Significant amendments to the Franchising Code of Conduct (Code) are scheduled to take effect on 1 January 2015 and will apply to all franchise agreements entered into or renewed on after 1 January 2015.

These amendments impose new requirements in relation to franchisor conduct with prospective and existing franchisees and compliance with franchise disclosure document obligations.

Significant changes to disclosure obligations

There are a number of changes to the franchisor’s disclosure obligations:

    • Master Franchisors: Master franchisors no longer have to prepare disclosure documents for sub-franchisees. This obligation is now imposed on the master franchisee. Such disclosure should include details of the nature of the relationship between a master franchisor and master franchisee.
    • Online Sales: Franchisors are required to disclose how online sales may be made in connection with the franchise, including whether the franchisor or (its associates) make such online sales.
    • Disclosure Documents: The Code maintains the obligation for a franchisor to provide a disclosure document to prospective franchisees. The disclosure document must be updated within four months after the end of the financial year.  The franchisor will not be required to comply with this obligation if it enters into not more than one franchise agreement during the financial year.

Good faith 

The Code now includes an express obligation on the parties to a franchise agreement to act in good faith in respect of any matter arising under or in relation to the franchise agreement or the Code.The Code contains a non-exhaustive list of matters which the Courts may have regard to in determining whether this obligation has been breached.   The imposition of a civil penalty will follow a breach of the good faith obligation.

Stronger enforcement provisions

The amendments empower the ACCC to seek orders for civil pecuniary penalties (CPP) and to issue infringement notices.The Code contains CPP provisions which if contravened allows the ACCC to seek an order for a financial penalty of up to $51,000 or to utilise the infringement notice regime to impose a fine of up to $8,500 for corporations and $1,700 for individuals.

Greater regulation of marketing funds

Franchisors must maintain a separate bank account for anticipated marketing and advertising fees to which franchisees have contributed.  A franchisor must also contribute to the marketing fund for each corporate store it operates. The marketing funds may only be applied to expenses that have been disclosed in the disclosure document and are legitimate marketing or advertising expenses or if it has been agreed to by a majority of franchisees.

Significant capital expenditure

A franchisor is prohibited from seeking franchisee contribution in respect of unreasonable and significant capital expenditure where such expenditure was not explicitly disclosed to the franchisee and such expenditure was not commercially necessary.

Restraint of trade

The New Code restricts a franchisor’s ability to enforce a post term restraint of trade at the end of term where the franchisee wants to renew the current agreement on substantially the same terms but has been refused renewal by the franchisor through no fault of their own.

What you should do now

As a consequence of these amendments franchisors will need to conduct an immediate review of their franchise agreement to meet the 1 January 2015 start date. Franchise agreements will need to be reviewed and amended to address these changes and ensure compliance with the Code’s new obligations.

How we can help

Pointon Partners has extensive experience relating to franchise agreements and can assist you with ensuring that your existing or proposed franchise agreements comply with the Code, negating the risks associated with noncompliance, which include sever pecuniary penalties.

If you have any queries regarding the above please do not hesitate to contact David Mazzeo for advice.