Transition arrangements ease Franchising Code start – what you need to know

The final details of the new Franchising Code of Conduct due to come into effect on January 1, 2015 are still to be released to the franchise sector. However, franchisors have now been told that their disclosure documents under the current code will remain valid until October 31 next year.

In a brief announcement at the Franchise Council of Australia’s national convention yesterday morning (October 27), Small Business Minister Bruce Billson said that the government was still committed to implementing the new code on January 1.

The minister acknowledged that while there was some concern about the looming commencement time frame given that the final version of the new code is yet to be released, he announced that franchisors will be able to continue to use their disclosure documents under the existing code until October next year.

“Existing disclosure documents will have a shelf-life well into next year,” he said, adding the October 31 date.

The announcement provides greater certainty to franchisors who can now proceed with updating their disclosure documents under the current code to meet the annual October 31 deadline.

Until yesterday’s announcement, franchisors lacked a clear understanding of what transitional arrangements might apply, and whether they should wait until the new code commences before updating their disclosure documents, or update them twice in October and again in January.

The official release of the new Franchising Code of Conduct is expected to still be several days away pending approval by the Governor-General. Minister Billson said the new code will encourage innovation and investment in the franchise sector.

In a reference to proposals dating back to 2008 by both the South Australian and West Australian governments to introduce specific state-based franchise legislation, the minister said that under the new national code there would be “no need and no good cause” for state-based interference in the franchise sector.

In his announcement, the minister reiterated that the new Franchising Code will contain the key elements included in the draft version released publicly on April 2 this year, and would ensure that franchise sector participants follow best practice.

The key elements include:

Good faith

A major change under the draft new code requires both parties to a franchise agreement to act in good faith toward one another before, during and at the end of an agreement.

Good faith is partly defined in the code, requiring parties to act honestly and not arbitrarily, and to cooperate to achieve the purposes of the agreement. If an agreement does not include a clause allowing a franchisee to renew, this does not mean that the franchisor has acted in bad faith.

Greater disclosure

The April 2 draft requires franchisors to provide potential franchisees upfront with a risk statement about franchising and to disclose how the proceeds from online sales are dealt.

Additionally, franchisors will also need to be more transparent with marketing funds, including holding funds in a separate bank account, and disclosing types of expenses to be allocated to the fund, as well as giving franchisees an option to vote for an annual audit.

Franchisors will also be compelled to contribute equally to marketing and other co-operative funds for any company-owned outlets.

Other provisions

Changes to the balance of power in franchise agreements prevent franchisors from attributing their costs in dispute resolution to franchisees, and require dispute resolution to be conducted in the state where the franchisee is based, not where the franchisor is based.

Additionally, capital expenditure requirements must be disclosed in the franchise agreement and justified to franchisees by a statement outlining the rationale, costs and expected benefits or otherwise agreed by a majority of franchisees in the system.

Restraint of trade provisions have also been targeted, potentially allowing ex-franchisees the freedom to continue operating as independents after the end of their franchise agreement if they are willing to be renewed but the franchisor does not offer a renewal.

Fines and penalties

Penalties of up to $51,000 per breach for major breaches will apply to the new code, as well as powers for the Australian Competition and Consumer Commission (ACCC) to apply fines of up to $8500 for minor breaches. The ACCC will also be given expanded power to compel franchisors to provide a wider range of documentation in response to its existing audit powers.

Final code release imminent

A date for the release of the final version of the new Franchising Code to be released has not been announced. However, it is expected to be in the next few days.

Jason Gehrke is the director of the Franchise Advisory Centre and has been involved in franchising for 20 years at franchisee, franchisor and advisor level.

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