What's happening?
We previously shared the results of the Federal Government's enquiry into the Franchising Code of Conduct ("the Code"). The Code is a mandatory industry code that all Australian franchisors and franchisees must comply with. The Government has now legislated the new Code and we can now see what changes have been implemented.
What are the changes?
As expected, the new Code is completely re-formatted and contains a number of key changes designed to make it quicker and easier for franchisors to comply with their obligations. The changes are numerous, but some of the key items include:
1. Franchisors and Franchisees will be required to follow a duty of 'good faith' towards each other. Previously, this has not been a legal requirement. The duty to act in good faith applies to all ongoing dealings between the Franchisor and the Franchisee, not just their initial negotiations of the Franchise Agreement. However, uncertainty remains about what is meant by 'good faith'. We expect that court judgements will soon start to shed light on what level of 'good faith' is expected by the Courts.
2. Franchisees may be required to provide certain information to their Franchisor when seeking their agreement to transfer the franchise to another party (e.g. if the business is sold).
3. Franchisors will need to provide an information sheet about the risks of franchising.
4. The mandatory Disclosure Document that Franchisors must provide to Franchisees will now contain additional information, including details of any litigation involving the directors of associates of the Franchisor, details of the Franchisee's rights to online sales, and details of the Franchisee's rights when the Franchise term ends.
5. Franchisors will need to provide greater transparency about the ways in which marketing funds are used; and
6. Franchisors may not require their Franchisees to incur significant capital expenditure unless that expenditure is disclosed in the Franchise Agreement, the majority of Franchisees agree, the expenditure is required to comply with legal requirements, or the Franchisor complies with certain obligations to justify the expenditure to affected Franchisees.
New penalties apply!
Franchisors who breach the Code will risk new civil penalties. The Australian Competition and Consumer Commission (ACCC) has been given the power to begin enforcing the Code, including the power to issue infringement notices and increased audit powers. If a penalty imposed under an infringement notice is not paid, the ACCC can take further action including further penalties of up to $51,000.00.
What happens next?
The changes are on their way! So Franchisors need to take urgent steps to ensure their documentation complies with the new Code. Franchisors should also be mindful of the new 'good faith' obligations that apply to their dealings with their Franchisees.
Franchisees should be aware of their improved rights under the changes, and ensure their franchisors are complying with their obligations.
For further guidance about the new Code or any other franchising issues, please feel free to give Mitchell Zadow, Managing Principal and Accredited Specialist in Commercial Law, a call on (03) 8561 3318.
The information contained in this article is intended to be of a general nature only and should not be relied upon as legal advice. Any legal matters should be discussed specifically with one of our lawyers.
Liability limited by a scheme approved under Professional Standards Legislation.
Mitchell is the Managing Principal of our law practice.
He is an Accredited Specialist in Commercial Law (accredited by the Law Institute of Victoria). He also deals with areas of Employment Law, Wills & Estate Planning and Probate. For further information, contact Mitchell on his direct line (03) 8561 3318.
