Since 1998 the mandatory Franchising Code of Conduct has been the key instrument regulating the conduct of franchises in Australia, as prescribed under the Competition and Consumer Act 2010 (Cth). A new Franchising Code of Conduct was made public on 3 November 2014 (“new Code”).
The implementation of the new Code will be the most significant reform to the franchising sector since the existing Code became law. The existing Code will be repealed and the new Code will come into force as law on 1 January 2015 and will apply, with some limited exceptions (such as Franchise Agreements entered into prior to 1 January 1998), to Franchise Agreements entered into both prior to 1 January 2015 and thereafter.
The regulatory framework will have application to not only networks that are commonly perceived as being traditional franchise systems, but also to many other license and distribution networks. Therefore, any person conducting such a network will need to review carefully, and seek advice, as to whether their network falls within the ambit of the new Code.
This is especially important, given that the Australian Competition and Consumer Commission (ACCC) has been provided with enhanced investigative and enforcement powers with the introduction of the new Code. As a result, there will be significantly more potential liability for those found to have infringed the new Code compared to the situation under the existing Code.
The changes that will be introduced with the implementation of the New Code, include:
- Enhancing the investigative and enforcement powers of the ACCC by providing that regulator with the power to:
- apply to the court for civil pecuniary penalties of up to $51,000 per breach; and
- issue infringement notices of up to $8,500 per breach without having to seek a court order.
- The introduction of a general duty on franchisors and franchisees to act in good faith during their dealings with each other.
- Franchisors must provide a generic information statement to a possible franchisee as soon as practicable after the possible franchisee expresses an interest in acquiring a franchise business.
- The new Code prescribes a new form of disclosure document for all franchisors to utilise. A franchisor is not required to update its existing disclosure document to accord with the form of disclosure document prescribed under the new Code until 31 October 2015. After this date, franchisors must update their disclosure document for the first time in the financial year commencing on 1 January 2015.
- The new Code prohibits franchisors requiring franchisees to undertake significant capital expenditure during the term of the Franchise Agreement.
- The new Code contains significant amendments to the ongoing disclosure requirements placed on franchisors.
- The new Code will not permit a franchisor to rely on a restraint of trade in certain circumstances. Those circumstances are where a Franchise Agreement expires and the franchisor refuses to extend the agreement and does not provide reasonable ‘compensation’ for the franchisee’s loss of goodwill.
- The new Code permits Franchise Agreements to include a procedure for dealing with disputes, which satisfies certain criteria, as an alternative to utilising that set out in the new Code.
Implications for business
Everyone operating franchise, ‘licence’ or ‘distribution’ networks needs to be mindful of the potential application, and impact of, the new Code on their operations. Given the significant adverse legal fall out that can occur from breaching the new Code, seeking legal advice on the new regime should be a priority.
Please contact Principal Mark Fitzgerald for more information.