THE FRANCHISING CODE

Author: Matthew Bromley

Date: 8 November, 2013

© Copyright 2013 This work is copyright. Apart from any permitted use under the Copyright Act 1968, no part may be reproduced or copied in any form without the permission of the Author.

Requests and inquiries concerning reproduction and rights should be addressed to the author c/- [email protected] or T 613-9225 6387. The Franchising Code A brief overview, proposed changes and some cases.

Matthew Bromley Foley’s List ADVICE TO FRANCHISEE CLIENTS

• WHY ARE YOU DOING THIS? • WHAT ARE YOU BUYING? A JOB? • WHAT ARE THE ALTERNATIVES? • DON’T DO IT! HISTORY OF THE CODE

• Introduced in 1998 • Mandatory industry code pursuant to CCAct 2010 • In Part IVB of the CCA ‐Section 51AD provides that a company must not contravene the Code • Section 80, 82 and 87 of the CCA provide remedies • But the loss and damage has to be caused by the contravention of the code to succeed. Brief overview of the Code

• It applies to “franchise agreements”‐which is defined‐ check that it is covered. • Disclosure document • Franchisor must create one before entering into a franchise agreement and within 4 months after the end of each financial year after entering into one. • Choice of Annexure 1 or 2 if expected turnover is less than $50,000 but in practice only Annexure 1 is used( because if franchisee asks for more info it has to be provided clause 6C) The disclosure document

• Must be in accordance with Annexure 1 of the Code • The layout is prescribed in section 7 of the Code. • General risk warnings • It must have a table of contents • There are 23 separate sections which must be addressed in the manner stipulated in Annexure 1. Brief Overview cont..

• The disclosure document must be given to a prospective franchisee or an existing franchisee who proposes to renew or extend the franchise agreement. • Can be requested by franchisee at any time but only once every 12 months Time frames

• At least 14 days before the entering into the agreement or receiving a non refundable payment the franchisor must give the following to the prospective franchisee/existing franchisee: 1. A copy of the Code 2. A disclosure document 3. Copy of the franchise agreement in the form in which it is to be executed Time frames cont…

• Signed statements must be received from the franchisee (no time limit just prior to the agreement or money paid) that: 1. They have received, read and had a reasonable opportunity to understand the disclosure document and the code 2. Been given advice by or chosen not to seek advice from an independent legal adviser, business adviser and accountant (from a prospective franchisee only) Cooling off

• A new franchisee may terminate an agreement within 7 days of entering into the agreement or making any payment under the agreement ( whichever is the earlier). • All monies paid must be returned within 14 days (less reasonable expenses if they have been set out in the agreement.) Lease and Prohibited clauses

• If the franchisee is leasing/occupying space from a franchisor then copies of relevant documents lease etc must be given to the franchisee • Franchise agreements cannot have a clause containing a: 1. General release of the franchisor from liability to the franchisee 2. A waiver of any verbal or written representation made by the franchisor Marketing funds

• Franchisor must prepare an annual financial statement detailing all the funds receipts and expenses • The statement must be audited • Given to franchisee within 30 days of the statement and audit report being prepared • 75% of franchisees can agree to waive these requirements Further Disclosure

• If the disclosure document does not mention certain matters and a franchisor later becomes aware of those matters then the franchisor ( within 14 days) must tell a franchisee, in writing. • Listed items in clause 18(2) includes judgments in certain cases, change in majority ownership, civil proceedings by at least 10% or 10 of the franchisees ( whichever is lower) Other matters

• A franchisor’s consent to a transfer or novation of an agreement cannot be unreasonably withheld • Consent deemed to be given if franchisor does not respond that the consent is withheld and say why within 42 days after request has been made • At least 6 months before the end of the term the franchisor must notify the franchisee whether it will renew/not renew/enter into a new agreement . Termination

• If franchisee breaches the agreement and the franchisor wishes to terminate then before that can happen notice must be given of the breach giving the franchisee a reasonable time to remedy the breach but no more than 30 days • Doesn’t apply if franchisee becomes insolvent, fraudulent, abandons the business etc Dispute Resolution

• The franchise agreement must have a complaint handling procedure that complies with 29 and 30 of the Code. • First step: a written notice of the nature of the dispute, what outcome is sought and what action it thinks is needed to settle the dispute • Parties the try to agree about how to resolve the dispute • If this can’t be done after 3 weeks then either party may refer the matter to a mediator and if they can’t agree on a mediator then the Office of the Franchising Mediator Adviser can be asked to appoint one and they must do so within 14 days. The mediation must start within 28 days after appointment • The mediator decides the time and place for the mediation • Parties must attend and try and settle the dispute Dispute resolution cont…

