The Australian Government has released the draft new Franchising Code of Conduct for review (and yet more feedback).  The Minister for Small Business says the government wants to “promote growth in the sector, reduce red tape and make sure that all participants in the industry follow best practice principles”.  Does it do that?  Let’s look at the major changes:

Good Faith obligation – It introduces an express obligation on both parties to act in good faith. This obligation will apply to all aspects of the franchising agreement including during negotiations, throughout the agreement, in dispute resolution and as part of renewal discussions. The obligation to act in good faith includes an obligation for a person:

(a) to act honestly and not arbitrarily; and
(b) to cooperate to achieve the purposes of the franchise agreement.

This obligation does not prevent a party to a franchise agreement, from acting in its legitimate commercial interests.

No more Joint Disclosure Documents - The removal of the ‘double disclosure’ currently imposed on master franchise systems means the head franchisor does not need to give disclosure to the sub franchisee.  However in a multilevel system the new form disclosure document will require that certain information about the head or master franchisor be provided by the master franchisee to its sub franchisees.

Pre Disclosure Information Sheet - Franchisors are required to provide prospective franchisees with a short information sheet which gives them an overview of the risks and rewards of franchising. This is provided at an interview stage (before disclosure) and sets out the sorts of due diligence enquiries franchisees should make.

Lease incentives - In addition to giving a copy of the lease a franchisor must give a franchisee details of any incentive or financial benefit that the franchisor or its associate is entitled to receive from the landlord. The requirement to disclose lease incentives has also been included in the new disclosure document (as if lease incentives were rebates) although this may pose practical difficulties.

Restraints of trade on former franchisees -  This change was foreshadowed in the Wein Report and means that restraints of trade will not be effective in certain circumstances where the franchisee sought and was refused a renewal but was not in breach and the franchisor did not “genuinely compensate” the franchisee.

Significant capital expenditure - The reforms will prevent franchisors from imposing ‘significant capital expenditure’ on unwilling franchisees unless: the expenditure was disclosed in the disclosure document ; or a majority of franchisees in a system agree to the expenditure (and have to incur it); or the expense is considered a necessary capital investment by the franchisor and can be justified by a statement which provides the rationale, costs and anticipated benefits associated with making the investment.  

Fortunately the nonsensical “unforeseen significant capital expenditure” provision has been removed from the disclosure document.

Marketing Fund changes - These will include: requiring additional disclosure on the types of expenses marketing funds are being used for; requiring company stores or franchisor owned businesses to contribute; giving franchisees the option to vote for an annual audit of the marketing fund; and requiring franchisors to keep marketing funds in a separate account.

Online trading disclosure  - the new form of disclosure document requires disclosure of the online trading activities of franchisors including if goods or services may be made available online, the extent to which those goods or services may be supplied in the territory of the franchise or made available via a third party website.

If the franchisee is to provide goods or services online, then disclosure is needed of the extent to which those goods or services may be supplied outside the territory of the franchise.  Most importantly disclosure is needed of details of any profit sharing arrangements that apply in relation to goods or services sold online and whether these arrangements may be unilaterally changed by the franchisor.

Immediate termination – The right to immediately terminate the franchise without prior notice has been extended to where the franchisee’s company has been deregistered by ASIC and the right to terminate for fraud has been changed from “is fraudulent” to “acts fraudulently” which may make this ground (very) slightly easier and clearer.

Dispute Resolution – New provisions introduced to prevent a franchisor from attributing its costs in dispute resolution to the other party.  Also franchisors cannot require franchisees to conduct dispute resolution outside the State where the franchisee’s business is located.

Enforcement – and here is the sting in the tail! The Government will introduce penalties of up to $51,000 for breaches of the Code. These penalty notices can be issued (on court order) for offences such as not following the correct form of disclosure document, not giving disclosure 14 days before signing; not giving a copy of the lease and lease incentive details within 1 month of signing the lease; not giving a copy of the audit of the marketing fund to franchisees within 1 month;  not notifying a franchisee of whether a franchise will be renewed; not refunding money in the event a franchisee terminates in the cooling off; not giving required notices for breach; disclosing a former franchisee’s details contrary to its request; not attending mediation and of course not acting in good faith.

ACCC powers – the Government has said that the ACCC will also be given powers to issue infringement notices of up to $8,500 without court order and will be allowed to use its audit powers to obtain documents that the franchisor has relied upon to support statements and claims made in their disclosure document.

One surprising point is that the legislation is stated not to commence until 1 January 2015.  This means that franchisors will have to update their disclosure documents as usual from 1 July 2014 and then revise them into the new form from 1 January 2015.  Rather than reduce red tape this seems to be an unnecessary duplication.  Additionally although its seems that the legislation is not to have retrospective operation it is not clear how this will affect the imposition of some of the penalties.

If you wish to view and comment on the draft legislation that will implement these reforms the period for submissions closes on 30 April 2014. For further information, including copies of the draft legislation and details on how to make a submission, please visit www.treasury.gov.au/ConsultationsandReviews/Consultations/2014/Franchising-Code.