Deadline Approaching for Franchisors to Update Franchise Documents

Franchising

When the new franchising Code of Conduct came into effect on the 1st of January 2015, Franchisors were allowed a grace period within which to update their existing documents to comply with new requirements. Franchisors are permitted to use their existing form of disclosure document up to 31 October 2015. As that deadline is rapidly approaching, it is important that franchisors review and upgrade their documents now in order to avoid substantial civil penalties.

The new franchising Code of Conduct came into effect on the 1st of January 2015 and, subject to some transitional provisions, has applied to both new and existing franchise agreements from that date.

The new Code requires the disclosure of additional information to prospective franchisees and imposes a duty of good faith on the parties to a franchise agreement.

With a new enhanced penalty regime operating along side the Code, a failure to comply with the requirements of the new Code may result in substantial civil penalties. It is therefore important for franchisors to understand their obligations under the new Code and ensure their franchise documentation is up to date and compliant.

The key issues for franchisors to consider are:

  1. New obligations in respect of Marketing Funds
    The following amendments have been effective since 1 January 2015. Franchisors are now required to:

The following amendments have been effective since 1 January 2015. Franchisors are now required to:

  • provide additional disclosure on the types of expenses marketing funds are being used for;
  • contribute to the marketing fund for company stores and franchisor owned businesses; and
  • keep marketing funds in a separate account.
    Franchisees must also be given the option to vote for or against an annual audit of the marketing fund.
  1. Updated form of Disclosure Document
    The new Code prescribes a new form of disclosure document. Franchisors are permitted to use their existing form of disclosure documents up to 31 October 2015, it is therefore important that those documents are updated to reflect the new requirements as soon as possible.
  2. Record Keeping
    New record keeping obligations are imposed on franchisors by the new Code. Franchisors must maintain a written record of any document that is required to be given to a franchisee or prospective franchisee for a minimum period of six years.
  3. Information Statement
    Franchisors are required to provide prospective franchisees with a 2 page information sheet which gives them an overview of the risks and rewards of franchising. The information statement should be provided to the prospective franchisee as soon as practicable after they formally apply, or express an interest in, acquiring a franchised business.
  4. Dispute Resolution & Restraint of Trade
    The new Code provides that franchise agreements must include a mandated internal complaint handling procedure.Although agreements entered into before 1 January 2015 are exempt (unless they are subsequently transferred or varied), the new Code restricts franchisors’ rights to –

    • require proceedings or a dispute to be brought in a state or territory outside of where the franchised business is based, or outside Australia; and
    •  require franchisees to pay the franchisor’s costs of settling a dispute.
  5. Good Faith
    There is now an obligation on all parties to a franchise agreement to act in good faith in their dealings with one another. Franchisors in particular should be mindful of this obligation when exercising their rights, and performing their obligations, under a franchise agreement or the Code.The meaning of ‘good faith’ under the Code takes on the same meaning that exists at common law which will continue to develop over time. Generally, parties to a franchise agreement will be required to act reasonably and not exercise their powers arbitrarily or for an irrelevant purpose. Importantly, this does not require a party to act in the interests of the other party, nor does it prevent a party from acting in their own legitimate commercial interests.
  6. Summary
    We recommend undertaking an immediate review of franchise agreements to ensure compliance with the requirements of the new Code.As the grace period within which franchisors can continue to use their existing disclosure documents has almost expired, it is essential that franchisors upgrade their documents as soon as possible.

    Franchisors should also review and, if necessary, update their policies and procedures in respect of marketing funds, record keeping and signing up new franchisees.

  7. Fixed Fees
    Wisewould Mahony can review and upgrade franchise agreements and disclosure documents to comply with the requirements of the new Code. In appropriate cases, we can provide this service at a fixed fee.For more information about the new Code of Conduct or any other franchising matter, please contact Adam Rich.