New Franchising Code of Conduct for new year

In brief - Important changes to the Franchising Code are evolutionary, not revolutionary

Good faith obligations, varied requirements for disclosure statements, a new information statement requirement, restrictions on requiring capital expenditure, limits on enforcement of restraints of trade and limits on the exercise of a right of early termination without cause, are among a number of several significant changes to the revised Franchising Code of Conduct which will commence on 1 January 2015. It includes some important transitional provisions to ease in the operation of the changes.

Franchising Code regulates wide range of business arrangements

The franchising Code creates significant requirements and obligations in relation to "franchises". It not only regulates arrangements that the parties themselves identify to be a franchise, but also a wide range of other relationships where there is a system or marketing plan developed by one party and adopted by another party.

Good faith obligations for all parties to a franchise

Among the highlights, the new Code will create a legal obligation for each party to a franchise to act towards the other parties in good faith, i.e. when looked at objectively and not just from their own viewpoint. There are examples of what is to be considered, but there is no exhaustive definition. Significantly, franchisees and franchisors alike have the obligation.

Code clear on what is not a breach of good faith

The new Code states that it will not be a breach of good faith merely to act in your own "legitimate commercial interests". We expect a lot of disputes and litigation in that area. It won't be a breach of good faith for a franchisee not to offer a renewal option in the original agreement or to decline to negotiate for renewal where there is no renewal option.

Breaches of good faith may include cost-shifting or damaging social media campaigns

Government papers indicate that, for example, it might be a breach of the good faith obligation for a franchisor to cost-shift to franchisees in a way that affects franchisee margins. Another example from government papers is the possibility that a rogue franchisee who runs a social media campaign with potentially incorrect and damaging information might be held to be in breach of their good faith obligation.

Update disclosure statement once a year, not for each new transaction

There is important clarification about the franchisor's obligation to provide a disclosure statement. The disclosure statement does not need to be updated for each new transaction, just once every year within four months after the end of the financial year. Franchisors have until 31 October 2015 (or four months after the end of their financial year, if that is earlier) to adopt the new form.

Disclosure statement streamlined

The new form is streamlined to a degree and, helpfully, there is now provision to modify the format for convenience. Redundant sections of the prescribed form can be deleted, although the headings have to be repeated to show what would otherwise have been covered.

Online trading intentions must be disclosed

Franchisors are now required to provide disclosure in relation to the respective rights and obligations to conduct and benefit from online trading activities.

Franchisors must provide prospective franchisees with information statement

Franchisors are now required to provide an information statement to a prospective franchisee, in a prescribed format, as soon as a prospective franchisee expresses serious interest in a possible franchise.

No clarity on interim updating but mandatory franchisor minimum disclosure update obligations still in place

The amendments do not resolve the concern that a disclosure statement may need "interim" updating in order to avoid it being misleading and triggering exposure to a misleading conduct claim. This is a separate issue to the Code obligation only to update the statement once a year.

The Code continues to specify certain potential changes and other developments that, if they occur, must be notified to franchisees and prospective franchisees if not already mentioned in the current disclosure document.

Capital expenditure must meet certain criteria

There are now several requirements to be met under the new Code before a franchisor can impose significant capital expenditure requirements.

Restraint of trade clauses no longer enforceable in some circumstances

A franchisor will no longer be able to enforce a restraint of trade clause against a franchisee in certain circumstances - broadly speaking, where a franchisee asks for a renewal but is neither given a renewal nor compensation for goodwill.

Restrictions on early termination without cause

A franchisor is now restricted from exercising a right under the agreement to terminate without cause before the actual expiry date.

Before terminating, the franchisor must give reasonable written notice of the proposed termination and the reasons. The franchisee then has the right to dispute the reasons under the dispute resolution provisions.

Dispute resolution to be state based

The mandatory dispute resolution provisions now provide for a dispute to be resolved in the State in which the franchisee's business is based. Franchisors cannot pass on their costs of dispute resolution to a franchisee.

Tougher penalties for non-compliance

The new Code provides for substantially increased penalties for non-compliance.

What should franchisors and franchisees do?

Franchisors need to update their standard documents and compliance manuals. Franchisors and franchisees have to be conscious of ensuring that in relation to the franchise, they only act in ways that a court will think are in good faith.