Proposed changes to the mandatory franchise code
Friday, 16 March 2007
Last Updated: Wednesday, 22 August 2007
By Rebecca Bedford and Peter George
In June 2006, the Minister for Small Business, the Hon Fran Bailey MP announced a review of the disclosure provisions of the Franchising Code of Conduct. A committee was established to review the current operation of Part 2 of the code (disclosure) and to identify possible amendments that could improve disclosure provisions. On 6 February 2007, the Government published its response to the committee's recommendations.
Among the 75 submissions received by the Government was one by the ACCC, which has successfully concluded litigation against 15 franchisors — 14 of those cases related to the franchisor's failure to comply with the disclosure provisions of the code. Minter Ellison has previously reported on the ACCC's push to target what it describes as 'rogue operators' in the franchising industry.
This article examines the main recommendations which were accepted by the Government, and some which were not.
Key changes to disclosure provisions of the code which have been accepted
1. At least 14 days before the franchise agreement is expected to be signed, the franchisor will be required to include copies of all associated agreements (including leases, guarantees and confidentiality agreements) to be signed by the franchisee, in the form that they are intended to be signed, with the disclosure document. This reflects current good practice and appears uncontroversial.
2. Franchisors will be required to disclose details of undertakings given under section 87B of the Trade Practices Act (TPA) not more than 14 days after the undertaking is given. Currently franchisors are required to disclose, as at the date of the disclosure document, any order or voluntary section 87B undertaking given but they are not required to advise of any subsequent undertakings. As the committee pointed out 'timely knowledge of the existence and content of section 87B undertakings may be material to the ability of the franchisee to make informed decisions'.
3. Franchisors will also be required to disclose materially relevant facts within 14 days of the franchisor becoming aware of them rather than the current 60 days.
4. The current provisions of the code relating to rebates will be extended to require franchisors to disclose the amounts, or methods of calculation, of the rebate or other financial benefit. This is also a significant, and seemingly quite onerous, change.
5. Marketing and other co-operative funds will need to be audited annually by a registered company auditor and the franchisee must be provided with a full account of these funds and with the auditor's report.
6. One of the most significant changes, which will operate prospectively, will require franchisors - subject to privacy laws - to provide the names, location and contact details of previous franchisees. The franchisor will need to obtain the consent of each past franchisee to provide this information, or indicate where consent has been withheld. The committee pointed out that the reasons for franchisees leaving the franchise may be important to prospective franchisees.
7. Disclosure documents will now be required to include:
- The business experience of all officers who have management responsibilities, including executive officers (who are currently exempt).
- Franchisor directors in the class of persons about which materially relevant facts must be disclosed, with the scope of disclosure extended to include criminal convictions for non-serious offences.
8. The current exemption relating to foreign franchisors who grant only one franchise or master franchise has been removed, as has the exemption relating to franchise agreements where sales under the franchise are likely to be less than 20 percent of the franchisee's gross turnover. According to the committee 'the protection provided by the disclosure provisions should be afforded to all prospective and existing franchisees'.
9. Importantly, consideration will be given to whether franchise agreements and disclosure documents should be prohibited by the code from including any general waivers of written representations made to potential franchisees. In its submission, the ACCC referred the Committee to the decision of the full Federal Court in Poulet Frais Pty Ltd v The Silver Fox Company Pty Ltd and suggested that this case might encourage franchisors to use broad disclaimers in franchise sales in order to avoid liability under the code. It is possible that there will be further amendments to the code to address this issue.
10. Short form disclosure documents will be abolished.
11. The financial details included in a disclosure document will be extended, where applicable, to include the consolidated entity to which the franchisor belongs. In some instances this might require the disclosure of financial information which would otherwise not be required to be disclosed.
Changes not accepted by the Government
Whilst the amendments to the code (when they come into effect) will no doubt lead to increased compliance costs and will require franchisors to spend more time completing disclosure documents, the situation could have been worse: the committee made a number of far-reaching recommendations which the Government declined to accept including:
1. The provision of a risk statement by franchisors in a disclosure document identifying significant risks involved in becoming a franchisee such as decisions made by third parties, earnings projections, franchisee rights and changing competition. Fortunately for franchisors, the Government stated that: 'Decisions relating to the viability and associated risks of any business venture are ultimately the decision of the businesses themselves'. The Government did, however, indicate that it will ask the ACCC to continue to educate the industry on the importance of risk analysis.
2. Inserting a statement obligating franchisors, franchisees and prospective franchisees to deal with each other fairly and in good faith. The Government pointed out that section 51AC of the TPA includes good faith as a factor in determining whether there has been unconscionable conduct.
3. Removing/modifying the right of a franchisor to include, in a franchise agreement, the right to unilaterally terminate a franchise agreement. Currently this is dealt with in clause 22 of the code (termination on reasonable notice). The committee recommended that if such a right was to be maintained, adequate compensation or a guaranteed buy-back be provided for and included in the disclosure document. If accepted, this change would have severely restricted the rights of franchisors.
4. Implementation of a mandatory process for the franchisor to register with the ACCC annually the most current disclosure documents, and sample auditing of the disclosure document be undertaken.
5. Removing the franchisee's right to unilaterally vary a franchise agreement. However, the Government did indicate that this issue would be dealt with through reform to section 51AC of the TPA- a unilateral variation clause will be a factor that may indicate a franchisor has engaged in unconscionable conduct.
Consultation process continues
According to a media release dated 21 February 2007, consultation is underway with the franchising industry on the Government's response and will continue until late March 2007.
Assuming the Government response is adopted, the next step is for the code to be amended, with legislation drafted and passed in Parliament. This is likely to occur before the end of the year.
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