• If 30 days have elapsed after the mediation has started and it has not resolved then either party can ask that the mediation be terminated. • Mediator then gives each party a certificate confirming the mediation has ended and has not resolved. • The parties are equally liable for the costs of the mediation unless they agree otherwise. 2013 Wein Review Main proposals • Recommendations 1 • Governments Response • Clause 20A: add a • Agreed in principle with a requirement that a proposed amendment disclosure document be that franchisors remind provided when a franchisees of their right franchisor signals it wishes to request a disclosure to renew the agreement. document when notifying Franchisee not bound to them of intention to renew until disclosure has renew. been given. 2013 Wein Review Main proposals • Recommendation 3 • Governments Response • The franchisor be • Agreed required to disclose the rights of the franchisor and franchisee to conduct and benefit from online sales. 2013 Wein Review Main proposals • Recommendations 4 & 5 • Governments Response • Remove Annexure 2‐ • Agreed Short Form Disclosure statement. • Require franchisors to • Agreed provide a stand alone generic key risks statement of 1‐2 pages at the time of first contact with the franchisor 2013 Wein Review Main proposals

Recommendation 7 Governments Response • Prohibit franchisors from • Accepted in principle imposing unreasonable • The Government also recognises that a balance should be struck significant unforeseen capital between the prohibition of expenditure. ‘unreasonable’ expenses on a franchisee and the ability of the franchisor to require upgrades to systems which may need to be made to comply with a change in Australian Standards, or ensure the franchise business take advantage of innovations which will improve the business as a whole, for example 2013 Wein Review Main proposals

Recommendation 8 Governments Response • Accepted in part • Marketing funds held on trust • It will amend the Code to make the administration of marketing funds more • Company owned franchises transparent and ensure that marketing and advertising funds are spent on legitimate must also contribute expenses related to the marketing and advertising of the franchise system.

• Government will not amend the Code to state that marketing or other cooperative funds are to be treated as trust funds or held in a trust account. Following consultation, the Government accepts that this may result in unintended taxation consequences regarding marketing funds, and may increase the compliance costs and risks in a way that is disproportionate to the benefit a trust arrangement would confer on franchisees. 2013 Wein Review Main proposals

Recommendation 9 Governments Response • The Code be amended to • Accepted in part include an express obligation • Accordingly, the Government is to act in good faith. concerned that merely referring • Not be defined, instead the to the unwritten law will make it unwritten law relating to good difficult for parties without legal representation to appreciate faith should be incorporated in what may be required of them. a manner similar to the The Government will, without unconscionable conduct limiting the common law, provide prohibition set out in section guidance to parties on the 20 of the Australian Consumer application of the duty following Law further consultation. 2013 Wein Review Main proposals

Recommendation 11 Governments Response • that sub clause 20(4) of the Code be amended to read: • Accepted in principle • The franchisor is taken to have given consent to the transfer or novation if the • Some franchisees have franchisor does not, within 42 days after expressed concern that the the request was made, or all information reasonably required by the franchisor proposed wording may allow a under the franchise agreement has been provided, whichever is the latter, give to the franchisor to frustrate or delay franchisee written notice: – that consent is withheld; and the transfer or novation by – setting out why consent is withheld. repeatedly requesting • The franchisee should take all reasonable steps to provide all information required additional information from under the franchise agreement to enable the franchisor to be able to properly the franchisee evaluate the request. [Amendments underlined] • . 2013 Wein Review Main proposals

Recommendation 12 Governments Response • If certain conditions are met • Accepted • Following consultation, the then restraint of trade clauses Government will also ensure that will not be enforceable. restraint of trade clauses are unenforceable not only in cases of • No breach, wishes to renew, non‐renewal (Recommendation 12(e)), but also where the franchisor abides by confidentiality has not extended a franchise clause, franchisor does not agreement, and where the franchisor has terminated the franchise want to renew agreement 'without cause' and the other conditions set out in the recommendation are met • . 2013 Wein Review Main proposals

Recommendation 14 Governments Response • Amend the Code to ensure • Accepted in principle that franchisors cannot: • amend the Code to prevent a franchisor attributing the costs of 1. attribute the legal costs of dispute resolution to a franchisee dispute resolution to a in the franchise agreement; and franchisee unless ordered by a • make amendments to the Code court; that preserve the parties’ ability 2. require a franchisee to litigate to negotiate a suitable forum for their disputes (including outside the jurisdiction in which mediation and alternative dispute the franchisee’s business resolution), while ensuring primarily operates. adequate protection of franchisees. 2013 Wein Review Main proposals

Recommendation 15 (b) & (c) Governments Response • The CCA be amended to allow the • Accepted ACCC to issue an infringement notice for a breach of the Code. • The CCA be amended to allow the ACCC to use its powers under • Accepted section 51ADD of the CCA (its random audit powers) to assess a franchisor’s compliance with all aspects of the Code, not just to require the production of documents created under the Code 2013 Wein Review Main proposals

Recommendation 17 Governments Response • There should not be another • Accepted in principle review of the Code for a minimum of five years after any amendments to the Code take effect in response to this report. Good faith

