What are the franchisors obligations?
On January 1, 2015 the Australian Competition & Consumer Commission (ACCC) replaced the old Franchising Code of Conduct with a newer version that applies from that date forward. It is important for both franchisors and franchisees to understand this code and comply with it in all of their dealings.
The most important change to the code is enactment of an obligation on the part of both franchisors and franchisees to act in good faith in any matter involving a franchise agreement. This good faith obligation applies to the term of a franchise contract and any disputes that may arise during the contract term as well as to the negotiations and disclosures that take place before the signing of a franchise agreement.
The Franchising Code of Conduct is a key document that sets out obligations of franchisors and franchisees. It is enforced by the Australian Competition & Consumer Commission (ACCC).
Some of the key obligations the Code imposes on franchisors are set out below. Note this is not an exhaustive list.
- Franchisors must act in good faith towards franchisees (and franchisees must act in good faith towards franchisors).
- Franchisors must provide a current Disclosure Document 14 days before entering into, renewing or extending the scope of a franchise agreement.
- Franchisors must obtain a receipt saying the franchisee has received, read and had a reasonable opportunity to understand the Disclosure Document.
- Franchisors must require franchisees to obtain a signed statement of advice from an independent lawyer, business adviser or accountant, or a statement saying advice has been recommended but the franchisee has decided not to seek that advice in respect of the Franchise Agreement.
- Franchisors must advise franchisees at least 6 months before the end of a term of a franchise agreement if the franchisor intends to renew or not renew the franchise agreement.
- Franchisors cannot require franchisees to undertake significant capital expenditure during the term of the franchise agreement unless that expenditure:
- was disclosed to the franchisee in the disclosure document provided at the start of the franchise agreement
- Is approved by a majority of franchisees
- Is required to comply with law
- Is agreed by the franchisee
- Is considered by the franchisor is necessary, justified by a written statement setting out the rationale for making the investment, the amount of capital expenditure required, the anticipated outcomes and benefits and the expected risks associated with making the investment.
- Franchisors cannot stop franchisees from forming an association, or from associating between themselves for a lawful purpose.
- If the franchise system requires franchisees to contribute to a marketing fund, franchisors generally must prepare a financial statement for the fund within 4 months of the end of each financial year, and have those statements audited. Franchisors must give franchisees copies of the financial statements and auditor’s report within 30 days of preparing those documents.
- Franchisors must keep franchisees up to date with materially relevant facts within 14 days of the matter arising: including (but not limited to):
- a change in ownership or control
- legal proceedings or certain judgements against the franchisor and other interested parties
Obligation to Act in Good Faith
Good faith is not defined in the Code. Instead, the Code says good faith needs to be considered within the meaning of the general law.
Good faith requires parties to a franchise agreement to exercise their powers reasonably and not arbitrarily or for some irrelevant purpose. Certain conduct may lack good faith if one party acts dishonestly, or fails to have regard to the legitimate interests of the other party.
Whether certain conduct will lack good faith will depend on the circumstances surrounding the conduct.
Some tips to help franchisors to manage the good faith obligation include:
- Treat all franchisees equally – there can’t be one rule for one franchisee and a different rule for others.
- Take time to consider if the Franchisor has complied with its obligations under the Franchise Agreement before threatening to breach or withhold franchisor services to a breaching franchisee.
- Ensure accurate file notes are taken for all conversations with franchisees.
- Where a meeting takes place, take accurate minutes and share those minutes with a franchisee after the meeting.
Since the Franchising Code of Conduct was amended starting January 2015, many of the obligations outlined above are now “civil penalty provisions” – meaning the ACCC can fine franchisors up to $54,000 per breach of each civil penalty provision.
If in doubt about your compliance obligations under the Franchising Code of Conduct, always seek legal advice.
About the author
Narissa Corrigan is the Principal of Ampersand Legal, a boutique law practice which provides legal advice to clients in areas including franchising, food, intellectual property, advertising & marketing, trade promotions and commercial law. Ampersand Legal offers clients a contract in-house legal service or legal advice on an as-needs basis, depending on client requirements. For more details, visit www.ampersandlegal.com.au or email firstname.lastname@example.org