Reform of the Franchising Code of Conduct
By Jamie Nettleton, Partner
2 March 2007
Introduction
Franchising in Australia is a successful $130 billion industry, providing employment for more than 600,000 Australians.
The Franchising Code of Conduct ("Code") (an industry code made under the Trade Practices Act 1974 (Cth)) ("TPA") governs the relationship between franchisors and franchisees, in particular in relation to:
- the disclosure obligations of franchisors to franchisees;
- the conditions of a Franchise Agreement; and
- resolving disputes between franchisors and franchisees.
Executive Summary
The Australian Government recently reviewed the Code and made a number of recommendations (34 in total) for amendments to the Code. 31 of the recommendations were either agreed to, or agreed to in principle, by the Federal Government. Consultation with industry is now underway.
Some of the proposals made will materially impact on the conduct of franchises, particularly those that rely on exemptions contained currently in the Code. For example, the "one franchise" and the "nominal franchise turnover" exemptions will be removed. Many of the other proposals streamline the existing requirements. In some cases, they will add to the regulatory burden imposed on franchisors but will result in further information considered relevant to the conduct of the franchise being disclosed to franchisees.
The changes are likely to be introduced into Federal Parliament in May 2007. Any concerns relating to the proposed changes should be submitted to the Government within the next month.
Proposed Changes to the Code
A brief summary of the recommendations agreed to by the Federal Government is set out below:
- 1. Requirement to include a complete copy of the Franchise Agreement with the Disclosure Document. The Government has acknowledged that this "best practice" should be mandatory.
- 2. Requirement to include copies of all associated agreements and contracts with the Disclosure Document. It is likely that all documents which are required to be signed by a franchisee should be made available to the franchisee at least 14 days before signing the Franchise Agreement. Where documents are not available at that time, those documents should be provided when they become available.
- 3. Disclosure of Section 87B Undertakings The Government has agreed that details of any Section 87B TPA undertakings given in connection with the relevant franchise by the franchisor to the Australian Competition and Consumer Commission ("ACCC") should be disclosed to franchisees not more than 14 days after the undertaking is given.
- 4. Rebates and other financial benefits The Government has agreed that franchisors should disclose not only whether the franchisor or an associate of the franchisor will receive a rebate or other financial benefit from the supply of goods or services to franchisees but also the amounts or method of calculation of such rebates or other financial benefits.
- 5. Auditing of marketing and other cooperative funds The Government has agreed that preparation of financial statements for marketing and other cooperative funds should be compulsory and that each franchisee should be provided with a full account of the funds together with auditors' reports.
- 6. Information about past Franchises The Government has agreed in principle that the Code will be amended to require franchisors to provide details of names, location and contact details (where consent has been obtained and where that information is available to the franchisor) of past franchisees.
- 7. Short form disclosure The Government has agreed that the opt-out provision for short form disclosure should be deleted from the Code as all disclosure information in Annexure 1 of the Code is of potential importance to franchisees and should be provided, if requested.
- 8. Disclosure of materially relevant facts The Government has agreed that all materially relevant facts should be communicated to franchisees within 14 days after the franchisor becomes aware of the facts in order to provide franchisees with timely disclosure of information which is materially relevant to the operation of their franchise.
- 9. Removal of "one franchise" exemption The Government has agreed that the exemption from application of the Code for franchisors not resident, domiciled or incorporated in Australia, should be removed from the Code and that all franchise systems operating in Australia should be subject to the same rules.
- 10. Removal of "nominal franchise turnover" exemption The Government has agreed in principle to delete the exclusion from the Code of certain franchises with nominal turnovers (less than 20% of total turnover of a franchisee's business) subject to consultation with industry.
- 11. Directors of Franchisor to disclose details of proceedings and convictions The Government has agreed that details of various proceedings involving directors of the franchisor, as well as criminal convictions for non-serious offences committed by directors of the franchisor should be disclosed to franchisees.
- 12. The right of unilateral change or termination of a Franchise Agreement The Government will consider the removal or modification of these rights of the franchisor through reform to s51AC of the TPA in relation to unconscionable conduct.
- 13. Financial details The Government has agreed that the current requirement for franchisors to include financial reports for the last two financial years with the disclosure document should be extended to include financial reports for any consolidated entity to which the franchisor belongs.
- 14. Standardisation of the audit period The Government has agreed that the audit period referred to in the Code during which a franchisor must create a disclosure document (within 3 months after the end of each financial year) should be aligned with the Corporations Act 2001 (Cth) audit period.
- 15. Details and history of the territory or site to be franchised The Government has agreed that this information should be contained in a separate document to be provided with the disclosure document.
- 16. Copy of the Code to be attached to the disclosure document The Government has agreed that a copy of the Code should be attached to the disclosure document.
- 17. Disclosure document to be given to Franchisees upon extension of the scope or term of a Franchise Agreement The Government has agreed that it is appropriate that a current disclosure document be provided whenever there is an extension of either the scope or term of a Franchise Agreement.
Recommended changes that will not be introduced
Recommendations which were not agreed by the Government are as follows:
- 1. The requirement to include a risk statement The Government did not agree that the Code should be amended to include a requirement for franchisors to include a risk statement with the disclosure document.
- 2. Provision of audited financial information for the Franchisor and the consolidated entity The Government did not agree that the ACCC should collect information on the extent to which franchisors' financial statements are currently audited and provided pursuant to the Code.
- 3. Registration and review of disclosure documents The Government did not agree to the recommendation of registration of franchisors of their disclosure documents.
Other technical or minor amendments have been either agreed or agreed in principle subject to consultation with industry bodies or otherwise rejected by the Government.
Conclusion
The changes made will cause the Code to have broader application to cover most franchises, including certain franchises that are not covered currently. For existing franchises covered by the Code, the new changes will need to be reviewed closely to ensure continued compliance with the Code in respect of the additional obligations that will be introduced.
However, as no change has been recommended to the scope of a "franchise agreement" to which the Code will apply, many organisations involved in the promotion, supply and sale of branded products will continue to fall outside the scope of the Code. Of course, care will still need to be taken to ensure that trade marks licences, distributorships, multi-level marketing organisations and commissioned agency agreements do not fall within the scope of the Code.