• The contractual requirement to act in “good faith” is not yet implied in all commercial contracts. • It is implied in all contractual dealings in USA Canada, NZ and Europe amongst others. • In Victoria the decision in Esso Australia Resources Pty Ltd v Southern Pacific Petroleum NL (Receivers and Managers Appointed) (Administrators Appointed) applies. In Esso the Court of Appeal stated the following principles: – a term of good faith is not implied as a legal incident of all commercial contracts; – a duty of good faith may be implied to protect a vulnerable party from exploitive conduct and when the relationship between the parties is imbalanced; – a term of good faith may be implied as a matter fact on the basis of the test in BP Refinery (Westernport) Pty Ltd v Shire of Hastings. Duty to co‐operate

• Close to some meanings of “good faith” • This is an accepted implied term in Australian contract law • “Each party agrees to do all such things as are necessary on their part to enable the other party to have the benefit of the contract.” Implied obligation not to prevent or hinder performance The principle is that: “If a party enters into an arrangement which can only take effect by the continuance of a certain existing state of circumstances, there is an implied engagement on his part that he shall do nothing of his own motion to put an end to that state of circumstances, under which alone the arrangement can be operative.” Stirling v Maitland (1864) 122 ER 1043 at 1047 per Cockburn CJ. Non‐derogation from grant

• In England: "Doctrine of derogation from grant is usually applied to sales or leases of land, but it is of wider application. It is a general principle of law that, if a man agrees to confer a particular benefit on another, he must not do anything which substantially deprives the other of the employment of that benefit: because that would be to take away with one hand what is given with the other." • Has been applied in franchise cases in England but not here in Australia Unconscionability

• Common law set out clearly by Justice Nettle, as he then was in Collection House Limited v Taylor [2004] VSC 49: • The jurisdiction in equity to set aside catching and unconscientious bargains is clear. It is raised whenever one party to a transaction is at a special disadvantage in dealing with the other party because of illness, ignorance, inexperience, impaired faculties, financial need or other circumstances that affect his or her ability to conserve his or her own interests, and the other party unconscientiously takes advantage of the opportunity thus placed in his hands. Among the other circumstances in which special disadvantage may be found to exist are age, sex, imperfect English and lack of assistance or explanation where assistance or explanation is necessary.

• There is also a subsidiary principle which relates to the onus of proof, that wherever a purchase (or other benefit) is obtained from a poor and ignorant person at a considerable undervalue, and the person does not have the benefit of independent advice, the onus is thrown upon the recipient of the benefit, when the transaction is impeached, of establishing that it was fair just and reasonable. There is authority too that, for this purpose, "poor" may be taken to mean a member of the lower income group and "ignorant" to mean less highly educated. ACL Unconscionability

• Section 21 and 22 of ACL applies • Not limited by “unwritten law” of unconscionability • Must have regard to a number of factors including the Code and the extent the parties acted in good faith • Limits not yet tested Some recent cases

• The vacuum cleaner case‐ unconscionability • ACCC v Lux Distributors Pty Ltd [2013] FCAFC 90 • “The task of the Court is the evaluation of the facts by reference to a normative standard of conscience. That normative standard is permeated with accepted and acceptable community values…Here, however, they can be seen to be honesty and fairness in the dealing with consumers. …….. The existence of State legislation directed to elements of fairness is a fact to be taken into account. Values, norms and community expectations can develop and change over time. ………These laws of the States and the operative provisions of the ACL reinforce the recognised societal values and expectations that consumers will be dealt with honestly, fairly and without deception or unfair pressure.” Recent cases

• Master Education Services Pty Limited v Ketchell [2008] HCA 38 • Struck fear into the franchise industry as the NSW Court of Appeal held that the failure of a franchisor to obtain a written statement that the prospective franchisee had received, read and had a reasonable opportunity to understand the disclosure document and the Code ( breaching Clause 11(1) led to illegality at common law and consequent unenforceability of the franchise agreement. • High Court allowed the appeal. Agreement not void . Recent cases

• Trans‐It Freight Pty Ltd v Billy Baxters (Franchise) Pty Ltd [2012] VCA 71 • Billy Baxters (Franchising) Pty Ltd v Trans‐It Freighters Pty Ltd & Ors [2009] VSC 207 • Are worth reading as it shows how difficult it is to predict the outcome of a misleading and deceptive conduct case in the context of old s51A • Franchisee ultimately won and went from $250K down to $1.2M up. • Obvious risk management issue is to ensure that statements about projected earnings are strictly controlled. Recent cases

• Pampered Paws Connection Pty Ltd) v Pets Paradise Franchising (Qld) Pty Ltd (No 10) [2012] FCA 25 • 13 reported decisions from 24 October 2008 when the claim was struck out with leave to amend to 30 August 2013 when the judge summarized the result as:

My overall firm impression is that the applicants succeeded to only a relatively minor degree in respect of the claims which they pursued. That success is reflected in the limited declaratory orders made and in the fact that no damages were proven to my satisfaction to have been suffered by reason of the contraventions which were made out.

• The Respondents went into administration in July 2012. It was part of the group that also owned the Billy Baxters franchise. Conclusion

1. Warn clients that litigation is inherently risky. 2. No outcome is certain. 3. The only guarantee that you can give them is that they will receive a bill for legal services at the end of each month. 4. If you are lucky enough to obtain a judgment then you may not collect the money. THE END