What is the Franchising Code of Conduct?

The Competition and Consumer (Industry Codes—Franchising) Regulation 2014 sets out the ‘Franchising Code of Conduct'(‘the Code’). The Code sets out the specific legal obligations that apply when a business is ‘franchised’; that is, where one business (‘the franchisee’) operates under the brand and substantial direction of another business(‘the franchisor’).

Many franchise disputes that our lawyers deal with relate to breaches of the Code, as such, we have provided an overview of the Code. We have detailed the key provisions in the code that regulate the obligations and rights of franchisees and franchisors.

The Code is a key cornerstone to the legal relationship of franchisors and franchisees.

Having a basic understanding of the Code is critical for both franchisors and franchisees. Here we look at the details in the Code and what franchisors and franchisees must know.

Franchising law in Australia

Franchises are covered under the Competition and Consumer Act 2010(‘the Act’) which applies in all states and territories and is aimed at promoting competition, fair trading and the protection of Australian consumers. Enforcement of this Act is carried out by the Australian Competition and Consumer Commission (ACCC).

The Act also allows for the issuing of mandatory codes of conduct imposing specific obligations on businesses in certain industries. For example, the recent Electricity Retail Code places restrictions on how electricity retailers may advertise electricity discounts and how much they can charge certain customers.

The purpose of the mandatory franchising code, the Franchising Code of Conduct, is to ‘regulate the conduct of participants in franchising towards other participants in franchising'(Clause

2).It is a substantially amended Code as a result of the 2013 Review of the Franchising Code of Conduct.

Key requirements in the Code include:

• that franchisor and franchisee act in ‘good faith’ towards each other;
• a cooling-off period which permits the franchisee to withdraw from the agreement within a certain period of time; and
• mechanisms for termination of the agreement.

We consider each of these elements in turn.

Under the Code(see clause 8), a franchisor is required to:

• develop a disclosure document, giving information to anyone considering entering into an agreement, information about the franchise. This document must be in the prescribed form provided in the annexure to the Code;
• maintain that document by updating it within four months of the end of the financial year;
• provide a copy of that disclosure document, along with a copy of the Code, and a final form of the franchise agreement, at least 14 days before entering into a franchise agreement or making a non-refundable payment.

In addition, the agreement must not be entered into, renewed, extended, nor payment received, without the prospective franchisee giving a written ‘information statement’ in the prescribed form. This assures the franchisor that the franchisee has been duly informed, including receiving independent legal, business or accounting advice.

The purpose of the disclosure requirements is to reduce the likelihood of the franchisee being misled about the prospects of the franchise, and to enable a reasonably informed decision.

Good Faith

Clause 6 of the Code sets out the requirement that both parties act in good faith towards each other. The meaning of this term is left for the general law, but the Code does specify that in interpreting this concept the court may have regard to the honesty and arbitrariness of the parties’ actions, and whether each party co-operated to achieve the purposes of the agreement.

The requirement for good faith recognises two key elements of a franchise agreement:

• the franchisor usually has significant bargaining power which may put the franchisee at a disadvantage;
• the franchise agreement is a ‘relational’ contract, which envisions an ongoing relationship between the parties(compared to, say, the sale of real property). This is unlikely to work well in the absence of good faith.

Dispute Resolution

The Code requires that:

• the agreement includes a dispute resolution procedure that complies with the Code (clause 34);
• both parties attempt to resolve a dispute by using(a)their own internal procedures, or (b),following the procedures set out in the Code(clause 35);

• in trying to resolve the dispute, both parties act in a ‘reconciliatory manner’. This includes attending and participating in meetings, and not taking various actions to further erode the relationship (see clause 36);
• notification requirements be complied with (clause 40).

The dispute resolution process in the Code, with its emphasis on reconciliation and mediation, recognises the importance of ongoing good faith for the survival of the franchising relationship.

Mediation is a large focus of resolving most commercial disputes. Disputes canal so settle through your negotiation prior to the mediation stage. Most disputes resolve at mediation, if a resolution is not possible at mediation the way is then made for court proceedings to be commenced.

Cooling Off Period

The ‘cooling-off period ‘means that the franchisee has seven days after entering into the franchise agreement or making a payment under the agreement, to terminate it(clause 26).This does not apply to transfers, renewals, or extensions of existing agreements.

If the franchisor does not make all repayments within 14 days of the agreement being terminated, they may be liable to pay a civil penalty. The penalty is typically imposed and then enforced by the ACCC.

Termination

Where the franchisor considers that there has been a breach, and wishes to terminate the agreement because of it, the procedure is set out in clause 27. Requirements include:

• providing the franchisee with reasonable notice, in writing, that termination is proposed due to breach;
• informing the franchisee what must be done to remedy the breach;
• giving reasonable time for the franchisee to remedy the breach. Note, this does not have to be more than 30 days.

Failure to follow these requirements may make the franchisor liable for a civil penalty.

The Code also sets out the requirements for termination, in accordance with the franchise agreement, where there has been no breach, and no consent. In this case reasonable notice must also be given, as well as the reasons for termination (see clause 28).

Clause 29 sets out when a franchise agreement may be terminated under special circumstances, such as where the franchisee becomes insolvent or goes into administration (see clause 29).

Other laws that apply

While the Code is the key source of the minimum rights and obligations of parties to a franchise agreement, there are many other sources of legal obligations that might apply to both parties, including:

• the Corporations Act 2001, such as company direct or obligations;
• the Fair Work Act, including obligations to employees;
• tax laws, such as the requirement to register for GST;
• general provisions of the Australian Consumer Law, such as the prohibitions on misleading conduct and unfair contract terms;

• general contract law, such as undue influence and duress.

In addition, if the franchisor is a member of the Franchise Council of Australia (‘FCA’),Member Standards apply. Breach of these may mean jeopardise the franchisor’s membership of the FCA.

Conclusion

Franchising is a unique commercial arrangement where the interests of both parties heavily relies on the success of each other. A franchise cannot be successful without proper management from the franchisor or the profitable trading of the franchisee.

Having a basic understanding the code is crucial for Franchisors wanting to start or for franchisees looking to invest in a franchise.

Whilst the code is there to outline the basic minimum legal requirements it is crucially important for all parties to understand how it applies.

This will ultimately lead to better commercial outcomes for both parties.

Should you require further legal advice about franchising we have many years of experience in advising franchisees and franchisors.

We provide legal advice and prepare franchise documentation (including franchise agreements, disclosure documents and associated documents. We also handle disputes and litigation for franchisees. Our lawyers have a deep understanding of the industry and the practicalities as well as a deep understanding of franchising law. We focus on providing our clients with concise legal advice with commercial understanding.

Call us today on 1300 907 335 to discuss any query you may have with one of our franchise lawyers. If you prefer, just complete the enquiry form on this page and we will respond to you promptly.