On 1 January 2015, the new Franchising Code of Conduct (Franchising Code) (see http://www.comlaw.gov.au/Details/F2014L01472) commenced operation in Australia.
The Franchising Code is a mandatory code under the Competition and Consumer Act 2010 (Cth). Subject to limited exceptions, the Franchising Code imposes obligations on all franchise agreements entered into, renewed, extended or transferred on or after 1 October 1998.
The Franchising Code introduces significant changes and imposes strict obligations on both franchisors and franchisees, especially in relation to good faith obligations and information disclosure.
Among other requirements, the Franchising Code:
(a) introduces an obligation on both franchisors and franchisees to act with good faith in respect of any matter arising under or in relation to the franchising agreement and the Franchising Code. While ‘good faith’ is not specifically defined, the Franchising Code sets out the matters to which a court may have regard including whether a party has acted honestly and not arbitrarily, and whether the party cooperated to achieve the purposes of the agreement. Further, the ACCC has foreshadowed (see http://www.accc.gov.au/speech/enforcing-the-franchising-code-recent-activities-proposed-reforms) that:
Fundamentally, good faith will require both parties to a franchise agreement to remain loyal to the contract they have entered into. Acting for an ulterior purpose, or in a way that undermines or denies the other party the benefits of the contract are examples of conduct that may qualify as bad faith.
(b) obliges franchisors to provide to prospective franchisees a disclosure document. The purpose of the disclosure document is to give prospective franchisees information to assist them in making a reasonably informed decision about the franchise and to give them current information that is material to the running of the franchised business. Subject to exceptions, the franchisor must update the disclosure document within 4 months after the end of each financial year. There are also obligations as to the provision of an information statement that outlines the risks and rewards of franchising;
(c) imposes disclosure obligations on franchisors to provide franchisees with a copy of certain documents (such as a lease where the franchisee leases premises from the franchisor for the purpose of the franchised business);
(d) regulates the content of franchise agreements (such as the transfer and termination of franchise agreements), as well as prohibiting the inclusion of certain terms (such as a general release of liability) and mandating a complaint handling procedure;
(e) prohibits franchisors from requiring a franchisee to undertake significant capital expenditure in relation to a franchised business except in limited circumstances; and
(f) obliges franchisors to set up a separate bank account for marketing and advertising fees contributed by franchisees.
Penalties under the Franchising Code
There are 24 civil penalty provisions in the Franchising Code, including in respect of the good faith and disclosure document requirements. Penalties will apply to conduct from 1 January 2015.
The ACCC has indicated that ‘failure to comply with a penalty provision could result in the ACCC taking court action seeking a financial penalty, or issuing an infringement notice for the breach’ (see http://www.accc.gov.au/business/franchising/franchising-penalties-infringements).
Time to review
The ACCC’s Compliance and Enforcement Policy issued on 19 February 2015 includes as a core enforcement priority “ensuring compliance with new or amended industry codes of conduct, including the Franchising Code”.
Accordingly, it is important that franchisors be proactive in ensuring that their franchise agreements and any dealings with franchisees (and prospective franchisees) are compliant with the new Franchising Code provisions.
For further information, please contact: