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What impact will the proposed new franchising code have on your business?

Written on the 10 September 2014

By Sean O'Donnell

In April 2014, the Federal Government released a draft version of the proposed new Code ("exposure draft") largely based on the recommendations made in the Wein review.  It also released the draft bill to amend the Competition and Consumer Act 2010 to provide for civil penalties and infringement notices for various breaches of the proposed new Code. That draft bill was slightly amended and was recently submitted to parliament for formal approval.

When releasing the exposure draft of the Code, Minister Billson stated "We want to promote growth in the sector, reduce red tape and make sure that all participants in the industry follow best practice principles.  The Government is also committed to guard against separate and additional state regulation to maintain a consistent national framework".

The exposure draft of the new Code is a substantive rewrite of the existing Code.  The new Code (at this stage) will commence on 1 January 2015. Some of the changes were expected and are welcomed, whereas others will require further examination once a final version of the Code is released as they extend beyond the original Wein review recommendations and the Government's Response issued in July 2013. 

Whilst it is uncertain what the new Code will actually contain, based on the exposure draft and subsequent negotiations with Treasury the likely core amendments will include:

  • A substantial renumbering of the Code and the removal of the old short form Annexure 2 disclosure document. There will be new definitions to try and remove interpretational problems.
  • Imposing an express obligation to act in good faith on parties to a franchise agreement. The obligation may apply before an agreement is signed, during the term of the agreement and possibly to renewal negotiations.  The obligation will include a duty to act honestly and not arbitrarily.
  • The introduction of civil penalties and fines for breaches of certain provisions of the Code.  Civil penalties will be up to a maximum of $51,000.  Infringement notices will carry a maximum fine of $8,500 for companies and $1,700 for individuals.
  • A requirement to provide a 'risk' statement to a prospective franchisee prior to giving disclosure.  It is likely that the risk statement will have to be provided once in becomes apparent to a franchisor that a franchise agreement is likely to be entered into.
  • A prohibition on a franchisor seeking to impose significant capital expenditure upon a franchisee during the term unless it has already been disclosed or the franchisor has issued a statement demonstrating that there is a business case for it to be incurred.
  • An inability of a franchisor to enforce restraints of trade in certain defined circumstances.
  • Additional record keeping requirements by franchisors to support any statements or claims made in a franchisor's disclosure document.  The ACCC will also be able to obtain this documentation to ensure that statements and claims in a franchisor's disclosure document can be substantiated.
  • Removing the requirement for overseas franchisors or master franchisors to give a disclosure document to prospective franchisees.  This will mean the prospective franchisee will only receive one disclosure document from the master franchisee which will include details of master franchise arrangements.
  • Improved transparency and obligations about marketing funds and the auditing of marketing funds, including an obligation to have them kept in a separate account.
  • The removal of the requirement to disclose unforseen significant capital expenditure in Item 13A. This will be replaced by the business case test requirement.
  • A requirement that disputes have to be litigated in the State where the franchise is operated.
  • A prohibition against franchisors seeking to recover their costs of dispute resolution from franchisees.
  • Imposing a greater limitation on the type of circumstances that a franchisor may immediately terminate a franchise agreement.

The amended Code will only apply to franchise agreements or renewals which happen post 1 January 2015. However, what is clear is that the likely core changes will mean that franchisors will have to amend existing franchise agreements, in addition to creating a new disclosure document.

Sean O'Donnell is partner at HWL Ebsworth Lawyers and an expert in franchising regulations.

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