Franchising Update - Winds of Change Arrive

by K&L Gates LLP
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In previous Franchising Updates1, we reported on the Wein Review of the Franchising Code of Conduct (Code) and the Abbott Government's response to the recommendations in the Wein Report.

On 2 April 2014, the Government issued its Future of Franchising statement (Statement) and issued, for public consultation, its exposure draft of amendments to the Code, and to the Competition and Consumer Act 2010 (CCA) to give effect to the Statement. The public consultation process will be open until 30 April 2014, with the proposed changes to come into effect on 1 January 2015.

The proposed changes will not only impact the franchisor/franchisee relationship generally but also the nature of the documentation between franchisor and franchisee.

Summary of Changes

Key aspects of the proposed reforms to the Code and the CCA include:

  • Amending the Code to reduce 'red tape' which the Government estimates will save the franchise sector AUD8.6 million a year2. This will include:
    • removing the double disclosure presently required of master and foreign franchisors
    • removing disclosure obligations in connection with the summation of franchise agreement provisions in the disclosure documentation
    • removing the short form disclosure document from Annexure 2 of the Code.
  • The introduction of a general duty on the part of both franchisor and franchisee to act in good faith towards each other to apply to all facets of the relationship.
  • The provision of additional documentation, information and transparency to franchisees including:
    • a brief prescribed information statement that sets out the risks and rewards of franchising
    • additional disclosure of online trading activity and the using of marketing or cooperative funds by the franchisor
    • the maintenance of marketing funds in separate accounts
    • franchisors advising franchisees of an entitlement to a current disclosure document upon indicating an intention to renew the franchise agreement.
  • Amending the Code to address areas of identified imbalance in franchise relationships such as:
    • preventing franchisors (subject to certain qualifications) from requiring significant capital expenditure by franchisees during the term of the franchise agreement
    • limiting the ability of franchisors to impose restraints of trade on franchisees
    • preventing franchisors from including clauses in franchise agreements requiring franchisees to pay the franchisor's costs of resolving disputes under the franchise agreement
    • preventing franchisors from requiring franchisees to conduct dispute resolution outside the State in which their franchise business is located
    • requiring company owned franchises to contribute to marketing and other cooperative funds.
  • The Australian Competition and Consumer Commission (ACCC) gaining new enforcement powers to:
    • seek civil pecuniary penalties of up to AUD51,000 for breaches of the Code
    • issue infringement notices of AUD8,500 to companies and AUD1,700 for individuals.
  • The proposed amendments will only apply to franchise agreements entered or renewed on or after 1 January 2015.

Implications

Should the current public consultation process not result in significant changes to the exposure draft or the timing for implementation of the proposed amendments, the franchising landscape will be materially different from 1 January 2015.

For franchisors in particular, some of the 'red tape' will be gone but in its place will be new obligations. Franchisors will need to carefully review and make any appropriate changes to their franchise documentation to ensure compliance with the Code, as amended, and avoid the risk of civil pecuniary penalties or infringement notices being imposed.

[1] Franchising Update - February 2014; Franchising Update - April 2013; Franchising Update - February 2013

[2] http://bfb.ministers.treasury.gov.au/media-release/018-2014/

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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