It's crunch time! Changes to the Franchising Code are nigh

In brief

The long-anticipated changes to the Franchising Code of Conduct are scheduled to take effect on 1 January 2015. Partners Tim Golder and Andrew Wiseman and Lawyer Nadia Guadagno report on the significant changes.

Review of the Code – where we are at

In January 2013, the Labor Government announced an independent review of the Code. The 'Review of the Franchising Code of Conduct' (the Wein Report)¹ was presented to the Government in April 2013 and was released publicly in May 2013. In June 2013, the Labor Government released an Industry Consultation paper² and, in July 2013, it released its official response to the Wein Report, which accepted most of the recommendations.³

Our previous Focus articles discussed the recommendations made by the Wein Report (Focus: Recommending change to the Franchising Code) and the Government's responses to them (Focus: Green light for franchising reform).

This week, the Liberal Government released Exposure Drafts of legislation to create a new Code and amend the Competition and Consumer Act 2010 (Cth) to add new penalties for Code breaches.⁴ The draft legislation is said to contain the entirety of the Government's changes to the Code and only submissions on technical aspects of implementation will be accepted. The new Code will commence on 1 January 2015 and will apply to all franchise agreements entered into or renewed on or after 1 January 2015.

Stronger enforcement provisions

The Government has introduced new penalties for breaches of the Code, with the aim of improving compliance.⁵ Breaches of a number of provisions of the Code will attract civil penalties of up to $51,000.⁶ The ACCC has also received new powers. It will be able to issue infringement notices for breaches of the Code with fines of up to $8500⁷ without needing a court order. Payment of the amount in an infringement notice does not amount to admission or finding of a contravention of the Code. The recipient is afforded the opportunity to make an application to the ACCC to have the notice withdrawn. If the notice is not withdrawn and the fine is not paid, proceedings can be commenced and the ACCC can seek a civil penalty. The ACCC can also use its audit powers to obtain documents the franchisor has relied upon to support statements made in the disclosure document.⁸ There is a corresponding obligation on franchisors to keep such documentation.⁹

Express obligation to act in good faith

The new Code includes an express obligation on the parties to act in good faith, not only during the franchise relationship, but also when the parties are discussing and negotiating entering into, and disputing, a franchise agreement.¹⁰ While the Wein Report recommended that the obligation to act in good faith not be defined, but instead incorporate the common law, the Government has instead opted to define the 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 and it cannot be excluded. Franchising parties should take care in drafting their agreements to ensure that clauses cannot be construed as giving a party power to make a decision or take action that may be deemed 'arbitrary'.

Changes to disclosure requirements

There are a number of changes to the information a franchisor is required to disclose to franchisees. While franchisors no longer have to summarise the provisions of the franchise agreement in the disclosure document, they 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.¹¹ Failure to comply with the disclosure requirements attracts the new civil penalties. Franchisors are also obliged to provide prospective franchisees with an information sheet that provides an overview of the risks and rewards of franchising.¹² In a welcome step for overseas and other head franchisors in multi-tiered systems, there will no longer be any disclosure obligations between them and sub-franchisees.

Next steps

The Government has sought comments only on the technical aspects of implementing the law.¹³ Given the extensive consultation that has already occurred as part of the review, the Government has said it has no intention to reconsider the policy underpinning these reforms. Anyone wishing to make comments must do so by 30 April 2014.

Following this, the Government will finalise the legislation. As noted above, the new Code will commence on 1 January 2015.

Conclusion

The new Code, which will apply to new and renewed franchises from 1 January 2015, introduces a number of significant changes to the rights and obligations of franchising parties, as well as new penalties for breaches of the Code. Franchising parties need to take action now to ensure that their practices and agreements will be compliant.