Franchising Code Compliance

The Franchising Code of Conduct (the Franchising Code) is a mandatory set of rules that all Australian franchised businesses must abide by.

There are significant penalties for the failure to comply with the Franchising Code.

Good Faith

The Franchising Code provides that "each party to a franchise agreement must act towards each other with good faith, within the meaning of the unwritten law". 

While the Franchising Code does not define “good faith”, it provides that when assessing whether a party has acted in good faith, a Court may consider if:

• a party acted honestly and not arbitrarily;
• a party co-operated to achieve the purpose of the franchise agreement.

Some of the elements of good faith include:

• honesty
• fairness
• not acting arbitrarily
• co-operating to achieve the purpose of the franchise agreement
• reasonableness
• having regard to the interests of the other party.

Legitimate Business Interests

While a party must take into account the interests of the other party, the obligation to act in good faith does not prevent a party from acting in its own legitimate commercial interests.

Consequently, a party is not required to act in the interests of the other party at the expense of its own interests.

The ACCC’s view is that conduct is prohibited where it harms the franchisee but it is not necessary for the protection of the franchisor’s interests. The Federal Court of Australia has accepted that view.

Conduct that may show a lack of good faith

The ACCC in it’s Franchisor Compliance Manual has indicated that the following conduct may raise concerns under the obligation of good faith:

• a franchisor treating a franchisee differently to other franchisees because the franchisee has raised concerns about the system.
• a franchisor raising numerous minor and immaterial breaches with a franchisee in an aggressive and intimidatory manner designed to extract concessions or cessation of complaints.
• franchisees using confidential information provided by the franchisor to compete with the franchisor.
• franchisees using social media to post negative comments about the franchisor or their dispute with the franchisor.

Penalties

The maximum Civil Penalty under the Code for a failure to act in good faith is 600 penalty units, or $187,800.00.

Disclosure

Disclosure arguably forms the foundation to compliance with the Franchising Code.

You need to be careful not to franchise by accident as failure to comply with the Franchising Code may lead to significant penalties.

Information Statement

A copy of the information statement relating to franchising which is published on the ACCC's website must be provided to a prospective franchisee as soon as practicable after the prospective franchisee formally applies or expresses an interest in acquiring a franchise business.

Documents to be provided before franchise

At least 14 days before a franchisee (or prospective franchisee) enters into, renews or extends a franchise agreement or pays a non-refundable deposit in relation to a franchise agreement (whichever occurs first), a franchisor must give the franchisee (or prospective franchisee):

• a copy of the franchise agreement in the form it is to be executed,
• a copy of the disclosure document relating to the franchise (in the form set out in the Franchising Code),
• a copy of the Key Facts Sheet,
• a copy of the Franchising Code.

In addition to the documents set out above, if the premises are leased to the franchisor or an associate of the franchisor and the franchisor or the franchisor's associate proposes to sublease the premises to the prospective franchisee for the purposes of a franchised business (or proposes to permit the prospective franchisee to occupy the premises without a lease), the franchisor must give to the prospective franchisee at least 14 days before the prospective franchisee enters into, renews or extends a franchise agreement or pays a non-refundable deposit in relation to a franchise agreement (whichever occurs first) a copy of:

• the lease of the premises to the franchisor or the associate of the franchisor (or if the franchisor is not in possession of the lease, a summary of the commercial terms, including any lease incentives);
• any disclosure information relating to the lease.

A failure to provide a franchisee or prospective franchisee with a copy of any of these documents as required by the Franchising Code may attract a civil penalty of 600 units (or $187,800.00).

Documents to be provided after franchise

While the Franchising Code requires a franchisor to provide significant disclosure to a prospective franchisee before the franchise agreement is entered into, there are also matters which a franchisor must disclose to a franchisee after a franchise agreement is entered into. These matters include things such as a change in the majority ownership or control of the franchisor or certain proceedings commenced against the franchisor or judgments awarded against the franchisor.  

A failure to disclose these matters to a franchisee as required by the Franchising Code may attract a civil penalty under clause 5A of the Franchising Code if the franchisor is a corporation, or a maximum civil penalty of $500,000.00 if the franchisor is a natural person. 

Under clause 5A(2) of the Franchising Code the maximum penalty, depending on the benefit derived by the body corporate and its annual turnover, may be the greatest of:

• $10 million;
• if the Court can determine the value of the benefit that the body corporate has obtained by its contravention - 3 times the value of that benefit;
• if the Court cannot determine the value of that benefit - 10% of the annual turnover of the body corporate during the period of 12 months ending at the end of the month in which the contravention occurred.

Disclosure Document

A franchisor must create a disclosure document relating to a franchise that complies with the Franchising Code.

Failure to create a disclosure document may attract a civil penalty of 600 units (or $187,800.00). 

The Franchising Code provides that a disclosure document must be in the form set out in Annexure 1 to the Franchising Code.

The disclosure document includes information such as:

• details of all the current franchisees in the franchise system,
• details of the franchisees that have left the system in the last three years,
• details of any relevant legal action that is being taken against the franchisor, 
• the financial and business details of the franchisor, and
• details of the costs and fees required to commence and operate the franchise.

After a franchisor enters into a franchise agreement, the franchisor must update the disclosure document within 4 months of the end of each financial year.

A franchisor does not need to update the disclosure document after the end of the financial year if:

• the franchisor entered into one or less franchise agreements during the financial year; and
• the franchisor does not intend to enter into another franchise agreement in the following financial year.

The civil penalty for a failure to update a disclosure document (if it is required) is 600 units (or $187,800.00). 

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