Franchising is a great ‘turn-key’ solution to starting a new business. For those going into a new area it’s an opportunity to learn from the mistakes of the many before you while owning your own business and avoiding a lengthy period of gaining experience at a low training wage.
The problem with franchises has always been that the knowledge, tools and experience in the particular business that franchisors offer give them a massive upper hand in the negotiation of any franchise agreement. This sometimes translated to unsustainable franchise fees and other payments.
The government identified this imbalance as an issue some time ago and set about trying to correct the balance. There was the Wein Review, released in 2013, followed by a report produced by the government entitled “The Future of Franchising.”
The outcome of all this reporting was the Competition and Consumer (Industry Codes—Franchising) Regulation 2014 (Cth) otherwise known as the Franchising Code of Conduct. It was enacted under the new consumer laws (the Competition and Consumer Act 2010 (Cth)) and replaced the old Code of Conduct which had been enacted in 1998 under the now-superseded Trade Practices Act 1974 (Cth).
The new Code took effect on 1 January 2015. It applies to all conduct after 1 January 2015. Conduct that will attract the operation of the new Code includes entering into, renewing, transferring or varying franchise agreements entered into after 1 October 1998.
The major changes effected by the new Code as against the old Code are summarised below:
- Greater transparency of financial information in a franchise through greater protection of right of prospective franchisee to speak to ex-franchisees and the ACCC being given power to obtain documents which form basis of disclosure material given to franchisees.
- Financial penalties of up to $51,000 for major breaches.
- New powers for the Australian Competition and Consumer Commission (ACCC) to issue infringement notices up to $8,500 without having to seek a court order.
- Franchisors compelled to contribute equally to marketing and other co-operative funds for any company-owned outlets.
- Changes to the balance of power in franchise agreements to prevent franchisors from attributing their costs in dispute resolution to franchisees, and require dispute resolution to be conducted in the state where the franchisee is based, not where the franchisor is based.
- Capital expenditure requirements must be disclosed in the franchise agreement, justified to franchisees by a statement outlining the rationale, costs and expected benefits or otherwise agreed to by a majority of franchisees in the system.
- Restraint of trade provisions have also been targeted, potentially allowing ex-franchisees the freedom to continue operating as independents after the end of their franchise agreement if they wanted to renew, but were refused renewal by the franchisor and not offered reasonable compensation for their goodwill.
- In addition to penalties of up to $51,000 for major breaches of the Code, the ACCC will also be able to apply fines of up to $8,500, and also compel franchisors to provide a wider range of documentation in response to its existing audit powers.
- A new section of the Franchising Code requires both parties to the agreement to act in good faith toward one another before, during and at the end of franchise agreements. Good faith is not defined in the Code, however parties are required to act honestly and not arbitrarily, and to cooperate to achieve the purposes of the agreement. If an agreement does not include a clause allowing a franchisee to renew, this does not mean that the franchisor has acted in bad faith.
Although transition provisions under the new Code will allow franchisors to continue to use disclosure documents updated under the old Code until 31 October 2015 (for franchisors with a June 30 financial year), most franchisors will find it necessary to update their disclosure documents – and most likely their franchise agreements – as soon as possible.
We are still seeing franchise agreements and disclosure material that does not comply with the old Code let alone the new Code.
If a franchisee is considering whether or not to renew, enter into a new agreement or terminate they are entitled to a vast array of information from the franchisor. The best way to eliminate risk for franchisees is to obtain information which they are entitled to under the new Code but, it would appear, often not provided with. It is also important to ensure that the information provided is up to date.
For franchisors now is a good time to ensure that their documentation is compliant with the new Code. There are now serious consequences for non-compliance.
If you need advice on franchising please contact Thomas Cameron, Associate in our Commercial Department for advice in relation to your franchising arrangements.