Changes to the Franchising Code of Conduct

On 1 January 2015, the current Franchising Code of Conduct (Code) will be repealed and replaced with an updated Code. The changes will affect all franchised businesses and this alert summarises that five key changes to the Code.

The Code applies to any franchise agreements entered, renewed or transferred after 1 January 2015.

1.     Obligation to act in good faith:

The Code imposes an express statutory obligation on Franchisors and Franchisees to act in good faith in their dealings with each other.  The obligation cannot be excluded or limited in the franchise agreement.  

“Good faith” is not defined in the Code and must be interpreted using common law principles. 

Conduct which may show “bad faith” includes acting dishonestly or in a way to deny the other party from enjoying the intended benefits of the contract. However, the obligation to act in good faith does not preclude either a Franchisee or a Franchisor from acting in a way to fulfil their legitimate business interests.  For example, a Franchisor that refuses to renew a franchise agreement will not necessarily breach the good faith requirement.

2.     Additional disclosure requirements

There have been several changes to the disclosure requirements of Franchisors. 

The obligation of disclosure continues throughout the duration of the franchise agreement. Importantly, Franchisors now must keep increased records to support their decision making.

Franchisors must provide an information statement to prospective Franchisors upon their expression of interest or application to become a Franchisee.  This information statement is a generic statement which highlights the business risks associated with a particular franchise. 

The form of disclosure document has also been amended. The Code provides a grace period, and the current form of disclosure document may be used until 31 October 2015.

3.     Transparency requirements for money used on advertising

Marketing funds must be kept in a separate bank account, and can only be spent in a way that is disclosed under a disclosure document or agreed by the majority of Franchisees.

In a key change, company operated franchised stores must also contribute to the marketing fund in the same proportion as other non-company Franchisees.

4.     Restrictions on restraint of trade clauses imposed by franchisors

For agreements entered after 1 January 2015, the Code deems restraint of trade clauses as un-enforceable, unless certain criteria can be met by Franchisors. Importantly, a restraint of trade clause will not apply where a Franchisee has sought renewal of their franchise agreement but the Franchisor has refused renewal.

Restraint of trade clauses in franchise agreement entered before 31st December 2014 will continue to apply.

5.       Limitations on capital expenditure

In some circumstances, the Code imposes a prohibition upon Franchisors that require that their franchisees undertake significant capital expenditure in relation to their franchised business.

The prohibition has several broad exceptions, such as where the expenditure is disclosed to the Franchisee in the disclosure document given before entering or renewing the franchise agreement, or if expenditure is to be incurred by a majority of Franchisees and is approved by a majority of Franchisees.

In other changes, the Code also imposes greater rights of investigation upon the ACCC, together with an option for the ACCC to issue infringement notices or take court proceedings.

For more information on how the changes to the Code will affect you, please contact:

Vittoria De Stefano 
Special Counsel
Harwood Andrews
T: 03 5226 8520
E: vdestefano@harwoodandrews.com.au