Franchising Code of Conduct Amendments
by
Norton Rose
1. BACKGROUND The Amendments to the Franchising Code of Conduct announced by the Federal Government last year take effect from March 1, 2008. The following is an executive summary of the key changes, with comments on some of the implications for franchise systems.
The broad impact of the changes is to:
- Require amendments to the disclosure document content, including the warnings on the face of the document; Adjust the disclosure process by requiring the franchise agreement provided at the time of disclosure to be in the form in which it is to be executed;
- Call into question the use of documents such as Offers to Franchise and Agreements to Franchise;
- Require separate disclosure in relation to sites or territories previously franchised; and
- Impose compliance obligations and impact franchise agreements signed by foreign franchisors. As no consolidated Code has been produced it will also be necessary to provide a copy of the old Code and the amending regulation to the Code as part of the disclosure process.
2. EFFECTIVE DATE AND PURPOSE OF THE CODE
2.1 The Regulations take effect from March 1, 2008.
2.2 Comment: Franchisors will need to comply with the current version of the Code up to March 1, 2008, and then comply with the Code as amended from March 1, 2008. By reason of clause 6(2) of the Code, which requires that a disclosure document comply with either Annexure 1 or 2 of the Code, franchisors will need to produce and use an amended disclosure document from March 1, 2008. They will then have to produce a further disclosure document within 4 months of the end of the 2007/08 financial year as required by clause 6(1) of the Code.
2.3 Clause 2(2) has been deleted, such that the Code is notexpressed to operate concurrently with the Oilcode.
3. DEFINITIONAL CHANGES
3.1 Various minor definitional changes have been made to:
- include as an "associate" someone that is associated and supplies real property to a franchisee, such as a landlord or lessee or estate agent;
- include Corporations Act offences in the definition of a "serious offence";
- update legislative references to the Corporations Act, 2001 and delete redundant definitions for "executive officer" and "secretary".
4. FOREIGN FRANCHISORS
4.1 The exemption from the application of the Code for a foreign franchisor that grants only one franchise or master franchise to be operated in Australia has been removed with effect from March 1, 2008.
4.2 Comment: The amendment has obvious consequences for new entrants to the market, but existing foreign franchisors and franchise agreements signed in the past by foreign franchisors will also now be caught by the legislation. Australian master franchisees of foreign based systems will also need to consider their compliance obligations under clause 6B of the Code, and whether the foreign entity also now needs to provide disclosure.
5. DISCLOSURE
5.1 Clause 6(1) extends the period within which a franchisor must update its disclosure document to 4 months after the end of each financial year.
5.2 Clause 6(2) provides that the Annexure 1 format of the disclosure document is to be provided if the franchised business has expected turnover of $50,000 per annum at any time during the term of the franchise agreement. The disclosure document may now be signed by any director or other officer of the franchisor.
5.3 Clause 6B(1) provides that a current disclosure document must now be provided not just on renewal or extension of the term, but on an extension of the scope of a franchise agreement.
5.4 Clause 10 now provides that the copy of the franchise agreement must be provided to a prospective franchisee in the form in which it is to be executed, and at the same time as they receive the disclosure document.
5.5 Comment: In the initial policy announcements the Government had included the word "intended" before "to be executed". This gave flexibility to allow for negotiations and minor changes. Unfortunately the failure to include "intended" in the legislation has created some uncertainty. It is the author's view that the franchise agreement must be in final form such that it could reasonably be executed at the time of disclosure, but that further negotiated changes and the insertion of further details such as the franchisee's company name would be permissible. However any material changes to the agreement would need to be carefully considered. Further representations made by the FCA to Government to clarify this issue have not yielded any outcome at this point. 5.6 Item 18.2 of the Annexure 1 disclosure document now requires all related agreements (Eg: leases, asset purchase or rental agreements, IP licences, security documents and confidentiality agreements) to be provided at least 14 days prior to signing, or at the earliest opportunity if not available.
6. CONDUCT
6.1 The clause 15 requirements to permit franchisees to freely associate now apply to prospective franchisees. 6.2 The prohibition on a franchise agreement containing or requiring a franchisee to sign a general release from liability has been extended to prohibit the waiver of any verbal or written representation made by the franchisor. Unfortunately the additional prohibition applies from October 1998, rather than March 1, 2008. Further representations made by the FCA to Government to correct this error have not yielded an outcome at this point.
6.3 Significant changes have been made to the reporting requirements of marketing funds. Four months is now allowed to prepare the financial statement detailing the fund's receipts and expenses and to finalise any audit, and the itemisation requirement has been removed. However the statement and a copy of the auditor's report must now be given to all franchisees within 30 days of preparing the report. The audit opt out requirement has been retained, despite being initially flagged for removal, but the 75% majority vote of franchisees contributing to the fund has to be taken either within five months of the end of the financial year or within two years of a previous vote.
DISCLOSURE OF MATERIALLY RELEVANT FACTS
7.1 Disclosure of prescribed matters under clause 18 has now to be provided within 14 days, not 60 days.
7.2 Proceedings, judgements, civil proceedings by 10% or 10 franchisees and awards against any franchisor director must be disclosed in addition to those against the franchisor.
7.3 Undertakings by a franchisor under s87B of the Trade Practices Act must be disclosed within a reasonable time, but not more than 14 days, of being given.
8. DISCLOSURE DOCUMENT CONTENT
8.1 There are various technical amendments to the corporate number disclosure requirements to accommodate foreign franchisors. The warning required to be included on the first page of the disclosure document has been amended to make it clear that the franchisor may deduct its reasonable expenses from any payments made by the franchisee if the franchisee terminates during the cooling off period and only if they have been properly disclosed.
8.2 Disclosure of name, position held and qualifications under clause 2.6 has been extended to each officer of the franchisor, and the requirement that such persons have management responsibilities has been removed. Clause 3.1 then requires a summary of the relevant business experience of each person listed.
8.3 Clause 4.1 has been amended to require disclosure of proceedings etc against any franchisor director as well as the franchisor, and the content of any order or undertaking must now also be disclosed.
8.4 Item 9.1 J) of the Disclosure Document must now disclose not only if rebates or other financial benefits are given, in connection with the supply of goods or services to the franchisor or an associate of the franchisor but also the names of all parties who provide them. However it is not necessary to disclose the amounts or method of calculation of rebates or other financial benefits.
8.5 Disclosure is now required of the name, location and contact details of past franchisees that have been terminated, transferred the franchise or otherwise exited the system, during the past three years. The requirement is linked to the requirement in item 6.4 if the information is available. The franchisor does not have to provide the details if the franchisee has requested that the details not be provided.
8.6 If a site or territory has previously been subject to a franchised business a separate document is to be provided to prospective franchisees with the disclosure document containing the details and history of the site or territory and the circumstances in which the franchisee ceased to operate.
8.7 In item 15.1, 16.1 and 17.1 of the disclosure document it is now necessary to refer to the relevant conditions of the franchise agreement. The option to summarise the conditions has been withdrawn.
8.8 The financial disclosure obligations under Item 20 of Annexure 1 are extended to include the financial reports for the relevant consolidated entity, if the franchisor is part of a consolidated entity that is required to provide audited financial reports and a franchisee requests the reports. The audit period referred to in clause 6(1) of the Code is also to be aligned to the Corporations Act audit period. 24.03.2008
FCA Member
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