February 2007

2007 - REVIEW OF DISCLOSURE PROVISIONS IN FRANCHISING CODE OF CONDUCT

The Federal Government's response to the Review of the Disclosure Provisions of the Franchising Code of Conduct ("the Review") [1] was released by Fran Bailey, Minister for Small Business and Tourism on 6 February 2007.

This response agreed with 31 of the recommended 34 changes to the disclosure provisions of the Franchising Code of Conduct (the Code).

The most critical recommendations of the review - and the Government's responses - are summarised:

1) RECOMMENDATION: That the franchisor must provide the prospective franchisee with the franchise agreement in the form in which it is intended to be executed. Further, that a copy of the franchise agreement must be provided with the disclosure document 14 days before the franchise agreement is expected to be signed. [2]

RESPONSE: The Government agreed the franchise agreement should be provided to prospective franchisees together with the disclosure document, and this practice should be required by the Code. (Some franchisors already do this.)

2) RECOMMENDATION: That the franchisor must provide the prospective franchisee with all documents required by the franchise agreement to be signed, in the form each is intended to be executed. Further, that these documents be provided with the disclosure document 14 days before the franchise agreement is expected to be signed. [3]

RESPONSE: The Government acknowledged a franchisor may have difficulty providing all documents required to be signed by the franchisor to the prospective franchisee 14 days before the franchise agreement is expected to be signed. However they agreed that if the documents are available, they should be provided at least 14 days before the franchise agreement is expected to be signed. Documents not available at that time are to be provided when they become available.

3) RECOMMENDATION: The Code should be amended to require the franchisor to include a Risk Statement with the Disclosure Document. [4]

RESPONSE: The Government disagreed, decisions about the viability and risks of a business venture are ultimately the responsibility of that business.

4) RECOMMENDATION: Compulsory annual audit of any marketing and other co-operative fund to which a franchisee must contribute to as a condition of the franchise agreement. The Review also recommended the removal of the current opt-out option, where an audit is not required if 75% of franchisees approve this measure. [5]

RESPONSE: The Government agreed with a compulsory audit of such funds, and further, required franchisees to be provided with a full accounting of such funds together with a copy of the auditor's report.

5) RECOMMENDATION: That franchisors be required to provide prospective franchisees not only with numbers but also names, location and contact details of former franchisees, subject to compliance with Privacy Laws and the consent of former franchisees to disclose contact details. [6]

RESPONSE: The Government agreed franchisors should provide names, location and contact details of former franchisees where consent had been obtained and the information was available to the franchisor.

6) RECOMMENDATION: Consideration be given to prohibiting clauses in franchise agreements that give a franchisor the right to unilaterally change arrangements with franchisees, but instead made subject to mutual consent or agreement to allow for compensation to be made to franchisees. [7]

RESPONSE: The Government did not agree such clauses should be prohibited. Its preference was that unilateral variation clauses within agreements should be addressed by reforming the Trade Practices Act 1974 (Cth) in relation to provisions for unconscionable conduct.

The Government will ask the ACCC to consider including this issue in their educational material.

7) RECOMMENDATION: That the ACCC administer a mandatory franchisor registration system, requiring annual lodgement of the most current disclosure material and other prescribed information. Further, that the ACCC enforce the Code's disclosure requirements by conducting sample audits of lodged disclosure documents. [8]

RESPONSE: The Government disagreed for several reasons:

• the paperwork and compliance burden on franchisors would be significant;
• the ACCC would not be in a position to ensure the quality or substance of the documents lodged;
• the ACCC would be seen to endorse and provide credibility to registered franchisors and lodged disclosure documents; and
• it is at odds with the Government's policy of reducing the regulatory burden on business.

Instead the Government will request that the Franchise Council of Australia publish a report on details of the national franchise-accreditation scheme.

8) RECOMMENDATION: That the Code should be amended to require "good faith" and "fair dealing" between franchisors, franchisees and prospective franchisees. [9]

RESPONSE: The Government agrees with the intention of this recommendation. However, "good faith" is a factor used in determining unconscionable conduct under s 51AC of the Trade Practices Act 1975 (Cth).

IN CONCLUSION

Currently the Government has not announced any legislation to give effect to the agreed recommended changes to the Code.

Stephens Lawyers & Consultants will issue updated reports as further information is released.

BACKGROUND INFORMATION

The Review, completed on 31 October 2006, was conducted by a committee chaired by Mr Graeme Matthews, National Managing Partner, KPMG Middle Market Advisory, supported by a secretariat from the Office of Small Business and a team from the law firm Corrs Chambers Westgarth.

The Committee was asked to review Part 2 - Disclosure, of the Franchising Code of Conduct and make recommendations for improving the disclosure provisions.

For the complete text of Review of the Disclosure Provisions of the Franchising Code of Conduct and the Australian Government response to the Review, follow these links:

http://www.industry.gov.au/content/itrinternet/cmscontent.cfm?objectID=8FC84271-CCCA-03A0-7399998601CA4ADE http://www.industry.gov.au/content/itrinternet/cmscontent.cfm?objectID=8FCD612C-94D2-C4EF-7A5CAA6D28A5EDE1

By Nina McLaughlin

Stephens Lawyers & Consultants' franchising lawyers and trade practices lawyers represent leading franchise companies in both litigious and commercial matters.

For further information contact:

Stephens Lawyers & Consultants

Level 3, 530 Lonsdale Street

Melbourne VIC 3000

Phone: (03) 8636 9100

Fax: (03) 8636 9199

Email: stephens@stephens.com.au

Website: www.stephens.com.au

All Correspondence to:

PO Box 13286

Melbourne Law Courts

Melbourne VIC 3000

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Disclaimer: This newsletter is not intended to be a substitute for obtaining legal advice.© Stephens Lawyers & Consultants, February 2007

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