New Franchising Code of Conduct from 1 January 2015

From 1 January 2015, the current Franchising Code of Conduct (called the “Code”) will be repealed and replaced with a new Code.

The Code was first enacted in 1998 as a mandatory Industry Code. The purpose of the Code is to regulate the conduct of participants in the franchise sector. The Code applies to franchise agreements entered into after 1 October 2013. Amendments made to the Code since 1998 apply to those franchise agreements that are made after the relevant Code amendments.

On 4 January 2013, Alan Wein was appointed to review the Code with a particular focus on:

  1. The efficacy of the amendments made to the Code in 2007 and 2010;
  2. Other matters such as good faith in franchising, end of term arrangements and the enforcement provisions under the Code.

On 30 April 2013, Wein produced his report the “Review of the Franchising Code of Conduct” making a broad suite of recommendations for change. Those recommendations were supported (in large part by the FCA) and have been adopted (again in large part) in the new Code.

Whilst many provisions of the Code will remain, some of the changes the new Code will bring include:

  1. Introducing an obligation for parties to act in good faith in their dealings with one another;
  2. Introducing financial penalties and infringement notices for serious breaches of the Code;
  3. Requiring franchisors to provide prospective franchisees with a short information sheet outlining the risks and rewards of franchising
  4. Changes to the Disclosure Document and importing mandatory provisions into the Franchise Agreement.

Good Faith

A key element of the draft new code requires both parties to an agreement to act in good faith towards one another before, during and at the end of an agreement.

Good faith is partly defined in the Code, requiring parties to act honestly and not arbitrarily, and to cooperate to achieve the purposes of the agreement. The principles of good faith have been recognised in previous court actions involving various areas of franchise practice including the terminating of contracts and the issue of exclusivity of territories.

This specific reference to “good faith” under the Code may potentially expand the scope for parties to a franchise agreement to seek redress. Only time will tell.

Fines & Penalties

Arguably the most important change to the Code will be the ability of the ACCC to impose fines for non compliance with the Code. The ACCC now has broad powers to impose penalties upon Franchisor’s for non compliance with various mandatory provision of the Code. Those penalties can be extensive (up to $51,000) per breach.

The enforcement areas for the ACCC include: failing to act in good faith; failing to provide a disclosure document, or maintain it in the form prescribed; failing to provide a copy of a lease or other agreements required under the Code; failing to provide financial statements relating to the franchisor; failing to disclose materially relevant facts; failing to indicate the franchisor’s intention to renew a franchisee within the required time frame, and failing to provide a disclosure document when providing such notice; failing to repay monies to franchisees who have terminated agreements during the cooling-off period; terminating a franchisee without providing a breach notice, the remedy and a reasonable time frame, or otherwise terminating a franchisee not in breach unless otherwise permitted by the Code.

The Risk Statement

Franchisors must provide potential franchisees upfront with a risk statement about franchising. The risk statement (in the form set out in the Code) is meant to be provided to prospective franchisees upon first meeting the prospective franchisee so as to give real risk information to a franchisee before they become emotionally and financially “invested” in the franchise.

One doubts how a further “statement” will change behaviours from both the franchisor and franchisee end. Again, time will tell.

Disclosure Document – Changes

With a view to correcting some of the flaws in the disclosure regime under the previous Code, the new Code will require Franchisors to make disclosure to franchisees around the following:

  1. How the proceeds from online sales are dealt.
  2. More transparent with marketing funds, including holding funds in a separate bank account, and disclosing types of expenses to be allocated to the fund, as well as giving franchisees an option to vote for an annual audit.
  3. Franchisors will also be compelled to contribute equally to marketing and other co-operative funds for any company-owned outlets.
  4. Dispute resolution costs cant be attributed to franchisees, and require dispute resolution to be conducted in the state where the franchisee is based, not where the franchisor is based.
  5. Additionally, capital expenditure requirements must be disclosed in the franchise agreement and justified to franchisees by a statement outlining the rationale, costs and expected benefits or otherwise agreed by a majority of franchisees in the system.
  6. 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 are willing to be renewed but the franchisor does not offer a renewal.

Preparing for 2015

The new Code starts in 1 January 2015. While there is a transition period for the requirement to update the current form of Disclosure, the Franchise Agreement of all franchisors will need to be updated to comply with the Code’s requirements in the new year.

Heath Adams is a Director of Adams & Partners Lawyers, and head of the commercial legal team within the firm. Heath’s primary focus is on servicing clients in the franchise sector including new and emerging franchise systems. He is an accredited specialist in Business Law. Read more about Heath here.

About Heath Adams

Heath Adams is a Director of Adams & Partners Lawyers, and head of the commercial legal team within the firm. Heath’s primary focus is on servicing clients in the franchise sector including new and emerging franchise systems. He is an accredited specialist in Business Law. Read more about Heath here.