Jun

26

Franchising

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FRANCHISING CODE OF CONDUCT AMENDMENTS 1 July 2010

 

The Franchising Code of Conduct (the Code) has been amended by the Trade Practices (Industry Codes – Franchising) Amendment Regulations 2010.  The amendments start from 1 July 2010 and apply to all Franchise Agreements entered into on or after 1 July 2010.  

 

WHAT ARE THE AMENDMENTS?

Risk Statement – Franchise Failure

The Disclosure Document must now include an express statement that, like any business, the franchise (or Franchisor) could fail, and that this could have consequences for the Franchisee. 

Payments to Third Parties

The Franchisor must now disclose details of any payments that are within the Franchisor’s knowledge or control, or are reasonably foreseeable by the Franchisor, that are payable by the Franchisee to a person other than the Franchisor (or an associate of the Franchisor).

Significant Capital Expenditure

Franchisors must now disclose whether the Franchisee, through the Franchise Agreement, the operations manual (or equivalent), or any other means, is required to undertake significant capital expenditure that the Franchisor did not disclose before the Franchisee entered into the Franchise Agreement.

Attribution of Legal Costs

The Disclosure Document must now state whether the Franchisor will attribute the Franchisor’s costs incurred in dispute resolution (including legal costs) to the Franchisee.

Unilateral Variation

For Franchise Agreements entered into in the financial year starting on 1 July 2011, 1 July 2012 or 1 July 2013 Franchisors are now required to disclose the circumstances in which they have unilaterally varied a Franchise Agreement since 1 July 2010.

For Franchise Agreements entered into after the financial year starting on 1 July 2013, Franchisors will be required to disclose the circumstances in which they have unilaterally varied a Franchise Agreement in the last 3 years.

 

Franchisors are also now required to disclose the circumstances in which they may unilaterally vary the Franchise Agreement in the future.

 

Confidentiality

Franchisors must now disclose whether they will impose a confidentiality obligation on a Franchisee and, if so, details of the matters the obligation may cover and of which may include:

  • outcomes of mediation
  • settlements
  • intellectual property
  • trade secrets
  • particular aspects of individual agreements, such as fees.


End of Term Arrangements

Franchisors must now disclose to their Franchisees:

  • what options the prospective Franchisee will have to renew, extend or extend the scope of the Franchise Agreement and, if so, the processes the Franchisors will use to determine whether to renew, extend or extend the scope of the agreement or enter into a new agreement;
  • whether the Franchisee will be entitled to an exit payment at the end of the Franchise Agreement and, if so, how the exit payment will be determined or earned;
  • details of the arrangements that will apply to unsold stock, marketing material, equipment and other assets purchase when the Franchise Agreement was entered into – including whether the Franchisor will purchase these assets and, if so, how prices will be determined;
  • whether the Franchisee will have the right to sell the business at the end of the Franchise Agreement and, if so, whether the Franchisor will have first right of refusal, and how market value will be determined;
  • whether the Franchisor will consider any significant capital expenditure by the Franchisee during the Franchise Agreement in determining the arrangements to apply at the end of the Franchise Agreement.


Terms

The concept of novation has been introduced into the Code.  Novation is defined as the termination of a franchise and entry into a new franchise with a proposed transferee on the same terms as the terminated franchise.   The rules that apply to transfer now also apply to novation.

References to the independent contractors provisions of the Workplace Relations Act 1996 (which have been repealed) have been replaced with the relevant references to the Independent Contractors Act 2006.

Transfer or novation

Franchisors must disclose whether it will amend or require the amendment of the Franchise Agreement on or before transfer or novation of the Franchise.

Good faith

The Code now provides that nothing in the code limits any common law obligation of good faith that applies to the parties to a Franchise Agreement.

Notice of renewal

Franchisors are now required to notify a Franchisee at least 6 months before the end of the term of the Franchise Agreement of the Franchisor’s decision to:

  • renew or not to renew the Franchise Agreement; or
  • enter into a new Franchise Agreement.

 

If the term of the Franchise Agreement is less than 6 months, the Franchisor must notify the Franchisee of its decision at least 1 month before the end of the term of the Franchise Agreement.

Dispute resolution

 

Reconciliatory manner

The Code states that if either party refers a dispute to a mediator, both parties must attend the mediation and try to resolve the dispute.

 

The Code now provides that a party will be taken to be trying to resolve a dispute if they approach the resolution of the dispute in a reconciliatory manner, including by:

  • attending and participating in meetings at reasonable times;
  • making their intentions clear as to what they are trying to achieve at the beginning of the mediation process;
  • observing any applicable confidentiality obligations;
  • not damaging the reputation of the franchise system (e.g. by providing inferior goods or services).

 

Costs of mediation

The parties to a dispute are equally liable for the costs of mediation unless they agree otherwise and the Code now provides that costs of mediation include the cost of:

  • the mediator;
  • room hire;
  • any additional input agreed by both parties to be necessary (including expert reports).

 

HOW DO THE AMENDMENTS AFFECT THE FRANCHISOR?

Franchisors actively granting new franchises will need to move fast and ensure the Disclosure Statement complies with the amended Code before 1 July 2010 and that they have systems in place to alert Franchisors to send out notice of renewals to Franchisees.

HOW CAN WE ASSIST

Ferguson Cannon can assist Franchisors by reviewing and amending your Disclosure Document and Franchise Agreement to ensure it complies with the amendments to the Code.

 

Please contact Tony Pattinson today for expert advice.

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Category: Business & Corporate Services, Fact Finders, Franchising, General

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