Amendments to the Franchising Code of Conduct

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Rostron Carlyle's Commercial Lawyers provide a wide range of services to businesses, corporate clients, joint venturers and franchises. Rostron Carlyle aims to ease the burden associated with complying with the ever increasing compelxity of government regulation of businesses and franchises.

Recent amendments have been made to the Franchising Code of Conduct (“the Code”) which is the Federal legislation that underpins all franchising in this country.

 

Background

 

The amendments are as a result of the recent parliamentary report titled: Opportunity not opportunism: improving conduct in Australian franchising completed in December 2008 by the Parliamentary Joint Committee on Corporations and Financial Services (the Joint Committee).

The amendments took effect from 1 July 2010 and although they will require Franchisors to review and amend their Disclosure Documents and Franchise Agreements, there is unlikely to be a major change to the way these documents currently appear and function. The key change is added disclosure.

 

A number of the amendments to the Code will not require changes to Disclosure Documents, Franchise Agreements or Operations Manuals however Franchisors and Franchisees will have to be mindful of the impacts of the amendments when negotiating a renewal or new franchise.

 

The “good faith” obligation

 

The Joint Committee considered, as part of their report, whether or not a specific obligation of good faith between Franchisors and Franchisees should be incorporated into the Code.
While the common law concept of “good faith” is as yet unsettled by the Courts, it is broadly accepted to include:

 

	an obligation on the parties to co-operate in achieving the objects of the agreement;
	both parties being honest in their conduct;
	both parties adhering to a standard of conduct having regard to their interests (1)

 

Ultimately the common law obligation of “good faith” between Franchisors and Franchisees was not added to the Code. Instead the Code was amended to state that “nothing in the Code limits any obligation imposed by the common law applicable in a State or Territory, on the parties to a franchise agreement to act in good faith”.

The “good faith” amendment does not automatically mean that each and every franchise relationship shall be subject to the obligation – it shall still depend on the individual facts pertinent to the parties.

 

Added disclosure requirements – payments to third parties

 

Franchisors are now required to disclose to their Franchisees any payments which are required to be made by their Franchisee to a third party if those payments are within the knowledge or control of the Franchisor or are reasonably foreseeable by the Franchisor.

This added disclosure should prompt a proposed Franchisee to consider the ongoing costs of operating a franchise (as distinct from the immediate short term set-up costs) which may include for example refurbishment under the lease some years into the future.

 

Added disclosure requirements – warning to Franchisees about franchise failure

 

Disclosure Preambles shall now be amended to include a specific warning that “Franchising is a business and, like any business the franchise (or franchisor) could fail during the terms. This could have consequences for the franchisee”

The direct warning should focus the intended franchisee’s attention on the fact that profits can not be guaranteed despite their best efforts. For those unsure or unwilling to invest their capital and time the warning may be enough to save them from making a costly financial mistake.

 

 Added disclosure requirements – warning to Franchisees about unilateral variation

 

Franchisors must disclose the circumstances in which they may unilaterally vary the franchise agreement in the future and for those franchise agreements commencing from 1 Jul 2011, 1 July 2012 and 1 July 2013 a Franchisor must disclose the details of a franchise relationship within which they have unilaterally varied a franchise agreement.

In practice most franchise agreements will carry a clause which provides that the agreement cannot be varied unless both parties express their consent to the variation in writing but care should be taken to check that either that provision applies or adequate disclosure is made especially in the intervening period until 1 July 2011. If in doubt – have your agreement reviewed in advance of it becoming an issue.

 

Added disclosure requirements – warning to Franchisees about the end of their term

 

Amendments to the Code mean that Franchisors must notify its franchisee at least six (6) months prior to the end of the franchise term as to whether or not the Franchisor shall renew or not renew the agreement or seek to enter into a fresh agreement.

The writer suggests that all Franchisees should check your renewal dates and the dates by which your option may be exercised and keep a diary note of same so as not to lose that interest. To be safe any option to renew (provided all other conditions precedent are satisfied) should be exercised in writing and a duplicate copy of the correspondence kept for your reference.

 

Complexities and where to from here?

 

It is important to thoroughly investigate any business venture prior to investing and franchising is no exception to the rule. Always be aware of your right to seek advice that you can understand when you receive it.

Given the complexities and potential pitfalls involved in setting up, buying or selling a franchise please do not hesitate to contact Rostron Carlyle for assistance in making your transition as smooth as possible.

 

 

 

"The information contained in this article is general in nature and cannot be regarded as anything more than general comment.  Readers of this article should not act on the basis of this comment

without consulting one of Rostron Carlyle's legal practitioners who will consider their particular circumstances".

 

 

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Our clients include both large and small private companies, franchises and growth companies.  It is our job to advise clients of risk so that they can make informed and timely decisions. 

 

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