Franchising code of conduct – civil penalties now apply!

17th November, 2014  #, #, #

The new Franchising Code of Conduct has been released.  It comes into effect on 1 January 2015*.

The new Code brings with it some major changes which franchisors will need to incorporate into their franchise agreements.

One of the significant changes franchisors need to be aware of is the introduction of civil penalty provisions for breaches of certain clauses in the Franchise Agreement.

Set out below is a summary of the sections which will attract civil penalties under the new Code if breached.

In all cases, the maximum amount of the breach is 300 penalty units, which at the current penalty unit rate, works out to be $51,000 per breach.

Keep watching Ampersand Legal’s website, LinkedIn and Twitter pages for an update on other key changes to the Franchising Code.

Please contact Ampersand Legal if you need any assistance in reviewing your franchise documents or processes to ensure that you comply with the new requirements.

(*There is a transitional period for new clause 8 of the Code (which requires the creation of a disclosure document.  An existing disclosure document can continue to be used before 1 November 2015, but must be update to comply with new subclauses 8(3), (4) and (5) by 31 October 2015.)

 

Code Clause

Compliance Requirement
6 There is a new obligation on the part of BOTH the franchisor and franchisee to act in good faith in respect of a franchise agreement and the Code.
8(1) A franchisor must create a disclosure document that complies with subclauses 8(3), (4) and (5).
8(6) A franchisor must update a disclosure document within 4 months of the end of the financial year (where required to do so – see subclause 8(7) for the exception).
8(8) Even if a franchise is not required to update a disclosure document, it must do so where a request is made by a franchisee under subclause 16(1).
9(1) A franchisor must give a copy of the Code, disclosure document and franchise agreement to a prospective franchisee within 14 days before the prospective franchisee enters into a franchise agreement or makes a non-refundable deposit.
9(2) The franchisor must give a franchisee a copy of the Code, disclosure document and proposed franchise agreement at least 14 days before renewing or extending the scope or term of a franchise agreement.
13(1) – (4) If a franchisee leases premises from a franchisor or associate, the franchisor is required to give the franchisee either a copy of lease/agreement to lease, or details of the lease terms (where there is no written lease) AND details of any incentive or financial benefit the franchisor/associate within 1 month of the lease being signed or the franchisee moving into the premises.Note: a separate penalty applies for both the failure to give the required information and for failing to give the information within the required time.
14(1) The franchisor must give the franchisee to the franchisee a copy of any of the following types of agreements which the franchisee or any director, shareholder, beneficiary, owner or partner enter into:

  • a lease (other than a premises lease referred to in clause 13) or a hire purchase agreement;
  • an agreement under which the franchisee gains ownership of, or is authorised to use intellectual property;
  • a security agreement;
  • a confidentiality agreement; or
  • a restraint agreement applying after termination of the franchise agreement
15 For all marketing or other cooperative funds, the franchisor must:

  • within 4 months of the end of the financial year:, prepare an annual financial statement detailing all of the fund’s receipts and expenses for the last financial year;
  • ensure the statement includes sufficient details about sources of income and items of expenditure (particularly advertising and marketing expenditure);
  • have the statements audited; and
  • give the franchisee a copy of the statement and auditor’s report within 30 days of preparing the report.
16 The franchisor must give a franchisee a copy of a disclosure document within 2 months or 14 days (as applicable).
17 Franchisors must disclose:

  • to a prospective franchisee, updated information about the franchisor’s solvency/financial position which isn’t included in a disclosure document (subclause 17(1)); and
  • to a franchisee, updated information about:
    • change in majority ownership or control
    • proceedings by a public agency or a judgment against the Franchisor, Franchisor director or associate alleging certain matters (such as breach of a franchise agreement)
    • a judgement against the franchisor or an associate in relation to certain employment matters
    • civil proceedings against the franchisor/director/associate by at least 10% or 10 of the franchisees (whichever is lower)
    • any judgement entered against the franchisor for more than $100,000 for a small proprietary company, and $1,000,000 for any other company
    • certain other judgements against the franchisor
    • the franchisor or an associate becomes externally administered
    • there is a change in the ownership or control of the intellectual property of the franchisor
    • the franchisor or an associate gives an undertaking under section 87B of the Competition and Consumer Act,

within no more than 14 days of becoming aware of that information (subclause 17(2)).
18(1) The franchisor must give a notice to a franchisee if it intends to extend a franchise agreement or enter into a new one.

  • This notice must be given at least 6 months before the end of the term if the franchise agreement term is 6 months or more.
  • The notice must be given at least 1 month before the end of the term if the franchise agreement term is less than 6 months.
18(2) Unless the franchisor does not intend to extend the franchise agreement, the franchisor’s notice must include a statement that the franchisee may request a disclosure statement.
26(3) If after entering into a franchise agreement a franchisee exercises its cooling off rights, the franchisor must repay all payments made by the franchisee under the franchise agreement within 14 days.
27(2) If a franchisor wishes to terminate a franchise agreement because of a breach by the franchisee, it must give the franchisee reasonable notice of the breach, tell the franchisee what is required to remedy the breach and allow the franchisee a reasonable time to remedy the breach.
28(3) If a Franchisor wishes to terminate a franchise agreement under the franchise agreement where there has been no breach by the franchisee, the franchisor must give the franchisee reasonable notice and reasons for the termination.
32 A franchisor cannot induce or influence an outgoing or past franchisee to agree (or not agree) to make its details available for disclosure to any prospective franchisees.
33 A franchisor must not engage in conduct that would restrict or impair a:

  • franchisee or prospective franchisee’s freedom to form an association; or
  • franchisee or prospective franchisee’s ability to associate with other franchisees or prospective franchisees for a lawful purpose.
39, 41 If a mediation is arranged under the Code, the parties must attend the mediation.

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