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Australia – Franchising Code: New Penalties.

8 May, 2014

 

Legal News & Analysis – Asia Pacific – Australia – Corporate/M&A

 

In Brief

 

The Government has moved ahead with the reforms to the Franchising Code of Conduct (Code) and relevant provisions of the Competition and Consumer Act 2010 (Cth) (CCA), releasing an exposure draft of amendments. Although there is a consultation period until the end of April, submissions are invited only in relation to drafting issues. If enacted, the revised Code will apply to franchise agreements entered into, or renewed, on or after 1 January 2015. Significant changes proposed include:

 

  • new civil penalties of up to 300 penalty units (currently AUD 51,000) may be imposed by the ACCC for breach,
  • an express obligation to act in good faith, defined in an inclusive manner,
  • new disclosure requirements, and
  • release of post franchise agreement restraints in some situations.

 

If enacted, franchisors and franchisees will need to review their documents and conduct to ensure that they comply.

 

Franchising Code Proposed Changes

 

The Government’s discussion draft of changes to the Code and the CCA1 broadly follows the recommendations put forward by Mr Alan Wein’s independent review2

 

These include the following:

 

1. Civil Penalties

 

The proposed changes give new powers to the ACCC to investigate and issue infringement notices, including requiring payment of civil penalties to the ACCC of up to 300 penalty units (currently AUD 51,000) for:

 

  • a franchisor’s failure to provide a disclosure document, and make other required disclosures in the required forms (including provision of ancillary documents required to be entered into by the franchisee and its associates, and materially relevant facts), at the prescribed times,
  • failing to act in good faith,
  • a franchisor failing to notify a franchisee of end of term arrangements within the prescribed timeframe,
  • in a cooling off termination by a franchisee, a franchisor failing to repay all payments made by a franchisee (less the franchisor’s reasonable expenses, if the expenses or their method of calculation have been set out in the franchise agreement),
  • termination otherwise than in accordance with the Code,
  • a franchisor failing to comply with a request by a franchisee that its details not be disclosed to a prospective franchisee, or seeking to influence a former franchisee into making such a request,
  • a franchisor inducing franchisees to restrict or impair their freedom to form an association, or
  • failing to attend mediation.

 

2. Good Faith

 

The Wein Report recommended introducing into the Code an obligation on franchisors and franchisees to act in good faith towards one another in connection with franchising, but recommended against including a definition of ‘good faith’.

 

The Government’s proposed amendments expressly provide an inclusive definition of good faith – the obligation to act in good faith includes an obligation to ‘act honestly and not arbitrarily, and to cooperate to achieve the purposes of the franchise agreement’. The amendments also include that the obligation to act in good faith does not prevent a party from having regard to its legitimate commercial interests, and that not including a renewal right does not mean that a franchisor is not acting in good faith. The proposed draft amendments to the Code include that a clause limiting or excluding the obligation to act in good faith is of no effect.

 

3. Disclosure

 

The Government has sought in the amendments to reduce the disclosure requirements in some instances: for instance, removing the double disclosure requirements on master and foreign franchisors and removing the obligation to summarise provisions of the franchising agreement in the disclosure documents. However:

 

  • there is a new obligation on franchisors to provide a short information sheet in a prescribed form with a generic overview of risks to which the franchisee may be exposed.
  • franchisors must now disclose how online sales may be made in connection with the franchise, including whether the franchisor or its associate may make online sales, and
  • more detail is required to be disclosed in marketing fund statements.

 

4. Termination

 

The Code currently allows the franchisor to terminate a franchise agreement in three situations:

 

  • termination for franchisee breach,
  • termination where there is no franchisee breach, and
  • termination in special circumstances.

 

The draft amendments to the Code provide that a franchisor may only terminate in those special circumstances where the franchise agreement expressly gives the franchisor the right to do so, or where the franchisee at the time of termination agrees that the franchisor may terminate. The Government has not followed the Wein Report’s recommendations that the Code be amended to give franchisees termination rights where an administrator has been appointed to the franchisor and its business has not ‘turned around’.

 

The Wein Report’s recommendations in relation to post termination restraints have been included. The draft proposed amendments provide that a restraint of trade clause in a franchise agreement has no effect after the agreement ends if the franchisee:

 

  1. had sought to renew the agreement on the same terms as the existing agreement,
  2. was not in breach of the agreement,
  3. had not infringed the intellectual property rights of the franchisor during the term of the agreement,
  4. the franchisor does not renew the agreement, and
  5. the franchisee has either received no compensation or any compensation given was only nominal.

 

Concerns were raised during public consultation that this clause could be abused by franchisees hoping to avoid restraint obligations. In response, the Government stated that it thinks any potential for such ‘mischief’ by franchisees will be limited by new, more stringent good faith obligations contained in the draft Code.

 

Next Steps – Refresh Your Compliance Processes

 

If the amendments are passed, civil penalties could be sought for failure by a franchisor to make prescribed disclosures, at prescribed times. Franchisors will therefore once again need to look over their disclosure documents, disclosure systems and review franchise agreements and and review whether they comply. Franchisees, too, will need to consider whether their behaviour in connection with their franchised business complies with obligations to act in good faith.

 

End Notes

 

  1. Amendments to the Franchising Code and the Competition and Consumer Act.
  2. 2013 Review of the Franchising Code of Conduct.

 

herbert smith Freehills

 

For further information, please contact:

 

Kristin Stammer, Partner, Herbert Smith Freehills

kristin.stammer@hsf.com 

 

Patrick Gay, Partner, Herbert Smith Freehills

patrick.gay@hsf.com

 

Martin Shakinovsky, Partner, Herbert Smith Freehills

martin.shakinovsky@hsf.com

 

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