Timing and application
With effect from 1 January 2015, the current Franchising Code of Conduct (1998 Code) will be repealed, and the New Code will apply to all franchise agreements. Subject to some limited exceptions, this will include franchise agreements entered into prior to 1 January 2015. Franchise agreements entered into prior to 1 October 1998 are exempted from compliance with the New Code altogether.
The New Code contains a transitional provision that specifies that a franchisor will not need to update its Disclosure Document until 31 October 2015. Thereafter, franchisors must update their disclosure document for the first time under clause 8(6) in respect of the financial year commencing on or after 1 January 2015 (e.g. from 1 May 2016 for franchisors with a 31 December year end, or 1 October 2016 for franchisors with a 30 June year end).
Increased penalties and enforcement
Additionally, with the introduction of significant financial penalties, businesses currently operating ‘licence’ or ‘distribution’ networks will need to carefully consider if they are in fact entering into ‘franchise agreements’ within the meaning of the New Code.
All franchisors will need to understand the effect of the New Code on their networks and adjust their franchise documentation and practices accordingly. This is especially important given the enhanced enforcement powers of the Australian Competition and Consumer Commission (ACCC) to deal with breaches of the New Code.
Significant changes to the New Code
Australia’s New Code has major implications for all franchises. Significant changes include:
1. Civil Penalties: Potential financial penalties of up to $51,000 per breach may apply
2. Infringement Notices: The ACCC can enforce civil penalty provisions by issuing an ‘infringement notice’ (rather than enforcing through the Courts) for breaches, triggering liability of up to $8,500 per breach.
3. Information Statement: Franchisors must provide a generic ‘Information Statement’, to a prospective franchisee as soon as practicable after the prospective franchisee ‘formally applies or expresses an interest in acquiring a franchised business’.
4. Good faith: The New Code introduces a statutory obligation to act in good faith. Failure to act in good faith gives rise to liability for a civil pecuniary penalty.
5. Disclosure Obligations: The New Code prescribes one new form of disclosure document to be used by all franchisors. There are some significant changes in relation to the requirements for preparing, updating and providing disclosure documents.
6. Master Franchising: The New Code simplifies the disclosure obligations in relation to master franchisors, removing the requirement for separate disclosure documents or a joint disclosure document to be provided to franchisees.
7. Ongoing requirement to disclose materially relevant facts: The New Code places further obligations on franchisors in their duty of ongoing disclosure. A number of provisions now require disclosure of events affecting ‘associates’ and ‘associate directors’ in addition to those affecting the franchisor.
8. Restrictions on significant capital expenditure requirements: The New Code proscribes requiring franchisees to undertake ‘significant capital expenditure’ during the franchise agreement term. This will include renewals or extensions.
9. Marketing and Advertising Fees: Changes impacting franchisors include a requirement that franchisors maintain a separate bank account for marketing fees and advertising fees contributed by franchisees from 1 January 2015.
10. Dispute resolution: The New Code requires a franchise agreement include an internal complaint handling procedure that meets certain specified criteria, which can be used as an alternative to the Code complaint handling procedure.
11. Franchisor’s costs associated with dispute resolution: The franchise agreement can no longer require the franchisee to bear any costs incurred by the franchisor in relation to settling a dispute under the agreement, and if it does, the clause is of no effect.
12. Termination for ‘special circumstances’: Franchise agreements will need to be carefully drafted to give the franchisor a contractual termination right where any of special circumstances exist. The New Code also introduces a new special circumstance ground, that arises should the franchisee ‘in the case of a franchisee that is a company – become deregistered by the Australian Securities and Investment Commission’.
13. Restraints of Trade: One of the most controversial aspects of the New Code is a provision which prevents franchisors from relying on restraint of trade provisions in certain circumstances. The exclusion applies where a franchise agreement expires and the franchisor refuses to extend the agreement, and does not provide reasonable ‘compensation’ for the franchisee’s loss of goodwill.
14. Record keeping obligations: The New Code imposes new record keeping obligations on franchisors.
15. Disclosure of former franchisee details: Franchisors are required under the New Code (as was the case under the 1998 Code) to supply the name, location and contact details of particular former franchisees in their disclosure document. However, franchisors will be obligated ‘not to do, or omit to do, anything with the intention of influencing a former franchisee to make such a request’.
16. Jurisdiction: The New Code prohibits franchise agreements from including a clause that requiring a party who wishes to bring an action or proceeding in relation to a dispute under the agreement, or to refer a dispute under the agreement to mediation, to do so other than in the State or Territory where the franchised business is based. Under the New Code any such clause will be void.
These changes will require franchisors to review their franchise agreements and disclosure documents vigilantly to ensure Code compliance. While some provisions streamline the disclosure process in the scenario where Master franchisors are based overseas, others (such as administrative and financial arrangements in any franchise system) will require close liaison between the Australian Master Franchisee and its direct reports overseas.
Tony Conaghan, IDI franchising country expert for Australia