Franchising in Australia is a well accepted format for SME business. In 1993 a voluntary franchising code of conduct (FCC) was established and then on 1 July 1998 a compulsory FCC was introduced for all of Australia at a Federal level. The FCC contains a broad definition of “franchising” resulting in the FCC having application over a wide range of businesses within Australia.
Compulsory franchise code
The FCC requires a number of contractual terms to be automatically within every franchise agreement including detailed advanced disclosure of information 14 days prior to signing and an additional right to cool off within seven days of either signing the agreement or certain FCC payments. It remains well recognised that applicant franchisees either have a significant disadvantage at the bargaining table or are derelict in pursuing adequate due diligence enquiries prior to entering a franchise agreement. More on the FCC disclosure document attempts to provide to franchisees details pre-contractual information the current form of the FCC can be read here. The FCC also requires a specific dispute resolution process and a restriction on rights of transfer and termination. Broadly the mandatory FCC has been well accepted in Australia and recognised across the world.
Franchise code be changed on 1 January 2015
Several amendments have been made to the FCC. Once again the Australian government has just announced that it is proceeding on with a detailed review of the Australian compulsory FCC. This announcement proposes that changes will be implemented on 1 January 2015 and will include:
- The introduction of a definition that both parties to a franchise agreement must act in good faith, act honestly and not arbitrarily and to achieve cooperatively the purposes of the franchise agreement. This obligation will not supersede general legal rights or other legitimate commercial interests particularly when dealing with third parties.
- The previous obligation to issue a disclosure document for each and every level of a franchise system has been dispensed with. This will reduce the level of paperwork provided to a franchisee.
- Additional information will need to be provided to a franchisee prior to the franchisee receiving the final form disclosure document. Details of this additional information have not yet been finalised.
- Where a franchise involves leased premises, the franchisor will need to be transparent with any inducements received from the lessor of those premises.
- A compulsory modification of the restraint of trade provisions applying to franchisees in the situation where it can be shown that the franchisor has not granted a renewal of the franchise term and has not been provided alternative appropriate compensation.
- Disclosure document compliance costs being reduced however in all likelihood the length of disclosure documents provided to franchisees will increase casting further doubt on whether franchisees actually will take the time to read through the information document. As a consequence instead of shortening the disclosure document, the government propose an additional explanation document attempting a short form overview of responsibilities and risks.
- The activities of a franchisor in managing and handling the franchise marketing fund will be restricted and additional transparency of information will be required and that the funds be kept separate from other moneys held by the franchisor. This last point may lead to some franchisors to conduct and fund marketing by other means. The obligation to audit the activities of the marketing fund continues.
- Franchisors are restricted from imposing significant capital expenditure that franchisees must pay unless either there has been prior disclosure, a vote of approval by franchisees or the franchisor can justify that the investment by the franchisees is justified (a process which may not necessarily be straightforward).
- A recognition that online trading conducted by a franchisee that harms the financial interests of the franchisee will now be subject to greater disclosure to enable a franchisee to have a more informed view prior to signing a franchise agreement.
- Currently unsatisfactory wording in the code relating to the right of a franchisor to immediately terminate are to be improved.
- Where a mediation of a dispute occurs, the right of the franchisor to demand the franchisee pay the franchisor’s costs has been restricted and the franchisee cannot be compelled to resolve the dispute outside of the State where the franchisee’s business is located without agreement. This will have a significant impact on foreign franchisor disputes.
- Increased financial penalties which will now be up to $51,000 AUD for each breach of the FCC will apply and it is likely that there will be more infringement notices issued by the Australian Competition and Consumer Commission (ACCC) regulatory authority.
- No deferment or allowance to avoid preparation of two sets of disclosure documents. Under the current FCC each franchise system must complete a new disclosure document within four months of the financial year ending 30 June. Increased costs to franchisors will occur due to the fact that an additional franchise disclosure document will need to be created and updated for legality commencing on 1 January 2015.
- The ACCC is now entitled to issue “on the spot” infringement notice penalties up to $8500 without the need for prior court orders.
One major obstacle to the introduction of the changes to the FCC is the obligation of the Australian government in accordance with section 51xxxi of the Australian Constitution which prohibits Australian legislation to remove existing property rights without payment of just compensation. Concerns exist as the FCC changes currently are retrospective in nature and consequently are seen as taking away rights in relation to:
- restraints of trade over franchisees leaving the franchise system
- substantial capital expenditure which the franchisor could require from franchisees
- franchisor entitlement to recover costs arising from disputes with franchisees
- franchisor entitlement to litigate in a preferred jurisdiction
- restricting franchisor contractual rights by the overarching obligation of good faith
The constitutional issues are being taken seriously. It is expected that carefully worded drafting of the changes to the FCC will steer past these complexities as otherwise extensive litigation and class-action disputes will hamper the integrity of franchising in Australia.
The Australian government undertook an extensive consultation process and received a significant number of comments to its proposed amendments to the FCC http://www.treasury.gov.au/ConsultationsandReviews/Consultations/2014/Franchising-Code . The consultative process has now closed. Details of the original exposure draft can be reviewed at http://www.treasury.gov.au/~/media/Treasury/Consultations%20and%20Reviews/Consultations/2014/Franchising%20Code/Key%20Documents/PDF/DraftFranchisingCode.ashx
Due to the fact that the implementation of these changes will be subject to the usual consultation and political process, some of the points in this summary may be modified including the proposed commencement date of 1 January 2015. As more definite information is published this note will be updated.
Written by Alan Branch, President – Global Development
OptiVance 360 –sustainable optimal advantage
Alan Branch has received multiple awards from the Franchise Council of Australia and a recognised international business consultant and speaker and franchise lawyer.