Understanding the key changes under the new Franchising Code

The new Franchising Code will include changes from the former code that can be broadly categorised under the following major headings:

1. Improving information available to franchisees;
2. Strengthening the balance in franchise agreements;
3. Improving the effectiveness of the code via fines and penalties.

Franchisors will be obliged to provide potential franchisees upfront with a risk statement about franchising, to disclose how the proceeds from online sales are dealt with, and to be more transparent with marketing funds (including holding funds in a separate bank account, and disclosing types of expenses to allocated to the fund, as well as giving franchisees an option to vote for an annual audit).

Franchisors will also be compelled to contribute equally to marketing and other co-operative funds for any company-owned outlets.

Changes to the balance of power in franchise agreements prevent franchisors from attributing their costs in dispute resolution to franchisees, and require dispute resolution to be conducted in the state where the franchisee is based, not where the franchisor is based.

Additionally, capital expenditure requirements must be disclosed in the franchise agreement, justified to franchisees by a statement outlining the rationale, costs and expected benefits or otherwise agreed by a majority of franchisees in the system.

Restraint of trade provisions have also been targeted, potentially allowing ex-franchisees the freedom to continue operating as independents after the end of their franchise agreement if they wanted to renew, but were not renewed by the franchisor and offered reasonable compensation for their goodwill.

In addition to penalties of up to $51,000 for major breaches of the code, the ACCC will also be able to apply fines of up to $8500, and also compel franchisors to provide a wider range of documentation in response to its existing audit powers.

A new section of the Franchising Code requires both parties to the agreement to act in good faith toward one another before, during and at the end of franchise agreements.

Good faith is not defined in the code; however, parties are required to act honestly and not arbitrarily, and to cooperate to achieve the purposes of the agreement. If an agreement does not include a clause allowing a franchisee to renew, this does not mean that the franchisor has acted in bad faith.

Although transition provisions under the new code will allow franchisors to continue to use disclosure documents updated under the current code until at October 31 next year (for franchisors with a June 30 financial year), most franchisors will find it necessary to update their disclosure documents – and most likely their franchise agreements – as soon as possible.

Information resources about the new Franchising Code

The new Franchising Code and its 99-page Explanatory Statement can be downloaded here.

In addition, the Australian Competition and Consumer Commission (ACCC) has updated its franchising guidance publications to reflect the changes in the new code. These are The Franchisee Manual and The Franchising Code of Conduct Compliance Manual.

Jason Gehrke is the director of the Franchise Advisory Centre and has been involved in franchising for 20 years at franchisee, franchisor and advisor level.

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