Franchising - Code of Conduct Changes from 1st March 2008

The Franchising Code of Conduct ("the Code") applies to a franchise agreement entered into, renewed or extended on or after 1st October 1998.

Franchising is a business system where one party (the franchisor) grants to another (the franchisee) the right to operate the business under an existing system or marketing plan.

A franchise agreement to which the Code applies must contain all the following four elements:

1. an agreement between the parties which can be written, oral or implied;
2. an existing system or marketing plan granted by the Franchisor to the Franchisee to carry on business;
3. the business which is associated with a symbol, advertising or trademark;
4. a fee to be paid by the franchisee to the franchisor.

The franchisor must give the franchisee a disclosure document at least 14 days before the franchisee enters into the franchise agreement.

The disclosure aspects of the franchise agreement are set to change from 1st March 2008 with the new Regulations taking effect from that date.

Details of some of the changes follows:

1. Clause 2(2) of the Code will be deleted such that the Code will not be expressed to operate concurrently with the  Petroleum Retail Marketing Franchise Act 1980.
2. definition of an associate as someone that is associated and supplies real property to a franchisee, such as a landlord or lessee or estate agent.
3. Corporations Act definition of a "serious offence".
4. update the legislative references to the Corporations Act, 2001 and delete redundant definitions for "executive officer" and "secretary".
5. Prior to 1st March 2008 there were three exceptions where the Code does not apply to a franchise agreement which were as follows:
   1. for a overseas (foreign) franchisor which uses only one franchise or master  franchise in Australia;
   2. when the agreement is covered by another mandatory code; and
   3. when the sale under the franchise are likely to provide no more than 20% of your gross turnover for the first year of the franchise, and you have been supplying the same goods and services for two years immediately before entering the agreement.
   4. From 1st March 2008 exception (a) will be removed and the Code will apply to the foreign franchisor. 
6. the disclosure document of the franchisor will have to extend to 4 months after the end of each financial year from the current 3 months.
7. the disclosure document of the franchisor may be signed by any director or other officer of the franchisor instead of only a director or executive officer currently.
8. the franchise agreement must be given to the prospective franchisee in the form in which it is to be executed.
9. the franchisee must give to the prospective franchisee all related agreements like leases, asset purchase or rental agreement at least 14 prior to the signing or at the earliest opportunity if not available.
10. prospective franchisee can also freely associate.
11. the prohibition on an franchise agreement containing or requiring the 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.
12. Marketing or other cooperative funds must give a copy of the auditors report within 30 days of preparing the report although they are allowed 4 months from the original 3 months to prepare the financial statements.
13. Disclosure of materially relevant facts such as change in the control or majority ownership of the franchisor, judgment in criminal or civil proceedings against a franchisor must now be provided within 14 days from the original 60 days.
14. In addition to disclosing civil proceedings against the franchisor, the franchisor must disclose any proceeding against any franchise director by 10% or 10 franchisee.
15. Undertakings by a franchisor under Section 87B of the Trade Practices Act must be disclosed within a reasonable time, but not more than 14 days of being given.
16. A Warning on the front page of the disclosure agreement has to be 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 if the expenses are properly disclosed.
17. Disclosure of the details of the name, position held and qualification of each officer of the franchisor have been removed but a summary list of the relevant business experience is required.
18. Disclosure of the proceedings against the franchisor has been extended to each franchisor director including the content of any order or undertaking.
19. Disclosure of any rebates or other financial benefits given in connection with any supply or goods or services must be made including the names of the parties who provide them.
20. Disclosure is 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 3 years.
21. Provision of a separate document to the prospective franchisee with the disclosure documents containing the details and history of the site to be franchised.
22. Reference must be made of the relevant conditions of the franchise agreement instead of a summary of the conditions.
23. Extension of the financial disclosure obligations to the financial report for the relevant consolidated entity.

Franchising is a dynamic area of the law and is therefore subject to constant change. The government has indicated that there will be further changes to the code in 12 months to address drafting issues. Currently the Franchising Coincil of Australia is making further representations to the government to address a number of anamolies. Should you require competent professional assistance cal LAC Lawyers.