You may have come across the expressions “Franchising Code of Conduct”, “Franchising Code”, “Franchise Code” or “Code” in connection with the Franchising industry.
The Franchising Code of Conduct helps protect the interests of franchisees by ensuring they receive essential information about the franchise opportunity, including financial details and legal obligations, before entering into a franchise agreement. This transparency is crucial for making informed decisions and avoiding potential risks.
It also promotes fairness and transparency in the franchising industry, preventing misleading or deceptive conduct by franchisors, therefore fostering trust and integrity within the sector.
This article explains what the “Franchising Code of Conduct” is, how it operates, as well as past and future developments.
Legal Background
Section 51AE of the Competition and Consumer Act 2010 (Cth) (CCA) empowers the Commonwealth to prescribe industry codes of conduct. These industry codes apply to particular agreements, including franchise agreements, and the relevant regulations can then declare such industry codes either ‘mandatory’ or ‘voluntary’. The Franchising Code of Conduct (Code) is a mandatory code that applies to the franchising industry in Australia.
The current Code commenced operating on 1 January 2015 under the Competition and Consumer (Industry Codes-Franchising) Regulation 2014 and its most recently updated compilation was registered on 15 November 2022.
Given its relationship with the CCA, a contravention of the Code amounts to a contravention of the CCA, allowing a party to seek all the types of legal relief allowed under the CCA, including damages, varying contracts, declarations, injunctions, as well as fines or penalties.
For completeness, before the current Code, the first Franchising Code of Conduct was adopted in Australia in 1 October 1998 under the Trade Practices Act 1974 (Cth), which was replaced by the CCA in 2010.
Purpose of the Code and Disclosure Document
The purposes of the Code are mentioned in the decision in Master Education Services Pty Ltd v Ketchell [2008] HCA 38 at [25]:
- to regulate the conduct of persons in the franchising industry in order to improve business practices, to provide some protection to franchisees proposing to enter into franchise agreements and to decrease litigation.
- Those purposes are sought to be achieved, in large part, by ensuring that a prospective franchisee is in a position to make an informed decision about the operation of the franchise and is encouraged to take independent advice before entering into a franchise agreement.’
Under the Code, a Franchisor must create (cl. 8(1)) and maintain (cl. 8(6)) a Disclosure Document.
The purpose of a Disclosure Document is to:
- provide meaningful information to assist a prospective franchisee make an ‘informed’ decision;
- enable a prospective franchisee to identify risks,
before entering into a franchise agreement.
Core elements of the Code
Among others, the Code includes an express obligation for:
- each party to a franchise agreement to act in good faith (new clause 6); and
- a franchisor to create (cl. 8(1)) and maintain (cl. 8(6)) a Disclosure Document that must comply with the Code.
These obligations (as many others in the Code) are civil penalty provisions, meaning that they carry a penalty for contravention of a maximum of 300 penalty units ($66,600). We have set out below the other much higher penalties under the Code.
Under cl. 9 of the Code, a franchisor must give to a prospective franchisee or transferee, or to an existing franchisee for the renewal or extension (this term includes a variation) of the term or the scope of its current franchise agreement the following documents:
- a complying disclosure document, in the form and order of Annexure 1 of the Code, which must include a copy of the franchise agreement in the form in which it is to be executed
- ‘Key Facts Sheet’, which is a condensed version of the Disclosure Document
- Information statement
- a copy of the Code, and
- lease documents, if the franchisor (or one of its associates) leases or subleases retail premises to the franchisee,
at least 14 days before entering into a franchise agreement or new/varied franchise agreement.
Operation and effectiveness of the Franchising Code of Conduct
On 22 March 2018, the Senate referred an inquiry into the “operation and effectiveness of the Franchising Code of Conduct” to the Parliamentary Joint Committee on Corporations and Financial Services. The ensuing report (Report), which was published on 14 March 2019, revealed a range of problems in the franchising sector, prompting a series of changes to the franchising regulation to restore confidence in the sector, by containing 71 recommendations, including updating the Code.
Following the Report, the Code underwent a series of updates with its latest version published on 1 April 2022.
The current Code includes many changes from the pre-Report Code, including the following most notable ones:
A. a Franchisor can now incur:
- increased civil penalty if they contravene certain provisions of the Code, which will be the greater of:a. $10,000,000;
b. if the court can determine the value of the benefit obtained – three times the value of the benefit; or
c. if the court cannot determine the value of the benefit, 10% of annual turnover in the 12 months prior to the breach. - Up to 600 penalty units ($133,200 per breach), doubling the previous maximum penalties.
B. Introduction of:
a. muti-party resolution, and
b. conciliation and voluntary binding arbitration as additional dispute resolution options, further to Mediation
C. improved disclosure relating to marketing funds, supply arrangements, exit arrangements and significant capital expenditure
D. introduction of a public Franchise Disclosure Register to increase transparency in the sector
E. Cooling off period was extended from 1 week to 2 weeks
F. Termination – clause 29 of the former Code previously allowed the Franchisor to terminate a franchise agreement immediately without notice in special circumstances, including where the franchisee:
a. no longer holds a licence that the franchisee must hold to carry on the franchised business;
b. becomes bankrupt, an insolvent under administration or a ‘Chapter 5’ body corporate;
c. is a company that is deregistered by the Australian Securities and Investments Commission.
The current clause 29 no longer allows franchisor such ability. Instead, it requires a Franchisor to provide to the franchisee 7 days’ notice of the proposed termination of the franchise agreement, explaining the relevant grounds for it. Importantly, the clause also provides that if the franchisee informs the franchisor that the grounds are disputed, the franchisor must not terminate the agreement until after the end of 28 days after the notice was given, and the dispute can be referred to conciliation or mediation, unless the Ombudsman appoints an arbitrator.
