What is the Franchising Code of Conduct?

What is the Franchising Code of Conduct?

 

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

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;
• Disclosure;
• Franchise Agreements;
• Termination; and
• Dispute Resolution.

 

 

 

 

Good Faith

Clause 6 of the Franchising Code provides that the franchisor and the franchisee must both act in good faith towards the other [What is Good Faith in Franchising?].

The obligation to act in good faith cannot be limited or excluded by either the franchisor or the franchisee.

Clause 6 of the Franchising Code is a penalty provision.

 

Disclosure

Disclosure Documents

The disclosure document arguably forms the foundation to compliance with the Franchising Code by franchisors [Understanding Franchise Disclosure Documents].

Clause 8 of the Franchising Code provides that a franchisor must create a disclosure document that complies with the Franchising Code.

Clause 8 of the Franchising Code is a penalty provision.

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.

Provision of Documents to a Prospective Franchisee

Clause 9 of the Franchising Code provides that 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:

• a copy of the Key Facts Sheet [Franchising Key Facts Sheet],
• 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 [What is a Franchise Agreement?].

In addition, if the franchise business is to be operated from premises and the premises are leased to the franchisor or an associate of the franchisor, the franchisor must give to the prospective franchisee at least 14 days before the franchisee enters into, renews or extends a franchise agreement, or pays a non refundable deposit in relation to the franchise agreement:

• a copy of the lease of the premises; or
• if the franchisor (or an associate of the franchisor ) does not have the lease, a summary of the commercial terms (including any lease incentives); or
• any disclosure information relating to the lease.

Clause 9(1) of the Franchising Code is a penalty provision.

 

Further Disclosure Obligations

• Clause 11 of the Franchising Code provides that an Information Statement must be given to a prospective franchisee before the documents described in clause 9 of the Franchising Code are provided.

Clause 11 of the Franchising Code is a penalty provision.

• Clause 13 of the Franchising Code provides that if the franchisee leases the premises from the franchisor or an associate of the franchisor, the franchisor must give to the franchisee a copy of a lease or information about the lease.

Clause 13 of the Franchising Code is a penalty provision.

• Clause 14 of the Franchising Code provides that if a franchise agreement requires a franchisee to enter into:

• • a lease;
  • an intellectual property agreement [What is Intellectual Property?];
  • a security agreement;
  • a confidentiality agreement [What is a Confidentiality Agreement?]; or
  • a restraint of trade agreement [What is a restraint of trade?]

the franchisor must give to the franchisee a copy of the agreement at least 14 days before the franchise agreement is entered into or when the agreement becomes available.

Clause 14 of the Franchising Code is a penalty provision.

• Clause 15 of the Franchising Code sets out the requirements for the provision of marketing fund statements if the franchisor operates a marketing fund [Marketing Fund Obligations]. 

Clause 15 of the Franchising Code is a penalty provision.

 

Franchise Agreements

The Franchising Code requires that a franchisor provide a franchisee with certain rights in relation to franchise agreements, in particular:

• a franchisee has a 14 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 franchise agreement must comply with the legal cost provisions set out in the Franchising Code,
• a franchise agreement must not contain a provision that requires a franchisee to pay the franchisor's costs of settling a dispute.

 

Termination

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 was entered into before 1 July 2021, the franchise agreement allows the franchisor to do so and the circumstances fall within the special circumstances set out in the Franchising Code;
• if a franchise agreement was entered into after 1 July 2021, a franchisor may terminate a franchise agreement by providing 7 days' notice, if the franchise agreement allows the franchisor to do so and the circumstances fall within the special circumstances set out in the Franchising Code.
  
  In addition, if a franchise agreement was entered into after 1 July 2021 and the franchisor provides the franchisee with 7 days' notice of termination, a franchisee can raise a dispute by following the process set out in the Franchising Code. If there is a dispute raised, the franchisor cannot terminate the franchise agreement until after 28 days from the provision of the proposed termination notice.

[Understanding Franchise Agreement Termination]

 

Dispute Resolution

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 dispute resolution practitioner

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 dispute resolution process (usually mediation or conciliation).

Step 4 – Dispute Resolution Process

When a dispute resolution process is required by a party, the Franchising Code stipulates that before any other action is taken the parties must engage in a dispute resolution process.

 

Summary

This is just a brief overview of the Franchising Code and does not cover all of the Franchising Code’s provisions. 

For more information about the penalties payable if you do not comply with the Franchising Code of Conduct see Franchising Code of Conduct Compliance.

 

Disclaimer

The information in this article is general in nature and is not intended to address the circumstances of any person or other entity. Although we do our best to provide timely and accurate information, we do not guarantee that the information in this article is accurate or that it will continue to be accurate in the future.