In response to the recent parliamentary inquiries concerning franchising and unconscionable conduct, the Federal Government has amended the Franchising Code of Conduct (Code). These changes took effect on 1 July 2010.
The majority of the amendments update the requirements as to what must be included in the disclosure document (Annexures 1 and 2 of the Code). It is imperative that franchisors review their current disclosure document and ensure it mirrors the amended Code.
Significant Changes to the Disclosure Document
The Disclosure Document must include the following warning - “Franchising is a business and, like any business, the franchise (or franchisor) could fail during the franchise term. This could have consequences for the franchisee.”
In addition to previous requirements the Disclosure Document must also state:
- known or reasonably foreseeable recurring or isolated payments, the franchisee will be required to pay to a person other than the franchisor or an associate of the franchisor;
- whether the franchisor will require the franchisee to undertake unforeseen significant capital expenditure (through the franchise agreement, operations manual or any other means);
- whether the franchisor will require the franchisee to pay for the franchisor’s costs in any dispute resolution process;
- whether the franchisor has unilaterally changed a franchise agreement in the past, for agreements entered into from 1 July 2010 and 30 June 2013 or in the last three years for agreements entered into from 1 July 2013;
- how the franchisor may unilaterally change a franchise agreement in the future;
- whether the franchisee will be obliged to keep any of the franchisor’s information confidential, and if so, what information must be kept confidential;
- details of what will happen at the end of the franchise term, including:
are there options to renew or enter a new agreement;
details of any exit payment to the franchisee;
what will happen to unsold stock, marketing material, equipment, other assets including whether the franchisor will purchase these and if so, how the price will be determined; and
whether the franchisee has the right to sell the business and if so, whether the franchisor has a first right of refusal;
whether the franchisor will consider capital expenditure by the franchisee when determining the arrangements to apply at the end of the franchise agreement;
for franchise agreements entered into from 1 July 2011, whether the franchisor has considered the capital expenditure by the franchisee when determining the arrangements to apply at the end of the franchise agreement and, from 1 July 2013, the last three years; and
whether, if the franchisee wants to transfer or novate the franchise agreement in favour of another party, the franchisor may amend the franchise agreement before it is transferred or novated.
The full franchisor disclosure requirement of the past three financial years in relation to unilateral contract variations and unforseen significant capital expenditure may be reduced if the franchise agreement is entered into before 1 July 2013.
Franchisors must notify franchisees whether or not the franchisor intends to renew the franchise agreement or enter into a new franchise agreement with the franchisee.
If the term of the franchise agreement is:
- six months or longer, the franchisor must notify the franchisee at least six months before the end of the term; or
- less than six months, the franchisor must notify the franchisee at least one month before the end of the term.
A new clause has been included that states nothing in the Code will limit any legal obligation for the parties to a franchise agreement to act in good faith.
This means a duty of good faith and fair dealing may be implied into many franchise agreements.
The clauses dealing with the conduct of parties during mediation have been expanded so that:
- a party will be taken to be trying to resolve a dispute if the party approaches the resolution of the dispute in a reconciliatory manner; and
- the costs of mediation will now include the costs of the mediator, room hire and any additional input, for example expert reports, agreed by both parties to be necessary.
If you would like to discuss this legal alert in more detail, or you would like some advice on how to comply with the new Franchising Code of Conduct requirements please contact a member of our team on 07 3231 2444.