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The Franchising Code

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The Franchising Code 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.
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