Complying with the new Franchising Code of Conduct

A franchise is an exciting and interesting form of business which gives an opportunity to be part of something great. It allows you to run your own business, while still reaping the benefits of the excellent reputation of a long standing franchise.

Some of the changes which will come into effect on January 1, 2015 call for new and strengthened requirements, especially when it comes to the transparency of the administration of marketing funds and the ability to force a franchisee to incur a significant capital expenditure. However, franchisors will be pleased to find the removal of some disclosure document requirements, as well as deletion of the daunting administrative obligation to cross reference agreement clauses in the disclosure document.

Key Changes and the New Franchising Code of Conduct

The somewhat convoluted old disclosure process has been changed which means that franchisors now have the task of drafting and distributing a new document in the event of transferring, renewing or extending the scope of an agreement entered into prior to 1 January 2015 or in the case of all new franchise agreements entered into post 1 January 2015. This new document is an Information Statement. You can find the guide in the Annexure 2 of the amended Code.

Good news - you are no longer required to cross-reference agreement clauses in the disclosure document. Now is the time to make sure that all old formats are done away with and you are working with new documents conforming to the new guidelines of the Code.

In a welcome move, master franchisors receive somewhat of a special treatment. You now only have to provide on set of disclosure as the master franchisor and removes the current situation of ‘double disclosure’ compliance for multi-layered franchise systems. The added benefit of this is that franchisees will only need to review one disclosure document. But it isn’t all smooth sailing. Even though it is only the master franchisor who must provide disclosure, more and more specific details are expected to be released, discussing the disclosure arrangement.

Sales conducted online, end of term arrangements and master franchise arrangements (mentioned above) will face new disclosure obligations.

There is now the condition that operation of marketing funds must be conducted through a separately established bank account and all marketing contributions are to be made to this specific account.

Take Notice

While the Code comes into effect on the 1 January 2015, it will apply to all new and renewed franchise agreements which were executed after 1 October 1998 in the event that they are being transferred, renewed or extended or until the existing code is repealed (currently expected to be 1 April 2019). This means that all of these agreements should be reviewed to ensure that they comply with the new Code.

The Code also won’t have the same impact on all the franchise agreements and you should consult the Code for a better understanding on how exactly the Code will have an effect on your business specifically. Our lawyers are always available to answer any questions you might have in connection with these new changes.

Do I need to change my existing franchise agreement?

One of the topics we discussed previously in our blogs is relevant in this issue as well, the matter of good faith. The new Code now requires acting in good faith when it comes to any issues coming from the agreement and the Code. We strongly advise that you take a careful look at your standing agreements to remove anything that might be considered to be unfair or unreasonable or any provision which might be construed as giving a party power to make a decision or take an action that may be deemed to be ‘arbitrary’ in the circumstances.

Next Steps

Remember, it is never too early to start rolling out these changes even before the new Code comes into effect! We strongly advise that you take action now and conduct a thorough review of your existing agreements and we can assist you to create a plan to ensure that your practices and agreements will be compliant.

What Should I Do Next?

Contact us if you would like further legal advice on complying with the new Franchising Code of Conduct. Our lawyers at You Legal will be happy to assist you in whatever way we can.

* This blog is for general guidance only. Legal advice should be sought before taking action in relation to any specific issues.