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Upcoming changes to the Franchising Code of Conduct

In August 2020, the Government released its response to the Parliamentary Joint Committee on Corporations and Financial Services inquiry into the operation and effectiveness of the Franchising Code of Conduct report: Fairness in Franchising.

The response outlines a number of changes that will be made to the Franchising Code of Conduct (Code) which include the following:

  • Cooling Off/Disclosure Period – the Code will clarify that the cooling off and disclosure periods are measured in calendar days and clarify that the 14-day disclosure period must begin at least 14 calendar days before signing a Franchise Agreement
  • Cooling Off – cooling off rights will be extended to the transfer of an agreement to a new franchisee and where the franchisee enters a substantially new agreement with the franchisor (a deemed transfer) but not to renewals or extensions
  • Early Termination – the Code will allow a franchisee to terminate the Franchise Agreement at any time up to 14 days after the last of certain events have occurred, such as:
      • the agreement being signed;
      • payment being made;
      • disclosure documents being received; and
      • a copy of the terms of the lease having been received (if applicable)
  • Format – Disclosure Document and Franchise Agreement must be made available in both electronic and hard copy format
  • Information Statement (Annexure 2 of the Code) must be provided to prospective franchisees separately and prior to providing the Disclosure Document and other disclosure materials
  • Legal fees – the Code will prohibit (and have pecuniary penalties for) franchisors passing on the legal costs of preparing, negotiating and executing documents to the franchisee (except where it is already incorporated into a joining fee)
  • Lease – clause 13 of the Code (“Copy of lease”) will be amended to require a franchisor’s interests in a leasing arrangement to be disclosed in a new Key Disclosure Information Fact Sheet
  • Penalties for Breaches Doubled – penalties for a breach of the Code will be doubled
  • Financial Information – any financial information provided must be part of the Disclosure Document, which must include a statement on the accuracy and appropriateness of the franchisor’s financial information
  • Significant Capital Expenditure – the Code will:
      • prohibit franchisors from requiring franchisees to undertake significant capital expenditure, except where it has been disclosed before  entering into a Franchise Agreement, is legally required, or is agreed to by the franchisee during the term
      • introduce an obligation to discuss expenditure prior to entering into a Franchise Agreement
      • require disclosure of the circumstances under which the franchisee is likely to recoup the expenditure
      • require franchisors to specify the amount, timing and nature of the expenditure (as practically as possible)
  • Dispute Resolution Processes introduce conciliation and voluntary binding arbitration. The Code will also clarify that, if the person conducting the dispute resolution process determines it is appropriate to conduct a multi-party process, the franchisor cannot refuse to take part in that process
  • Supply Arrangements require franchisors to disclose more information on supplier rebates, commissions and other payments and to disclose any master franchisor controls and/or rebates from suppliers
  • Marketing Funds clarify requirements relating to the treatment and reporting of marketing funds and introduction of penalties for breaches of clauses that relate to the use of marketing funds
  • Exit Arrangements ensure end-of-term arrangements for franchisee goodwill are clearly specified in the Disclosure Document and clarify a franchisee’s entitlement to goodwill in the Franchise Agreement
  • Termination clause 29 of the Code will be amended to require the franchisor to provide the franchisee with 7 days’ notice of a proposed termination in special circumstances (e.g. for fraud or public health and safety), so that a mediator or arbitrator can assist the parties to negotiate
  • Restraint of Trade technical changes will be made to clause 23 regarding the effect of restraint of trade clauses in Franchise Agreements (if the agreement is not extended)

A new mandatory Key Disclosure Information Fact Sheet will be introduced containing information taken from the Disclosure Document and highlighting key information, obligations and risks associated with entering a particular Franchise Agreement (such as financial information to assist prospective franchisees in assessing the time that they will need to commit to the business, franchisee entitlement to goodwill etc)

Information Statement

The Information Statement (Annexure 2 of the Code) will be updated to include the following information:

  • Encourage prospective franchisees to refer to the Disclosure Document to see if a franchise system has a high turnover of sites (to look out for possible ‘churning and burning’)
  • Outline risks with estimating labour costs, particularly for greenfield sites
  • Place an obligation on prospective franchisee to obtain information about employment matters and compliance with employment law
  • Clarify that if the franchisor becomes insolvent, the prospective franchisee may lose the benefit of shared funds (such as marketing funds)
  • Warn prospective franchisees of the need to obtain advice about restraints of trade before entering the agreement
  • Prospective franchisees will be made aware of the use of ‘no agent’ and ‘entire agreement’ clauses

If you require specific advice regarding the content of your Franchise Agreement or would like us to review your franchise documents, please contact us at enquiries@tanglaw.com.au.

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Case Study: How Could Our Lawyers Assist You To Start a Franchised Business?

The Story

Tom and Anna operated a successful cleaning business.  They did not want to miss the opportunity to take on more contracts to clean offices; however, they had limited resources (i.e. capital and human resource).  They wanted to grow and expand their cleaning business and began to explore the different options.  They ultimately decided to turn their business into a franchised business.

 

Tom and Anna instructed us to advise and assist them.

Solution


We advised that:

11) There is a mandatory franchising code which must be complied with by franchisers.  Failure to do so will have severe implications.
22) The most valuable assets of the business, being its intellectual property (such as know-how, their brand, business system, etc, which are intangible), must protected. 
33) A major factor contributing towards success of a franchised business is its ability to select the right candidate as franchisee.

Outcome

A franchise structure was established for their business whereby:

 

11) The intellectual property of the business was registered with the relevant authorities and protected via appropriate legal structures being established.

 

22) Multiple levels of entities were established and their sources of revenue were increased.  The structure gave Tom and Anna the flexibility to expand quickly and also to take control if any of the entities runs into troubles.

 

33) Formal agreements and documentations that comply with the franchising code were prepared.
Tom and Anna took full advantage of the established franchise structure and continued to expand their business.  They eventually took the franchised business and expanded to the other States.

About the Writer

Kelvin Tang

Kelvin has over 14 years’ experience practising law in Western Australia. He is the founder and Principal Partner of Tang Law based in Perth, Western Australia. Kelvin is a Registered Migration Agent (MARN: 1386452) and has extensive experience in providing service on Commercial Law, Dispute Resolution & Litigation, Family Law, Wills & Estate Planning and Settlements.