees in the Australian business sector.

In July 2013, the Government undertook to review the Code and consider its efficacy given that a number of franchising contracts have since run their full course.

The review involved consideration of the following areas:

  • disclosure and enforcement under the Code;
  • issues concerning the failure of a franchise;
  • transparency, good faith and confidentiality in franchising;
  • end of term arrangements, including restraint of trade; and
  • dispute resolution under the Code.

Following the review, 18 recommended amendments to the Code were made with the Government accepting all recommendations either in whole, in principle or in part. The main recommendations and areas which expect to be the subject of future legislative reform are summarised below.

Disclosure

Amendments to the disclosure provisions under the Code are expected to include:

  • ensuring that franchisees are entitled to a copy of the franchisor’s disclosure document at the time they are provided with a notice of renewal or extension of the franchise agreement;
  • prescribing a new and alternative short-form disclosure regime for foreign and master franchisors with a view to reducing ongoing compliance costs;
  • phasing out the current short-form disclosure documents;
  • providing additional disclosure of rights of participants to conduct online sales; and
  • requiring franchisors to provide a risk statement, separate to the disclosure document, at the earliest possible opportunity in respect of the first grant of a franchise.
Enforcement

Compliance with the Code is governed and enforced by the Australian Competition and Consumer Commission (“ACCC”).

Amendments to the enforcement provisions under the Code are expected to include the granting of powers to the ACCC to enable it to:

  • seek pecuniary penalties for breaches of the Code;
  • issue infringement notices for breaches of the Code; and
  • investigate and audit a party’s compliance with all aspects of the Code.
Franchisor Failure

Recommendations were also made concerning amendments to the Code that would afford certain rights to the parties in circumstances where the franchisor becomes insolvent. Such recommendations sought to enable the parties the right to terminate the franchise agreement, as well as the ability for franchisees to become unsecured creditors of the franchisor in respect of amounts referable to the unexpired portion of the franchise agreement.

However, due to the inherent complexity of the proposed reforms and their tax implications, it is expected that further consultation will be made before any significant amendments are implemented.

 

Transparency

Amendments to the Code seeking to improve the transparency of financial information disclosed between the parties in respect of common costs incurred in the franchising business have been recommended and include:

  • incorporating common examples of potential unforseen capital expenses into the generic risk statement to be implemented as part of the disclosure amendments (discussed earlier); and
  • implementing a new and more transparent approach to the administration of marketing costs and other legitimate expenses relating to the advertising of the franchise.
Good Faith

The following recommended amendments to the Code have attracted a lot of attention:

  • the introduction of an express duty to act in good faith (to be imposed on the franchisor, franchisee and their respective agents);
  • ensuring that the duty to act in good faith will extend to the negotiation of the franchise agreement, the performance of obligations under the financial agreement and the Code, and to the resolution of any disputes;
  • codifying the common law relating to good faith into the Code; and
  • ensuring that the duty cannot be limited or excluded from operation by any provision of the franchise agreement.

If the proposed amendments are adopted, it has been acknowledged that education will need to be administered across the industry in order to ensure that the relevant stakeholders understand what the duty of good faith would require of them.

Confidentiality

It has been recommended that a franchisor be prohibited from interfering with a prospective franchisee’s right to discuss the franchise system with current and former franchisees, subject to any written request being made by the former franchisee requesting their exclusion from such disclosure.

End of term arrangements

The review into ‘end of term arrangements’ included consideration of the rights of franchisees nearing the end of their contracts and the recognition that should be afforded to franchisees for contributions made to the building of the franchise.

In this regard, recommendations included:

  • providing greater clarity to parties when seeking a transfer or novation of the franchise agreement; and
  • enabling greater balance between the rights of franchisees and the franchisors at the end of the term of the franchise agreement, by ensuring that any restraint of trade clauses in the franchise agreement that prevent the franchisee from carrying on a similar business in competition with the franchisor, will not be enforceable if certain conditions have been satisfied.
Dispute Resolution

Free and low cost dispute resolution services have already been provided under the Code through the establishment of the Office of the Franchising Mediation Advisor (“OFMA”). OFMA’s services are available to franchisees and franchisors who want to resolve any disputes early and inexpensively, however, using OFMA is not mandatory under the Code.

In the circumstances, recommended amendments to the dispute resolution provisions under the Code include:

  • ensuring the application of the Code extends to participation in any alternative dispute resolution process (i.e. including non-OFMA mediations);
  • ensuring that parties abide by appropriate behaviours and act in a re-conciliatory manner if mediating under the Code;
  • preventing a franchisor from attributing the costs of dispute resolution to a franchisee in a franchise agreement; and
  • preserving the parties ability to negotiate a suitable forum for their disputes to be heard.
Conclusion

The review and proposed amendments of the Code have highlighted the importance of conducting due diligence and obtaining suitable legal advice before entering into a franchise agreement.

It is expected that the amendments foreshadowed above will only apply to franchise agreements entered into after the legislative changes are made.

Going forward, however, the Government has communicated a commitment to continue monitoring the regulation of the franchising industry and recognises that the Code will likely evolve over time to meet the changing needs of the industry.

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