Franchising Code amendments commence on 1 July

10 June 2010

Amendments to the Franchising Code of Conduct (Code) effective from 1 July 2010 will require franchisors to update their disclosure documents annually, within four months of the end of the financial year. Partner David Williams discusses the changes and advises that franchisors should update their disclosure documents before 1 July 2010 to reflect the changes to the Code.

The recently released Trade Practices (Industry Codes - Franchising) Amendment Regulations 2010 amend the Franchising Code. The amendments apply to franchise agreements entered into on or after 1 July 2010. They increase franchisors' disclosure obligations, providing clearer information upfront to prospective franchisees about the franchise system.

Background briefing

The Australian Government has amended the Franchising Code as part of its response to two reports into franchising - Opportunity not opportunism: improving conduct in Australian franchising by the Parliamentary Joint Committee on Corporations and Financial Services and Strengthening Statutory Unconscionable Conduct and the Franchising Code of Conduct by an expert panel.

On 3 March 2010 the Minister for Small Business Dr Craig Emerson released the report of the expert panel, which was established in November 2009 to look at specific behaviours that might be considered inappropriate in a franchising arrangement. He announced that the Government had accepted the Panel's recommendations, which required amendments to the Franchising Code of Conduct and Trade Practices Act.

Key changes

As a result of the Government response to the Joint Committee report, changes to the Franchising Code of Conduct will:

Require franchisors to disclose to their franchisees what happens at the end of a franchise agreement, for example, whether or not a franchisee has a right to renew the franchise agreement. Franchisors will also be required to inform franchisees six months before the end of the agreement whether or not they intend to renew or enter into a new agreement. Where franchise agreements are for a term less than six months, franchisors will be required to inform franchisees at least one month prior to the end of the franchise agreement of their decision to renew or not renew a franchise agreement.
Require franchisor disclosure documents to include an express statement that franchising is a business and, like any other business, the franchise could fail.
Include a list of necessary and desirable behaviours to encourage parties to approach a dispute resolution process in a reconciliatory manner (including attending and participating in meetings at reasonable times).
Provide that nothing in the Code limits any common law requirement of good faith in relation to a franchise agreement to which the Code applies.

As a result of the Government response to the expert panel report, changes to the Franchising Code will also require franchisors to disclose:

The circumstances in which unilateral variations to franchise agreements may take place and the circumstances in which the franchisor has unilaterally varied a franchise agreement in the past three financial years.
Whether the franchisor will require the franchisee, through the franchise agreement, the operations manual (or equivalent), or any other means, to undertake significant capital expenditure that was not disclosed by the franchisor before the franchisee entered into the franchise agreement.
Whether the franchisor will consider any significant capital expenditure undertaken by the franchisee during the agreement, in determining the arrangements that apply at the end of the agreement (for example, renewal of the franchise agreement).
Whether the franchisor, during the last three financial years, considered any significant capital expenditure undertaken by franchisees, in determining the arrangements to apply at the end of their agreements.
The fact that the franchise agreement could be changed even when the franchisee is trying to sell the business.
Whether the franchisor will attribute their costs, incurred in dispute resolution, to the franchisee.
Whether franchisees may be subject to confidentiality obligations.

Commencement information

The changes apply to franchise agreements entered into on or after 1 July 2010.
Two elements of the proposed regulations, on unilateral contract variation and unforeseen significant capital expenditure provisions, require franchisors to disclose information relating to their activities over the past three financial years.
To minimise compliance burdens and to provide franchisors with adequate time to collate this information, these provisions have a 'stepped' introduction. That is, franchisors will have to provide information for one financial year after the first year (2010-11) of operation of the provisions, two financial years after the second year (2010-12) of operation and so on. The provisions will be fully operational by 2013.

For further information, please contact:

David Williams | Partner
Mullins Lawyers
t +61 7 3224 0270
f +61 7 3224 0333
dwilliams@mullinslaw.com.au