The franchising industry is now heavily regulated by the Australian Competition and Consumer Commission (ACCC). The ACCC has embarked on a new, revolutionary regime under the Franchising Code of Conduct 2015. The Code prescribes a particularly high standard of conduct for franchisors. Of the 24 civil penalty provisions set out in the Code, 22 provisions relate to breaches by the franchisor. The Code also introduced new requirements including the good faith and disclosure obligations. With these in mind, the risks of breaching the Code should be managed by a comprehensive franchising strategy.

Duty of Good Faith

The Franchising Code of Conduct stipulates that the franchisor and the franchisee must act in good faith in their commercial dealings. You should know that it is hard to define “good faith” in a commercial sense. Unsurprisingly, the Code chooses not to define the term. Rather, the Code intends to have it interpreted through common law. This broad definition makes it difficult for you to pursue your commercial interests without legal risk. Although the Code promotes the key values of honesty, fairness and cooperation, it might be complicated for you to apply these values to your specific circumstances. If you are unsure, you should always seek guidance from a qualified legal professional. Your good faith obligations also begin prior to your contractual relationship with your franchisee and may continue after the contract ends. You are required to uphold these obligations during the negotiation and dispute resolution stages of your dealings

Duty of Disclosure

The Franchising Code of Conduct is built upon the notion of transparency and it requires you to disclose specific information to your franchisees and franchisee prospects. When you receive an application or expression of interest, you are required to provide the applicant with an information statement outlining the details of your offer. If the applicant accepts the offer, you must provide them with a disclosure document at least two weeks before the contract is signed or you receive any non-fundable payment. Thereafter, once every year, your franchisees may also request you to provide a new disclosure document. Having said these, you must promptly update your disclosure document annually to reflect your franchise’s ongoing financial situation. Your disclosure document should include important information such as:

The structure of your franchising system;
An overview of current franchisees, including their basic statistics and the numbers of businesses resold or terminated by the franchisees in the past three years.
An overview of your franchise’s financials, including copies of financial statements for the past two years.

In addition, depending on the structure of your franchising system, you may be required to provide further documents. For example, you must provide your franchisees with leasing documentation if they are renting your premises. You must also provide disclosure if you are not directly leasing the premises but would receive a financial benefit or rebate as a result of the lease. Likewise, if your franchise has a marketing or cooperative fund, you must provide franchisees with periodic reports detailing the usage of the fund, as well as annual audit papers. Throughout your relationship with your franchisees, you are also required to keep them informed of all material events. Under the Code, an event is considered material if it may have an impact on a franchisee’s operations and/or profitability. A good rule of thumb is for you to disclose all substantial changes in your business structure as they occur. To ensure that you are compliant with your disclosure requirements, it is recommended for you to request a written acknowledgement of receipt from your franchisees when you send them a document.

Franchise Agreement Requirements

To further promote transparency and instil confidence in franchisees, the Franchising Code of Conduct also sets out a set of obligations surrounding your franchise agreement. Importantly, you must provide your franchise agreement and a copy of the Code to a prospective franchisee at least two weeks before the contract is signed or you receive any non-fundable payment. The Code also stipulates a one-week cooling period. During this period, if your franchisee changes their mind, you are required to provide them with a full refund less your incurred expenses. The Code also requires you to promptly disclose any change in the scope of your franchise agreement. The Code assigns numerous rights to your franchisees under your franchise agreement. For example, it provides your franchisees with the right of association, so long as franchisees are gathering for a lawful purpose. Likewise, the Code also prohibits any requirements for your franchisees to undertake significant capital expenditure that is either unjustified, undisclosed or hasn’t been agreed upon by a majority of franchisees.

Administrative Requirements

The Franchising Code of Conduct also stipulates particular ways for you to regulate your franchise.

Marketing Funds: You are required to keep an independent bank account for your marketing fund and you must not favour the businesses you operate over other franchisees in collecting marketing contributions.
End-of-Contract Provisions: The majority of these relate to the termination of the franchising relationship. For example, at least 6 months prior to the end of the term, you are required to provide a franchisee with a notice clarifying whether you intend to renew. Furthermore, the Code also bars you from issuing a default notice without a proper reason and from unreasonably terminating the contract.

Penalties and Infringement Notices

The biggest change brought about by the Franchising Code of Conduct is the introduction of penalties and infringement notices. If you are found in breach of the Code, the ACCC can issue a maximum fine of $51,000. Applicable breaches include breaches of disclosure obligations. In addition, the Code also gives the ACCC the discretion to issue infringement notices. If you fail to pay an infringement notice, the ACCC may then pursue the breach in court. An infringement notice can impose a fine of $8,500 upon your company, and/or a fine of $1,700 upon you.

The Bottom Line

With the provisions introduced by the Franchising Code of Conduct, franchising requires numerous obligations to be fulfilled. You must ensure that the Code’s requirements are built into every aspect of your internal processes and that you always make an informed decision. The help of a legal consultant can make it much easier for you to promote your business and expand your franchise.

What do I do now?

Contact us if you would like to have more information on managing the legal risks involved with franchising. 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.

The Franchising Code of Conduct: An Overview