FINAL WORD

Australia has one of the most rigorous codes of practice for the franchise sector in the world, and unlike many countries, it is mandatory. Lawyer Ashley Tan looks at why the Code is important to franchisees.

How the Franchising Code of Conduct will affect you as a franchisee

The Competition and Consumer (Industry Codes—Franchising) Regulation 2014, dubbed the Franchising Code of Conduct, was introduced in 1998 to try and create a more level playing field in an entrepreneurial system with a relatively imbalanced bargaining position between the franchising parties.

The Code amendments on 1 January

2015 ramped that up further with greater disclosure requirements from franchisors, fines for non-compliance and the obligation to act in good faith. It applies to all aspects of the franchise relationship from assessing the franchise you will purchase and then signing the initial contract, through the years the agreement is on foot, to your exit from the system and termination of the franchise agreement.

The Australian Competition and Consumer Commission (ACCC) regulates the Code and enforces the conduct of its participants. The failure to comply by either party (including a franchisee) can incur financial penalties of up to $51,000 and an infringement notice of $8,500 per breach.

The key aspects of the Code that are particularly relevant to franchisees are:

DISCLOSURE DOCUMENT

It is imperative to thoroughly evaluate the franchise you are considering to purchase. The disclosure document contains in-depth information not otherwise publicly available to a prospective buyer so that you can conduct what is known as due diligence (an in-depth appraisal) prior to entering into a typically five to seven year relationship with the franchisor.

GOOD FAITH

Arguably, franchisors and franchisees acting in good faith in their conduct with each other is the most important element of the Code. There isn’t a definitive explanation of good faith, but as a general guide, the Code stipulates the necessity for all parties to act honestly and not arbitrarily, and assesses whether parties cooperated to achieve the purposes of the agreement.

The good faith obligation does not mean that either party cannot act in its own legitimate commercial interests.

It is also important to note that neither party can contract out of, or limit this obligation imposed by the Code.

TERMINATING A FRANCHISE AGREEMENT ARRANGEMENT 1. TERMINATION DURING THE COOLING OFF PERIOD

The Code provides that a franchisee may terminate within seven days after entering into the agreement and making any payment under the agreement (pre-payments). That is, you can change your mind during that time and the franchisor must, within 14 days, refund all payments made by the franchisee to the franchisor.

2. TERMINATION WITHIN THE TERM OF A FRANCHISE AGREEMENT

A franchisor may terminate a franchisee if they believe the franchisee has breached a term of the franchise agreement. The Code requires that the franchisor give the franchisee reasonable notice in writing, how a breach may be remedied, and allow the franchisee no more than 30 days to remedy the breach.

Another area the Code ensures that the parties proceed in an equitable and reasonable manner is in dispute resolution. Both parties have the right to stipulate the nature of the dispute and the outcomes sought and refer the matter to an appointed specialist franchise mediator to assist in resolving the dispute.

A franchisor cannot require a franchisee to pay for a franchisor’s costs in settling a dispute under a franchise agreement.

STATEMENT OF INDEPENDENT ADVICE

Last but not least, the Code requires the franchisor (or their representative) to provide a Statement of Independent Advice to you before entering into the franchise agreement. It recommends that you seek independent legal, business and accounting advice.

It is absolutely critical to contact a franchise specialist lawyer and business advisor because they can assist you in assessing all the information, clarifying your rights and obligations under the franchise agreement and even negotiating with the franchisor if you require. Ashley Tan is a commercially driven franchising lawyer with degrees in both economics and law. An enthusiastic member of the DCS Lawyers team, she develops and reviews franchise documentation, advises on general commercial and corporate matters including business structuring and lease transactions with a special interest in dispute resolution and consumer law.