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NEW FRANCHISING CODE OF CONDUCT IN ACTION
The new Franchising Code of Conduct (Code) came into effect earlier on 1 January 2015. In our e’News alert on 5 November 2014 we summarized the significant features of the new Code and foreshadowed some of the key changes that will affect Franchisors’ documentation (i.e. franchise agreements. Disclosure documents and ancillary documents) and the implications for their practices and procedures.
If has now been more than 3 months since the commencement of the new Code. Given the significant reforms implemented by the Code, it appears that in applying the Code in practice, there are a few common misconceptions in the industry in relation to some of the key obligations imposed on franchisors and the timing requirements of these obligations.
Caution – Transitional provisions
The new Code includes transitional provisions to enable a franchisor with an “existing disclosure document” (being one which existed on 1 January 2015) to defer updating its disclosure document until no later than 31 October 2015. This was intended to give franchisors a transition period to update their existing disclosure document to the new form described under the new Code. A common misconception with these transitional provisions is that some franchisors mistakenly take this to mean that nothing needs to be done (whether updating franchise agreement, disclosure document or otherwise) until the second half of the year and closer to October – this is incorrect.
The new Code applies to all conduct and transaction occurring within a franchise system on or after 1 January 2015. Practically this means that the Code applies to all franchise agreements that are granted (as well as existing franchise agreements that are varied, transferred or extended) from 1 January 2015. Most template franchise agreements will need to be updated to meet the new Code requirements, especially in relation to restraints of trade, capital expenditure, marketing funds, mediation and jurisdiction clauses. Best practice (and often the most cost effective approach) would be for franchisors to move their existing disclosure documents to the new form, in conjunction with the review and update of the template franchise agreement, sooner rather than later.
What you must do NOW
If you are a franchisor, the list below is some of the things which you should do now to comply with the Code:
- 1. Update your ancillary franchise documents
Most franchise systems have a ‘suite’ of franchise documents which they use for recruitment and disclosure to new and existing franchisees. Many of these documents often make reference to the ’old’ Code;
As an example, under the ‘old’ Code various statements were required to be obtained under clause 11. These were commonly called clause 11 or section 11 statement or certificates. The requirement to obtain these statements is now in clause 10 of the new Code, and therefore any reference to “section 11” is incorrect
- 2. Information statement
Under the new Code, you must give an information statement )as set out in Annexure 2 of the Code) to a prospective franchisee as soon as practicable after the franchisee formally applies or expresses an interest in acquiring a franchised business. This information statement must be in the correct form and you cannot develop your own version of the statement by using your branding or different font sizes.
We recommend it us prudent to also include this information statement in the package of documents usually sent to a franchisee as part of formal disclosure.
- 3. Correct Code
When you are providing disclosure, even if you are relying upon the transitional provisions, you must provide a copy of the new Code. The ’old’ Code must not be given out.
- 4. Additional disclosure obligations
As before, franchisors must update their disclosure documents each year (within 4 months of the end of the financial year). Franchisors should keep in mind that in addition to and separate from the disclosure document, there are additional disclosure obligations in the Code with which franchisors must comply post 1 January 2015.
For example, you must disclose to the franchisees or prospective franchisees changes in materially relevant facts as set out in clause 17 of the Code (e.g. change in the majority ownership or control of the franchisor, certain proceedings being initiated against the franchisor or judgments obtained against a franchisor). If an event set out in clause 17 occurs and depending on the nature of the event, you must notify the event to franchisees and/or prospective franchisees in writing within 14 days of becoming aware of the event.
- 5. Express disclosure relating to lease incentives and financial benefits
There is now an obligation under the Code to disclose details of any incentive or financial benefit received by a franchisor (or an associate) as a result of a lease or agreement for lease (or some other agreement providing occupancy rights). This obligation is separate and in addition to the items in the disclosure document relating to rebates and incentives.
This obligation applies where the franchisee leases premises from the franchisor as well as where the franchisee occupies, without a lease, premises leased by the franchisor. The details of the incentive or financial benefit (which must at least include the name of the business providing the incentive or financial benefit) must be disclosed within 1 month after the lease or agreement to lease is signed by the parties (if it relates to clause 13(1) or within 1 month after occupation commences (if it relates to clause 13(3)).
If you are required to make such disclosure to a franchisee, we also recommend that you seek a written acknowledgement of receipt of the disclosure from the franchisee.
In additional to the above list, there are other obligations in the Code which franchisors need to be aware of Procedures for the grant, renewal, transfer, variation, breach and termination of franchise agreements all need to be reviewed to ensure compliance with the Code.
Why is compliance so important
The recent franchise reforms have empowered the ACCC to seek civil penalties for certain contraventions of the Code. Failure to comply with those provisions of the Code which are civil penalty provisions will expose franchisors to a potential penalty (up to $51,000) or a fine ($8,500 for corporation and $1,700 for individuals). The spectre of individual liability is real and cannot be dismissed.
As a warning and reminder, in a recent speech given by the ACCC Chairman Rod Sims in February 2015, he announced that one of the ACCC’s enforcement and compliance priorities for 2015 is to take a “stronger line to protect small firms by ensuring compliance with industry codes of conduct”. Accordingly it is important that senior executives within franchisors take steps to ensure that their franchise system is complying with the Code.
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