The Australian government has released an exposure draft of amendments to The Trade Practices (Industry Codes – Franchising) Regulations 1998 (the Franchising Code of Conduct) and relevant provisions in the Competition and Consumer Act of 2010 (the CCA) for public consultation.
These amendments aim to implement the government’s response to a review of the Franchising Code of Conduct in 2013.
Legal regime governing franchising in Australia
The offer and sale of franchises in Australia is regulated by the Franchising Code of Conduct. The Franchising Code of Conduct requires franchisors to provide a prospective franchisee with the following documents at least 14 days before the franchisee signs an agreement or delivers non-refundable money:
(i) a disclosure document
(ii) a copy of the franchise agreement in its final form and
(iii) a copy of the Franchising Code of Conduct.
The Franchising Code of Conduct also regulates certain terms and conditions of the franchise agreement, including terms associated with the transfer and termination of the franchise agreement and dispute resolution procedures. The Australian Competition and Consumer Commission (ACCC) is the government agency that administers and enforces the Franchising Code of Conduct.
Impetus for changes to the Franchising Code of Conduct
In January 2013, the Australian government announced a review of the Franchising Code of Conduct – its fourth major review of franchising and the Franchising Code of Conduct at the Commonwealth level since 2006. The four-month review was conducted by industry expert Alan Wein. In April 2013, Wein made 18 recommended changes to the Franchising Code of Conduct dealing with disclosure, good faith, dispute resolution and fines and penalties.
As explained in the government’s “Future of Franchising Statement” issued along with the exposure draft of amendments, the changes to the Franchising Code of Conduct are meant to address the issues and recommendations identified in Wein’s report.
Key changes to the Franchising Code of Conduct
The exposure draft of amendments contains all of the government’s changes to the Franchising Code of Conduct following the 2013 review. The draft amendments:
A. Remove the double disclosure requirements which are currently imposed on master and foreign franchisors. The draft amendments also remove the double disclosure obligations in relation to summarizing provisions of the franchise agreement in the disclosure document.
B. Require franchisors to provide prospective franchisees with a short information sheet which gives them an overview of the risks and rewards of franchising. The sheet should include information on unforeseen capital expenditures, the importance of education and conducting due diligence on the franchise relationship, and the prospect of franchisor failure.
C. Introduce a general duty on franchisors and franchisees to act in good faith during their dealings with each other. This obligation will apply to all aspects of the franchise relationship, including during negotiations, throughout the term of the franchise agreement, in dispute resolution, and as part of renewal discussions.
D. Prohibit franchisors from imposing significant capital expenditures on franchisees unless:
1. the expenditure is disclosed in the disclosure document
2. a majority of franchisees in a system agree to the expenditure or
3. the expense is considered necessary by the franchisor and can be justified by a statement which provides the rationale, costs and anticipated benefits associated with making the investment.
E. Provide that outlets owned by the franchisor contribute to the franchise system’s marketing and other cooperative funds.
F. Introduce the following changes to marketing funds:
1. require additional disclosure on the types of expenses marketing funds are being used for
2. give franchisees the option to vote for an annual audit of the marketing fund and
3. require franchisors to keep marketing funds in a separate account.
G. Prohibit the parties to a franchise agreement from shifting their costs in dispute resolution to the other party.
H. Ensure that franchisors cannot require franchisees to conduct dispute resolution outside the state where the franchisee’s business is located, unless otherwise agreed at the time of the dispute.
I. Improve and enhance the enforcement measures available to the ACCC by allowing the ACCC to:
1. seek civil pecuniary penalties of up to AU$51,000 from a court and
2. issue infringement notices of up to AU$8,500 without having to seek a court order.
J. Allow the ACCC to use its audit powers to obtain documents that the franchisor has relied upon to support statements and claims made in its disclosure document.
The changes to the Franchising Code of Conduct are expected to take effect on January 1, 2015. The government has invited interested parties and stakeholders to comment on the enforcement draft of amendments to the Franchising Code of Conduct and CCA. The government has clarified that it is seeking comments only on the technical aspects of implementing the amendments, and there is no intention for the public consultation process to reconsider the policies underlying these reforms. The comment period closes on April 30, 2014.
We will keep readers of FranCast informed of further developments in Australia.