G. Franchise Agreements cannot contain provisions that attempt to limit or exclude the obligation of good faith, including by reference to another document;
H. new requirements for “new vehicle dealership agreements”, including compensation of franchisees for early termination, which aim to ensure a franchisee’s ability to make a return on investment, as well as further protections that apply at the end of a franchise term.
New Review of the Code
On 15 August 2023, the Federal Government announced a review of the Code, with the intention to:
- evaluate previous reforms and assess the Code’s general fitness for purpose, noting that the Code is due to sunset on 1 April 2025.
- Have regard to the roles of the Australian Competition and Consumer Commission and the Australian Small Business and Family Enterprise Ombudsman in supporting enforcement and dispute resolution under the franchising regulatory framework.
The consultation paper released in August 2023 in connection with this review confirmed that the review will focus on 5 key themes:
- scope of regulation
- requirements prior to entering into a franchise agreement
- enduring obligations in franchise relationships
- the end of a franchise relationship
- enforcement and dispute resolution
The submission period is now over, so we will need to watch this space to see the outcome of this new review.
FAQs and Key Provisions
What is the franchise code of conduct?
The Franchising Code of Conduct is a mandatory industry code under the Competition and Consumer Act 2010 that governs the relationship between franchisors (companies or individuals who grant franchises) and franchisees (individuals or entities who operate franchise businesses). It sets out a range of rights and obligations for both franchisors and franchisees to ensure fairness, transparency, and good business practices within the franchising industry.
Key provisions of the Franchising Code of Conduct include:
- Disclosure Requirements: Franchisors must provide prospective franchisees with a disclosure document containing essential information about the franchise opportunity. This document includes details about fees, financial performance, and the franchisor’s history.
- Cooling-off Period: Franchisees have a fourteen-day cooling-off period during which they can withdraw from the franchise agreement. In such instances, the Code requires franchisors to refund all money paid by the franchisee under the agreement, except for the Franchisor’s reasonable costs, if they have been disclosed in the agreement.
- Dispute Resolution: The Code establishes a dispute resolution process, including conciliation and mediation, and, if necessary, arbitration, to help resolve disputes between franchisors and franchisees.
- Termination: It outlines the circumstances under which a franchise agreement can be terminated by either party, such as for breaches of the agreement or if the franchisee makes a proposal to terminate at any time under new clause 26B.
- Marketing and Advertising: The Code regulates marketing and advertising practices to ensure they are fair and accurate, preventing misleading or deceptive conduct.
- Good Faith: Both franchisors and franchisees are required to act in good faith in their dealings with each other. This principle promotes honest and fair interactions.
- Updates and Review: The Code is periodically reviewed and updated, to ensure its effectiveness and relevance in the franchising industry.
- Watchdog: The Australian Competition and Consumer Commission (ACCC) monitors Code compliance, being Australia’s national competition, consumer, fair trading and product safety regulator.
The Franchising Code of Conduct aims to protect the interests of franchisees and maintain the integrity of the franchising sector in Australia. It helps ensure that franchisees have access to important information, rights, and dispute resolution mechanisms, fostering a fair and balanced relationship between franchisors and franchisees.
What is a waiver of verbal or written representation?
In the context of the Franchise Code of Conduct in Australia, a waiver of verbal or written representation refers to a formal acknowledgment or agreement made by a franchisee that they have not relied on any verbal or written statements or representations made by the franchisor or their representatives that are not explicitly documented in the franchise agreement or disclosure document. This waiver is intended to protect franchisors from claims by franchisees that they were promised certain benefits, earnings, or guarantees outside of what is specified in the official franchise documents. Essentially, it serves as a legal safeguard to ensure that franchisees understand and accept that their rights and obligations are primarily based on the written terms of the franchise agreement and the information provided in the disclosure document rather than any informal or unrecorded assurances made during negotiations. In practice however, these waivers can be challenged in Court, and need to be carefully prepared to also stand the test of the new Unfair Contract Terms regime under the Australian Consumer Law. Get in touch with MV Law Business Lawyers if you need assistance with a franchising matter.
What are the disclosure requirements under the Code?
Franchisors are required to provide potential franchisees with a disclosure document that contains essential and meaningful information about the franchise, such as the franchise fees, business operations, and any legal or financial matters that may impact the franchisee.
How does the Code address dispute resolution?
The Code establishes a dispute resolution process, which includes conciliation, mediation and, if necessary, arbitration, to help resolve disputes between franchisors and franchisees.
Is there a cooling-off period for franchise agreements?
Yes, the Code provides a 14-day cooling-off period during which a franchisee can withdraw from a franchise agreement. In such instances, the franchisor must refund all money paid to it by the franchisee, except for the Franchisor’s reasonable costs, if they have been disclosed in the franchise agreement.
Are there any restrictions on marketing and advertising in the franchise?
The Code includes provisions that regulate marketing and advertising practices to ensure they are fair and accurate, and that the Franchisor provides meaningful information to franchisees in relation to marketing funds.
Can a franchise agreement be terminated, and under what circumstances?
The Code outlines the circumstances under which a franchise agreement can be terminated by either the franchisor or the franchisee, including breaches of the agreement or if the franchisee makes a proposal to terminate at any time under new clause 26B of the Franchising Code of Conduct.
Feel free to reach out to the writer in case you have any other questions about the Code.
Massimo Di Maio
Partner
(02) 6279 4335
Massimo.DiMaio@mvlaw.com.au
MV Law Canberra