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Here at last: the Code arrives

Written on the 5 November 2014

By Sarah Stowe

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Finally, it's arrived. The much anticipated, much discussed Franchising Code of Conduct 2014 has been formally ratified by the Governor General, Sir Peter Cosgrove.

We've been promised "no surprises" by the Minister for Small Business, the Hon Bruce Billson, and the expected Code changes were the subject of a panel session at last week's Legal Symposium at the Franchise Council of Australia's National Franchise Convention.

The new Code takes effect on 1 January 2015.

Stephen Giles, partner at Norton Rose Fulbright, and the deputy chairman and director of government relations at the FCA, said "It's the conclusion of a process that's been going on since early 2013, and it's been a fairly collaborative and comprehensive review."

Collaboration with government has enabled the industry to head off the more extreme suggestions, and hopefully head off any threatened State regulation of franchising Giles said.

The result is an improved Code of Conduct with new penalties for breaches, and a strengthened regulatory regime. "Franchisees will gain additional comfort from the improvements, yet compliance ought not to be a major burden for franchisors," he said.

What's in the Code?

"There is an important new good faith obligation and some improved disclosure, notably in relation to online," said Giles. "Also some simplification of some of the Code disclosure requirements that added no value but took time, and this will save time and costs," he indicated.

There is also only one disclosure document required to be given to unit franchisees where there is a master franchise arrangement in place, and franchisors that have granted one or fewer franchises and do not intend to grant any franchises in the following year will be able to avoid the cost of ongoing updating in certain circumstances.

"The FCA has been very close to the process, we've tried to work with the government. We made it our mission to make it work within the framework."

What does a franchisor need to do?
  • Consider whether to update its franchise agreement immediately, which some may elect to do if they are not happy with the default arrangements that apply to restraint clauses at end of term if a franchisee requests but is not granted an extra term
  • Review whether and when to update the disclosure document  - there is a transition period until the end of financial year 2015. If the franchise agreement is updated the disclosure document will also need to be refreshed
  • Consider what needs to happen in the operation of the marketing fund. Franchisors will need to set up a new bank account and there will be some ancillary administration - the Code requires franchisors with company units to contribute to the fund.
  • Consider how the new information statement will be disseminated to franchise buyers. "Franchisors will need to keep records of this so they are likely to move to electronic distribution," Giles said.
  • Review document retention and record keeping. "There are more explicit requirements in the Code under a new clause. Anything that is necessary under the Code should be recorded. It's a matter of common sense," Giles said.
"If you do a review it should be comprehensive, and not just focus on the things that have changed, " he advised. "A number of franchisors might have had disclosure documents produced internally or by consultants, but now there is merit in getting legal experts in for a one off review," he suggested. "Some of the disclosure document content in the past might have been considered acceptable, but with increased ACCC audit activity and significant fines and penalties now applying it is prudent to be precise in your responses."

A broader definition of good faith and unconscionable conduct will also have an impact on the sector, as will further legislation prohibiting unfair contract terms due in late 2015, Giles suggests. "We are assuming the franchise agreement to be considered a standard contract, so a prudent approach is to see if there are any provisions in agreements and other documents that extend beyond what is reasonably necessary to protect the franchisor’s legitimate interests" he advised.

You can read the Franchising Code of Conduct at the Australian Government ComLaw website.

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