On 2 April 2014, the Government released for public consultation an exposure draft of amendments to the Franchising Code of Conduct (‘the Code’) and relevant provisions in the Competition and Consumer Act 2010.

If the draft legislation is passed into law, it will result in significant changes to the framework for franchising laws in Australia. The notable changes are the introduction of pecuniary penalties for breaches of the Franchising Code, amended information disclosure requirements and a new express obligation on franchisors to act in good faith.

Whilst the government is seeking comments on technical aspects of the draft legislation by 30 April 2014, it has no intention to reconsider the underlying policy on which the legislation is based.

Why The Changes?

Enhanced protections for small business franchisees were warranted According to the Small Business Minister. The goals of the amendments are:

  • to promote growth in the franchising sector, and provide greater power and protection in the Code to franchisees, who are often small business owners;
  • to reduce red tape; and
  • ensure that all participants in the franchising sector follow best practice principles.

What Are The New Penalties For Franchisors?

For many years, non-compliant franchisors did not face any pecuniary penalties under the Code. The reforms mean stronger consequences for breaching the Code as a deterrent for parties who would otherwise breach the Code.

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The reforms will:

  • introduce civil pecuniary penalties, empowering the ACCC to take proceedings and seek penalties of up to $51,000 for serious breaches of the Code; and
  • empower the ACCC to issue infringement notices of up to $8,500 without having to formally bring proceedings in court when it has reasonable grounds to believe that an entity has breached the Code which may be disputed by the allegedly infringing party.  If the party disputes the infringement notice the ACCC may commence court-based action regarding the alleged contravention. Alternatively, the entity may choose to pay the infringement notice, in which case the ACCC may not commence court proceedings in relation to the alleged breach;

What’s On The Horizon?

A good faith requirement will be imposed, which franchisors and franchisees cannot contract out of. This is an obligation to act honestly and not arbitrarily and to co-operate to achieve the purposes of the franchise agreement.

The obligation will apply in all dealings that the franchisee and franchisor have with one another, including during negotiations, the term of the agreement, in dispute resolution and as part of renewal discussions.

Other changes will include:

  • improving disclosure and transparency of marketing funds and online sales agreements;
  • removing unnecessary provisions to reduce red tape and compliance costs; and
  • introducing general provisions to clarify the operation of the Code.

Do Franchisors Need To Make Any New Disclosures?

In addition to current disclosure requirements the Code will now require franchisors to provide prospective franchisees with an information statement in a prescribed form.

The information statement is intended to give franchisees a general overview of the risks and rewards of entering into a franchising agreement which may include information on unforeseen capital expenditure, the importance of education and conducting due diligence, and the prospect of franchisor failure. The goal is to encourage franchisees to conduct more thorough investigations prior to entry into a franchise agreement.

When Does all This Come Into Effect?

Subject to any submissions received in respect of the technical drafting of the legislation, the Government expects to introduce the Bill formally to Parliament later this year, with the changes to take effect from 1 January 2015.

Next Steps For Franchisors?

Franchisors have less than a year to prepare themselves for the proposed changes. Franchisors Must

  • update their disclosure documents;
  • prepare new information statements to ensure that they comply with the new information requirements; and
  • implement best practice protocols compliant with the new “good faith” obligations.

Call us on 1300 664 984 or visit www.franchiseease.com.au to find out more.