February 2008

THE FRANCHISING CODE OF CONDUCT
AUSTRALIAN RULES AMENDED EFFECTIVE 1 MARCH 2008

Lengthy consultation occurred between legislators and the Australian franchising industry as a result of the 2006 Matthews Report, leading to a number of significant amendments to the Franchising Code. The new provisions of the Code take effect from 1 March 2008, and will have wide-ranging consequences.

Prudent franchisors will closely review their existing agreements and processes, particularly in relation to disclosure, recruitment and franchise renewal, to ensure they are compliant before the amended code is implemented. The major changes required by the amended Code are summarized below.

Foreign franchisors

  • Overseas franchisors considering entering the Australian market must comply with the Code as from 1 March 2008. Formerly, exemption was available where only one franchise was granted in Australia and there was no sub-franchising.

Prohibitions on franchisors

  • Franchisors must not induce franchisees or prospective franchisees not to form an association or to not associate with other franchisees
  • Franchise agreements cannot contain or require a franchisee to sign a waiver of any verbal or written representation made by the franchisor. The existing Code already prohibits franchise agreements containing a general release of franchisor from liability toward the franchisee.

Marketing Funds

  • Franchisors operating a marketing fund to which franchisees contribute, must prepare and have audited financial statements relating to the fund within 4 months of the end of the financial year, and provide the statement and auditor's report to all franchisees within 30 days thereafter.
  • This does not apply if 75% of franchisees vote in favour of waiving the requirement, so long as such an agreement is made within the time period specified in the Code.

Disclosure of materially relevant facts

Franchisors now will have to make disclosure in writing to franchisees of any matters which will materially affect the operation of the franchise business, within 14 days of becoming aware of such matters. The information to be disclosed is specified by the Code, and includes the following.

  • Change in majority ownership of control of franchisor
  • Civil, criminal or other public agency proceedings or an award in arbitration against a franchisor or its director alleging breach of franchise agreement, contravention of trade practices law, contravention of the Corporations Act 2001; unconscionable conduct; misconduct; an offence of dishonesty
  • Civil proceedings in Australian against a franchisor or a director by at least 10% (or 10) of the franchisees.
  • Change in ownership of intellectual property
  • Franchisor becomes externally administered or insolvent
  • The existence and content of any undertaking given to the ACCC, or an order is made by the courts under S87B of the Trade Practices Act

Disclosure Documents

The Franchisor must maintain a current Disclosure Document in the form prescribed by the Code.

At least 14 days before entering into any new franchise agreement or renewing an existing agreement, the Franchisor must give the prospective or existing franchisee:

  • a copy of the Code (as amended);
  • the Disclosure Document; and
  • a copy of the franchise agreement in the form in which it is to be executed

As a part of the Disclosure Document, the amended Code also requires the Franchisor to provide to the prospective or existing franchisee, all associated agreements and contracts that the franchisee has to sign (including such contracts as leases, hire purchase agreements, guarantees, mortgage security deposits, confidentiality agreements, and intellectual property licenses). The practical effect of this is to cause delays. For instance, if changes are made to the terms of the franchise agreement during negotiations, then the 14 day requirement before signing will recommence.

The Code now also requires additional information to be included in the Disclosure Document. The major changes are:

  • Franchisor must specify whether it or an associate receives any rebate or other financial benefit from the supply of goods and services to the franchisee (including the name of the business providing the rebate or financial rebate), and whether this is shared with the franchisees
  • Where franchise sites or territories are not new, the Franchisor must provide details of the history of the business, including circumstances in which the previous franchisee ceased to operate. This information must be included in a separate document and also within the Disclosure Document
  • In addition to providing contact details of existing franchisees, the Franchisor is also now required to provide contact details of former franchisees, where in the last 3 financial years, the franchise business was transferred, ceased to operate, terminated, not renewed, bought back or otherwise acquired by the Franchisor. Contact details do not have to be provided if the former franchisee has requested in writing that this information not be released. Privacy issues have to be considered when disclosing personal information relating to franchisees.
  • The existing requirements to disclose information about litigation involving the Franchisor have been extended to include directors alleged to be involved in such litigation
  • Financial Statements - if a Franchisor is a part of a consolidated entity required to provide audited financial reports, the Franchisor must provide these reports to franchisees upon request

Stephens Lawyers & Consultants have a high level of expertise in franchising law, representing and advising leading Australian and overseas franchisors. For further information contact:

Katarina Klaric
Stephens Lawyers & Consultants
Level 3, 530 Lonsdale Street
Melbourne VIC 3000
Phone: (03) 8636 9100
Fax: (03) 8636 9199
Email: katarina.klaric@stephens.com.au
Website: www.stephens.com.au
All Correspondence to:
PO Box 13286
Melbourne Law Courts
Melbourne VIC 8010

To register for newsletter updates and to send your comments and feedback, please email stephens@stephens.com.au Disclaimer: This newsletter is not intended to be a substitute for obtaining legal advice. © Stephens Lawyers & Consultants. February 2008.

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