Come 1 January 2015, Australian franchises will be governed by a new Franchising Code of Conduct (the Franchising Code).  Australia’s 73,000 franchisees, 1,180 franchisors and the 407,000 people employed in the sector will all be affected.

What is a franchise and why is the Code important?

Franchising is a now prolific way of doing business. The franchisee is given the right to distribute goods and services using the trade name of the franchisor.  The Franchising Code regulates disclosure and conduct, protects franchisees and regulates complaint handling and dispute resolution.

Reforms to the Code

There are four key reforms;

• an express obligation to act in good faith;
• new disclosure requirements;
• greater protections for franchisees; and
• new and harsher penalties.

 Franchisors, franchisees and potential franchisees must act in good faith.  This means, acting honestly and not arbitrarily and cooperating to achieve the purposes of the franchise agreement.  This obligation continues to exist even if a franchise agreement attempts to exclude it.  Failure to comply with this provision attracts the new civil penalty.

Disclosure is streamlined to reduce red tape.  For example, international and ‘master’ franchisors are no longer required to provide a disclosure document to a franchisee where a sub-franchisor has already done so.

 Increased protection is provided with new disclosure requirements:

• A short information sheet for prospective franchisees stating the risks and rewards of franchising;
• Franchisors must disclose online trading activities;
• Franchisors cannot require franchisees to pay their dispute resolution costs; and
• Dispute resolution must be conducted in the state where the franchisees’ business is located.

Now, the ACCC can issue infringement notices of up to $8,500 without a court order, as well as seek civil penalties of up to $51,000 from the court for serious breaches of the Code.

Be prepared

These reforms are in effect on 1 January 2015.  Franchisors and franchisees should contact Peter McNamara for advice and review the Code to ensure they have a full understanding of their new obligations.