Attention Franchisors and Franchisees: Changes to the Franchising Code of Conduct

Posted on Nov 13, 2014 by Terry Morgan   |   Categories: Commercial & Business Law, Franchising

The current Franchising Code of Conduct is to be replaced with a new Code on 1 January 2015. It is anticipated the changes will take effect immediately, without transitional periods for compliance.

While the Code’s purpose is still fundamentally the same the Code has imposed a number of new obligations on Franchisors, according to commercial lawyer TERRY MORGAN.

The changes were introduced as a result of a two year review of the previous regulations and consultation process with various stakeholders, including the Treasury department and the Franchise Council of Australia.

Notable changes under the new Code:

  • The Code now includes a codification of a duty to act in good faith for dealings between franchisors and franchisees.
  • Marketing Funds operated by Franchisors have greater regulation and transparency. The marketing account must be kept separate from other funds and the Franchisor needs to provide more specific disclosure on what the funds are to be used for. Franchisors that operate corporate stores must also contribute to the fund on the same terms as franchisees.
  • Under the new Code Franchisors must issue an “Information Statement” to all prospective franchisees. The information statement will be a prescribed form Annexed to the Code.
  • The current requirement of Franchisors to disclosure information to Franchisees has been significantly modified. The majority of the changes have been implemented to make it easier for Franchisors to satisfy disclosure requirements. Specifically, only master franchisees are required to provide disclosure. As of 1 January 2015, it is no longer necessary for both the head franchisor and master franchisee must each provide disclosure. Only the master franchisee must disclose. However there are now greater requirements on the detail to be disclosed.
  • Franchisors that have entered only one franchise agreement during the previous year, and do not anticipate entering any in the following year, have less disclosure requirements.
  • A new requirement is that civil penalties, imposed by the Court of up to $51,000.00 have now been introduced for a breach of certain provisions of the Code. The Australian Consumer and Competition Commission (ACCC) may also issue infringement notices up to $8,500 for breaches of the Code.
  • The code has also introduced disclosure regulations that deal specifically with online transactions.
  • A relaxing of the restraint of trade or certain franchisees at the end of the franchise agreement, subject to certain requirements.

What should you do to prepare for the changes?

The new Code will apply to franchise agreements retrospectively to 1 October 1998, except in some circumstances. It is recommended the franchise agreement is reviewed to ensure that it meets the requirements of the Code and that the Franchisor obtains legal advice to ensure compliance with the new disclosure requirements.

Given the new penalties imposed, it is important that Franchisors are aware of and have strategies in place to comply with their requirements.

It is further recommended that franchisees that are renewing or terminating a franchise agreement or prospective franchisees should seek advice to ensure the process is legal and all the required disclosure has been provided by the Franchisor.

We recommend a franchise agreement be reviewed by a lawyer to ensure it meets the requirements and that the Franchisor obtains legal advice to ensure compliance with the new disclosure requirements. Contact Baker Love if you would like our assistance. Call (02) 4944 3322 or email jthompson@bakerlove.com.au.