The Franchising Code is prescribed under the Trade Practices Act 1974 and applies to all franchisors and franchisees. It was introduced in 1998 to regulate the conduct of franchisors and franchisees, and to ensure that prospective franchisees are sufficiently informed about a franchise before entering into it. The code also provides a cost-effective dispute resolution scheme.

1 Code enforcement

The Australian Consumer and Competition Commission (ACCC) is responsible for enforcing the code and educating franchisors and franchisees about their rights and obligations under the code.

2 A prospective franchisee has rights

A franchisor must provide a prospective franchisee with a copy of the franchise agreement, disclosure document and a copy of the franchising code at least 14 days before they sign any agreement or make a non-refundable payment related to the proposed franchise agreement. This is designed to give the prospective franchisee the information required to make an informed decision about entering into a franchise agreement. The franchisor must also receive a signed statement that the prospective franchisee has read and had reasonable time to understand the disclosure document, and a statement that the franchisee has been given (or has been told to seek but decided not to) independent legal, accounting and business advice, before entering into a franchise agreement.

3 WhatÕs in the disclosure document?

There are two types of disclosure documents: a short form for franchised businesses with expected annual turnover of $50,000 or less and a long form for those with expected annual turnover of $50,000 or more.

The long form disclosure document sets out a lot of useful information, including the relevant experience of the franchisorÕs officers, certain legal proceedings against the franchisor or one of its directors, the contact details of all existing (and some past) franchisees, the number of franchises in the last three financial years that were transferred, terminated, bought back or not renewed, details of any requirements for supply of goods, whether or not a franchisee has an exclusive territory, the conditions of any financing arrangements, any establishment costs and obligations of the franchisee to enter into any other agreements, such as a lease or sublease.

If the franchisor provides earnings information in a disclosure document, it must be based on reasonable grounds. The Franchising Code also requires franchisors who give a short form disclosure document to provide certain additional information if the franchisee requests it.

4 The franchisor must provide leasing documents

If the franchisee is to occupy a site leased by the franchisor, the franchisor must provide certain documents such as a copy of the lease agreement, a copy of the documents that give the franchisee rights to occupy the premises, written details of the conditions of occupation within one month after occupation begins or the lease agreement is signed.

5 The franchisor must provide financial information

As part of the financial disclosure required, at least one director must sign a statement as at the end of the last financial year that in the directorsÕ opinion there are reasonable grounds to believe that the franchisor will be able to pay its debts.

The franchisor must also provide financial reports for the last two completed financial years in accordance with the Corporations Act 2001 (or the foreign equivalent for a foreign franchisor) if a franchisee requests the reports. However, franchisors do not have to provide these financial reports if the directorÕs statement mentioned above is accompanied by an independent audit report from a registered company auditor.

6 A master franchisee has the same responsibilities as a franchisor

If the franchise is being purchased from a master franchisee, then the potential buyer is entitled to receive either two separate disclosure documents from the master franchisee and franchisor or a joint document outlining the respective obligations of the master franchisee and the franchisor.

7 Cooling off period

The franchisee is allowed a seven-day cooling off period from the time of signing the agreement or making a payment under the agreement, whichever is done first. In these circumstances a franchisor is required to refund all monies within 14 days; however they can deduct any reasonable expenses if those expenses, or the method for calculating them, have been set out in the agreement.

8 Ongoing disclosure by the franchisor

A franchisee can request a current disclosure document once every 12 months. Franchisors are required to maintain this document and to alert the franchisee to certain new matters not mentioned in the previous disclosure document.

Such matters as a change of ownership, the franchisor going into administration, or certain proceedings or judgments against the franchisor alleging a breach of a franchise agreement, unconscionable conduct, misconduct, an offence of dishonesty or a contravention of trade practices law or the Corporations Act. A current disclosure document must also be given to a franchisee proposing to renew their franchise agreement, or extend the term or scope of a franchise agreement.

9 Marketing information must be maintained

If a franchisee is required to pay money to a marketing fund or other cooperative fund, the franchisor must give them an audited financial statement each year, which details all of the fundÕs receipts and expenses. However, this statement does not need to be audited if 75 per cent of the franchisees in Australia who contribute to the fund have agreed that this is not required.

10 No waivers

The franchisor cannot require a franchisee to sign a general release of liability of the franchisor towards the franchisee, or a waiver of any verbal or written representation made by the franchisor.

11 Association of franchisees or prospective franchisees

A franchisor is prohibited from inducing franchisees or prospective franchisees not to form an association or not to associate with each other for a lawful purpose.

12 Transferring the agreement

When it comes to selling the franchise, the franchisor may be able to prevent a franchisee from transferring their agreement to a third party in certain circumstances. For example if the franchisor believes the new franchisee will be unable to meet their financial obligations under the agreement, if the transferee does not meet the franchisorÕs selection criteria or if the new franchisee will have a significantly adverse effect on the franchise network.

The franchisor has 42 days in which to object to the proposed transferee.

13 Renewing the agreement

Prospective franchisees should check their franchise agreements to see if they have an option to renew and, if they do, whether it is subject to any conditions.

14 Compliance and disputes

A franchise agreement must provide for a complaint handling procedure that complies with the code. The complainant must inform the other party, in writing, of the nature of the dispute and what action the other party can take to settle the dispute. The parties should then try to agree about how to resolve the dispute. If the parties cannot agree, they can refer the matter to a mediator.

If the parties cannot agree about who should be the mediator, they can request the Office of the Mediation Adviser (OMA) to appoint one. The costs of any mediation are borne equally by franchisee and franchisor, unless they agree otherwise.

Both the franchisee and the franchisor also have recourse to legal action and the opportunity to contact the ACCC.

15 Terminating the agreement

A franchise agreement can be terminated early in certain circumstances. The code stipulates that the franchisor can terminate the agreement if there is a breach of the agreement by the franchisee, but it insists on the franchisor giving the franchisee reasonable time to rectify the breach.

The codeÕs dispute resolution procedure applies if there is a dispute arising from termination in these circumstances.

The franchisor can also terminate the franchise agreement even if the franchisee has not breached the agreement, if such a clause exists under the agreement. If this is the case, the franchisor is required to give the franchisee reasonable notice of the termination and the reasons for it. The franchisee can also use the codeÕs dispute resolution procedure in this situation.

The franchisor can also end the agreement in special circumstances set out in the code, including if the franchisee operates the franchise in a way that endangers public health or safety, becomes bankrupt or insolvent, is convicted of a serious offence, operates the business fraudulently, abandons the franchise, or agrees to termination of the agreement.

For further information about the Franchising Code of Conduct, visit www.accc.gov.au/franchisingcode.