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Thursday, April 10, 2014

The countdown is on - changes to the Franchising Code are upon us

By Nadia Guadagno, Lawyer

Successive governments have been talking about reforms to the Franchising Code of Conduct (the Code) for over a year now. But the time has finally come to take action. Last week, Exposure Drafts of legislation to create a replacement Code and add to its enforcement armoury were released.

The Federal Government says it's done with talking – only submissions regarding 'technical aspects of implementing the law' will be accepted over the next few weeks. So that means that the changes appear to be certain and with the start date said to be 1 January 2015, businesses and advisers have 9 months to get ready.

Here's a snap shot of the more significant changes.

Complete re-draft

Rather than drafting legislation to amend particular provisions of the Code, the Government has drafted a completely new Code to replace the existing Code. While the new Code incorporates a large part of the existing Code, it has been renumbered, reordered and reformatted and there is a number of new elements.

New penalties

The Government has introduced new penalties for breaches of the Code with the aim of improving compliance and deterring breaches.
  • Civil penalties have been added for breaches of a number of provisions of the Code of up to $51,000. 
  • The ACCC has also been granted the power to issue infringement notices for breaches of the Code (without a court order) with fines of up to $8500.
  • The ACCC can also use its audit powers to request documents which underlie the information provided by franchisor in its disclosure document.

Express obligation to act in good faith

Under the new Code, franchising parties will be bound by an obligation to act in good faith, not only during the franchise relationship, but also when the parties are negotiating entering into, and disputing, a franchise agreement. The new Code defines this obligation as including obligations 'to act honestly and not arbitrarily' and 'to cooperate to achieve the purposes of the franchise agreement'.  A breach of this provision is subject to a civil penalty.

Changes to disclosure requirements

There is a number of changes to the information a franchisor is required to disclose to franchisees.
  • What's out? In multi-tiered systems, master and foreign franchisors will no longer have to provide disclosure documents to sub-franchisors. Additionally, franchisors no longer have to summarise the provisions of the franchise agreement in the disclosure document. 
  • What's in? Franchisors must now disclose information about online trading to ensure franchisees are more fully able to assess the viability of the business they are proposing to operate. Franchisors are also obliged to provide prospective franchisees with an information sheet which provides an overview of the risks and rewards of franchising.

Breaches of a number of the disclosure requirements will attract the new civil penalties.
The new Code will apply to franchise agreements entered into, and franchise agreements which are renewed, on or after 1 January 2015. Franchising parties need to take action now to ensure that their practices and agreements will be compliant.

For a new detailed analysis of the changes to the Code see our Focus.

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