Franchising Code Changes Announced

• Franchisors must now provide to franchisees either as part of or with their disclosure document, a copy of the franchise agreement in the form it is to be executed - thus it is no longer possible to provide an out of date pro forma franchise agreement that may have been in use when the disclosure document was created for the year in question.  
• All other agreements that a franchisor will require a franchisee to sign as part of the franchise acquisition process must be provided to the franchisee 14 days prior to signing of the franchise agreement if they are available, otherwise as soon as they become available.   
• The mandatory statement to appear on the front page of a disclosure document will need to be varied to reflect that, upon a franchisee "cooling off" a franchisor may retain an amount to cover its reasonable expenses.  
• In respect to each key event in item 6.4 of the disclosure document (e.g. transfers, terminations, franchisor buy-backs and closures) franchisor must provide details above, the name, location and details of each ex-franchisee if the information is available, unless the ex-franchisee has requested that information not be disclosed.  
• Franchisors who receive rebates or other financial benefits from suppliers to the network must disclose the name of the party from whom it receives such rebates or financial benefits - amounts do not need to be disclosed.  
• If the territory or site to be franchised has been previously franchised the disclosure of details of the franchised business including the circumstances in which the previous franchisee ceased to operate, must now be contained in both a separate document and the disclosure document.  
• Franchisors will no longer be permitted to summarise relevant provisions of your franchise agreement in Items 15, 16 and 17 of their disclosure document.  A copy of the franchise agreement must be attached to the disclosure document and references made to the relevant clauses.  
• The same type of litigation disclosure as was required for franchisors is now required for franchisor directors.   
• Franchisors will be required to disclose the business experience of all officers of franchisor corporate entities. Previously this information was not required in relation to executive officers.  
• If a franchisor entity is a part of a consolidated entity that is required to provide audited financial reports under the Corporations Act, you may need to provide the financial reports of the consolidated entity, if a franchisee requests such reports.  
• Franchisors will now be required to provide to franchisees a copy of the statement of the marketing or co-operative fund detailing all receipts and expenses of the fund for the last financial year.  This statement will need to be more detailed and must be prepared and sent to all franchisees within 4 months after the end of the financial year which it relates, irrespective of whether a request is made.  
• All foreign franchisors will now be required to comply with the Franchising Code.  
• Franchisors will be prohibited from inserting into their franchise agreements general waivers regarding written or verbal prior representations.   
• The requirement to give a disclosure document now extends to circumstances where a franchisor wishes to extend the scope of a franchise agreement.  

In our view the Government has struck a reasonable balance between protecting the interests of franchisees and prospective franchisees and the need to not burden franchisors with unnecessary compliance obligations.  

Statements from Franchisees that they have read, received and understood the Franchising Code and Disclosure Document  

The NSW Court of Appeal in the case of Ketchell v Master Education Services Pty Ltd has recently decided that a franchise agreement entered into in circumstances where the franchisor did not receive from the franchisee a statement to the effect that it had read, received and understood the Franchising Code and disclosure document (as is required under regulation 11 of the Code), rendered the franchise agreement unenforceable.  In the case in question, the franchisor's claim to recover unpaid royalties was dismissed.  

This decision is soundly based upon authorities dealing with the effect of illegal contracts, but is likely to be the subject on an appeal to the High Court of Australia.  

It serves as a warning to all franchisors to ensure that they receive from franchisees such a statement before entering into a franchise agreement.    

This article was written by Tony Garrisson, a Principal in the Commercial division of Mason Sier Turnbull and Philip Colman, the head of Mason Sier Turnbull's franchising division. 

23-Aug-2007