If you want to franchise your business, you will have to comply with the Franchising Code.
There are a number of areas which are covered by the Franchising Code including:
- Good Faith;
- Franchise Agreements;
- Termination; and
- Dispute Resolution.
The Franchising Code provides that the franchisor and the franchisee must both act in good faith towards the other.
The obligation to act in good faith cannot be limited or excluded by either the franchisor or the franchisee.
The disclosure document arguably forms the foundation to compliance with the Franchising Code by franchisors. 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.
At least 14 days before a franchisee enters into, renews or extends a franchise agreement or pays a non-refundable deposit in relation to a franchise agreement, a franchisor must give the franchisee:
- an Information Statement,
- a copy of the Franchising Code,
- a disclosure document in the form set out in the Franchising Code,
- a franchise agreement in the form it is to be executed.
The Franchising Code requires that a franchisor provide a franchisee with certain rights in relation to franchise agreements, in particular:
- a franchisee has a 7 day cooling off period after the franchise agreement is signed, or after a franchisee has paid non-refundable money to the franchisor. If a franchisee decides to exercise their cooling off rights, the franchisor must give a refund of any payment the franchisee has made within 14 days. The franchisor does have the ability to deduct a reasonable amount incurred by the franchisor,
- the franchisor is prohibited from preventing a franchisee from forming an association or from associating with other franchisees or prospective franchisees for a lawful purpose,
- a franchise agreement must not contain, or require a franchisee to sign a statement that releases the franchisor from general liability towards the franchisor,
- a franchise agreement must not contain, or require a franchisee to sign, a waiver of any verbal or written representation made by the franchisor,
- a franchise agreement must contain a dispute resolution clause which complies with the Franchising Code.
A franchisor can only terminate a franchisee in accordance with the provisions set out in the Franchising Code:
- if a franchisee breaches a franchise agreement (apart from certain special circumstances), a franchisor must follow the provisions in the Code relating to the provision of notice in writing and allowing the franchisee a “reasonable time” to remedy the breach;
- a franchisor may terminate a franchise agreement immediately if the franchise agreement allows the franchisor to do so and the circumstances fall within the special circumstances set out in the Franchising Code.
The Franchising Code sets out a detailed procedure for resolving disputes.
Step 1 – Written Notice of Dispute
The complainant, whether they are the franchisee or the franchisor, must write to the other party with details of the complaint. The Franchising Code stipulates that the letter must include the following information:
- The nature of the dispute,
- The outcome the complainant wants, or the desired outcome, and
- What action the complainant believes will settle the dispute.
Step 2 – Direct negotiation between the parties
The Franchising Code mandates that before any other action is taken the parties to the complaint must endeavour to resolve the dispute between them.
Step 3 – Appointment of a mediator
If the parties have tried to resolve the dispute between them and have failed, after 21 days of the written notice of dispute being given, either party may refer the matter to a mediator.
Step 4 – Mediation
When mediation is required by a party, the Franchising Code stipulates that before any other action is taken the parties must engage in mediation.
This is just a brief overview of the Franchising Code and does not cover all of the Franchising Code’s provisions. Should you require any advice about the Franchising Code or the effect of the Franchising Code on your business, contact us so that we can assist you.