Under the new changes to the Franchising Code of Conduct, franchisees will be entitled to more information about the risks of entering into Franchise Agreements. This should help them to make more informed decisions.
Although the additional disclosure obligations for franchisors are not onerous, they do require franchisors to update their documents before 31 October 2010.Kate Hocking
The Code is a mandatory code under the Trade Practices Act 1974 (Cth), that:
The Code requires franchisors to provide a disclosure document to prospective franchisees or a franchisee, if the franchisor or the franchisee proposes to renew, extend, or extend the scope of the franchise agreement.
The franchisor must provide that document at least 14 days before the prospective franchisee:
The Code is contained in Annexure 1 of the Trade Practices (Industry Codes — Franchising) Regulations 1998 (Regulations). In a response to recent parliamentary inquiries concerning franchising, the Government has passed a number of legislative changes to the Regulations and the Code.
The key changes to the Code will require franchisors to make additional disclosures, in the disclosure document, in all of the following areas:
The franchisor must declare on the first page of the disclosure document that franchising is a business and, like any business, the franchise (or franchisor) could fail during the franchise term, and this could have consequences for the franchisee.
The franchisor must disclose details of each recurring or isolated payment payable by the franchisee to someone other than the franchisor or their associate, if:
The franchisor must disclose whether the franchisor will, in any way, require the franchisee, to fund unforeseen significant capital expenditure that was not disclosed by the franchisor before the franchisee entered into the franchise agreement.
The franchisor must disclose whether it will require the franchisee to pay the franchisor"s costs, including legal costs, incurred in dispute resolution, to the franchisee.
The franchisor must disclose:
The obligation applies whether the variations result from legislative changes or from a change by the franchisor to the franchise system.
The franchisor must disclose any confidentiality obligations that will be imposed on the franchisee including details of the matters that the obligation may cover.
The franchisor must now include details of the process that will apply in determining arrangements to apply at the end of the franchise agreement including:
The franchisor must advise whether it will amend (or require the amendment of) the franchise agreement on or before the transfer or novation of the franchise.
The term 'novation' has been introduced to the Code and is defined as the termination of the franchise and entry into a new franchise with a proposed transferee on the same terms as the terminated franchise.
In addition to the changes to the disclosure obligations under the Code, the key changes to the Regulations are summarised below:
The parliamentary inquiry into franchising identified that some parties to a franchise dispute are stalling negotiations and acting to deplete resources of the other party. These actions frustrate the dispute resolution process under the Code. Previously, there was little guidance on what behaviour is regarded as a genuine attempt by a party to resolve a franchise dispute.
Now, a non-exhaustive list of acceptable dispute resolution behaviour has been added to the Regulations. A party will be taken to be trying to resolve a dispute in a reconciliatory manner, if they:
The parties are equally liable for the costs of mediation, unless they agree otherwise. 
The 'costs of mediation' include:
A franchise agreement entered into on or after 1 March 2008 must not contain, or require a franchisee to sign, a waiver of any verbal or written representation made by the franchisor.
The franchisor must now notify the franchisee, at least 6 months before the end of the franchise agreement, of the franchisor's decision:
If the term of the franchise agreement is less than 6 months, then the franchisor must notify the franchisee of its decision at least one month before the end of the term of the franchise agreement.
It is unclear if:
The changes to the Code do not include a statutory obligation for franchisors and franchisees to deal with one another in good faith (although this was considered).
Instead, by way of compromise, a new clause has been inserted into the Code which preserves and recognises any common law developments on the concept of good faith. This clause provides that nothing in the Code limits any obligation imposed by common law on the parties to a franchise agreement to act in good faith.
Although the Code applies to franchise agreements entered into on, or after, 1 October 1998, the changes to the Code apply to any franchise agreement entered into, renewed, transferred or extended on or after 1 July 2010.
There are no transitional arrangements. Accordingly, any franchisee that signs a franchise agreement on or after 1 July 2010, must have been provided with a disclosure documents that comply with the new Code.
Franchisors are required to update their disclosure documents annually within 4 months after the end of financial year. All franchisors must ensure the new changes are incorporated into their updated disclosure documents by 31 October 2010.
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Geoff Musgrove is a partner in the Maddocks Commercial team.
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