The Australian franchise sector has been regulated by the Australian Competition and Consumer Commission (ACCC) since 1998.
The Franchising Code of Conduct (the Code) aims to regulate the conduct of participants in franchising towards each other and to ensure that they are sufficiently informed about a franchise before entering into it. The code also provides a cost-effective dispute resolution scheme for franchisees and franchisors.
Additionally the Code states that the parties of a franchise agreement have an obligation to act in good faith towards each other. This applies to any dealing or dispute regarding a franchise agreement or the negotiation of the franchise agreement or with respect to any matter under the Code itself.
In addition to the good faith requirement the Franchising Code of Conduct has several other key areas:
- Disclosure of pertinent information regarding the Franchisor and the franchise system
- The terms which may or may not be contained within the Franchise Agreement
- Complaint handling and dispute resolution procedures
Franchisors are firstly required by the Code to provide prospective franchisees with a copy of the prescribed Information Statement which gives information about franchising.
This should be provided when someone applies for a franchise or expresses an interest in acquiring a franchise.
Next, once the parties have decided to proceed with the issuing of a franchise agreement, a franchisor (or a master franchisee if there is one) must give a franchisee at least 14 days before the franchisee enters into a franchise agreement or pays a non-refundable amount:
- a copy of the Code
- a disclosure document in the required form, and
- a copy of the franchise agreement in the form it is to be executed. Some changes can be made to the franchise agreement after disclosure but before signing if the changes are requested by the franchisee or are changes of a minor nature without the need to re-disclose and have a further 14 days period.
If there are major changes then the franchisor may need to issue disclosure again and wait another 14 days before the franchisee can sign.
The Code also requires that a franchisor:
- informs the franchisee of any materially relevant facts about the franchise (for example, certain court proceedings) within 14 days after the franchisor becomes aware of them, and
- gives a copy of any relevant lease and details of any lease incentive received by the franchisor or any other relevant documents or information
2. Franchise agreements
The Code requires that franchisors provide their franchisees with certain rights in relation to franchise agreements, prohibits other clauses and sets out requirements for transfers and terminations of franchises. In particular:
- A franchisee has a cooling off period of 7 days in which to terminate a franchise agreement. If the franchisee chooses to exercise their cooling-off rights, they must be given a refund minus any reasonable expenses incurred by the franchisor within 14 days.
- A franchisor cannot unreasonably refuse consent to the transfer of a franchise.
- A franchisor cannot terminate a franchise for breach unless it follows a specified notice procedure and cannot immediately terminate a franchise other than in special circumstances.
- A franchisor is prohibited from inducing franchisees or prospective franchisees not to form an association or associate with other franchisees or prospective franchisees for a lawful purpose.
- There are requirements about the conduct and audit of marketing or advertising funds.
- A franchise agreement must not contain, or require a franchisee to sign a statement that releases the franchisor from general liability towards the franchisee.
- A franchise agreement must not contain, or require a franchisee to sign, a waiver of any verbal or written representation made by the franchisor.
- Provisions which require disputes to be heard in another State or Territory to where the franchisee’s business is located or which allow the franchisor to recover costs of settling a dispute from a franchisee are prohibited and void.
3. Dispute resolution
Every franchise agreement must contain a complaint handling or a dispute handling procedure that complies with the Code. Any party to a franchise agreement who has a dispute with another party to the agreement may engage the Code’s dispute resolution procedure. The Office of the Franchising Mediation Adviser provides mediators for resolving disputes using the dispute resolution procedure set out in the Code.
For franchise agreements signed, renewed or varied on or after 1 January 2015 provisions apply to prevent a franchisor from passing on its costs in dispute resolution (mediation) to the other party.
Also franchisors cannot require mediations be held outside the State or Territory where the franchisee’s business is located.
Penalties for breach of the Code
It is important also for franchisors to realise that the Code has civil pecuniary penalty clauses (24 in total) for breaches of the Code including failing to give proper disclosure, failing to repay money to franchisees who terminate in the cooling off period, or terminating without the proper notice.
Also both franchisees and franchisors may suffer a penalty for failing to act in good faith or failing to attend mediation.
The penalties are potentially quite significant especially where there are multiple breaches. For each breach of a civil pecuniary penalty provision the ACCC has the power to either:
- Issue an infringement notice – 50 penalty units for a company (i.e. currently a fine of $8,500) / 10 penalty units for an individual ($1,700); or
- Seek a court order for a civil pecuniary penalty of up to 300 penalty units – $51,000
Read recent changes to the Franchising Code of Conduct
Important: This article is prepared on the basis of the Franchising Code of Conduct effective from 1 January 2015.
Prepared by Corinne Attard | Partner
Holman Webb Lawyers | Sydney
T: (02) 9390 8354
E: [email protected]