Expert Article


 

Changes to the Code – Franchisors beware!

Amendments to the Franchising Code of Conduct (Franchising Code) took effect from 1 July 2010.

 

These changes follow the findings of an expert panel. 

 

The amendments follow the release of the government’s official response to the inquiry into the conduct of parties to franchise agreements.

 

A summary of the key changes is set out below.

 

 

END-OF-TERM ARRANGEMENTS

 

The amendments to the Franchising Code impose a requirement that franchisors disclose to prospective franchisees the process that will apply in determining end-of-term arrangements, including clarification of:

  • Exit payments;
  • Arrangements regarding unsold stock; and
  • A franchisee’s right to sell at the end of the term.
  • Whether there is a right of renewal.
  • The processes to apply in determining end-of-term arrangements, including whether or not there is a right of renewal beyond the term of the franchise agreement;
  • Franchisors will be required to inform franchisees at least six months before the end of the franchise agreement of their decision to renew or end the franchise arrangement;

 

These new disclosure requirements in respect of end-of-term arrangements apply to franchise agreements signed on or after 1 July 2010.

 

These amendments are aimed to clarify the position and avoid the assumption by franchisors that they may have an automatic right to renew.

 

DISPUTE RESOLUTION

 

The Franchising Code has been amended to include a list of conduct to encourage parties to approach dispute resolution in a conciliatory manner including:

  • Attending and participating in meetings at reasonable times;
  • Making intentions clear at the outset of negotiations;
  • Observing confidentiality obligations during and after a mediation; and
  • Not damaging the franchise brand during the dispute.

 

 

PRESERVATION OF THE COMMON LAW OF GOOD FAITH

 

The Government has opted not to pursue the inclusion of a good-faith obligation in the Franchising Code.

 

After much debate, the Government concluded that a well-defined good-faith obligation was not achievable and the adoption of a general, undefined good-faith obligation may create uncertainty.

 

The Government has however amended the Franchising Code to provide that nothing limits any common law requirement of good faith in relation to a franchise agreement to which the Code applies.

 

EXPERT PANEL REPORT ON DISCLOSURE REGIME:

 

The Government announced on 3 March 2010 that it would strengthen the disclosure requirements of franchisors under the Franchising Code.

 

Under this revised disclosure regime, the information needs to be provided by franchisors to prospective franchisees at a time in the decision-making process that enables franchisees to conduct their due diligence and make an informed decision whether or not to enter into the franchise agreement and to better evaluate the risks and rewards of entering into a franchise arrangement.

 

 

UNILATERAL CONTRACT VARIATION

 

The Government has amended the Franchising Code to require franchisors to disclose the circumstances in which unilateral variation to an agreement may take place, and disclose to franchisees circumstances in which a franchisor has unilaterally varied a franchise agreement in the past three financial years.

 

 

UNFORSEEN CAPITAL EXPENDITURE

 

In some circumstances, unforseen capital expenditure may be required by franchisees.

 

The amendments to the Franchising Code require franchisors to disclose whether significant capital expenditure would be a factor to be considered in deciding to renew the franchise agreement, and whether that has occurred in the past three financial years.


DISCLOSURE STATEMENTS


The amendments require the following changes to be made to disclosure statements:

 

  • Information shall be  provided on whether or not the prospective franchisee would be entitled to an exit payment at the end of the term and, if so, how the exit payment would be determined;
  • Details provided on what arrangements would apply at the end of the agreement to unsold stock or equipment;
  • Details on whether or not the prospective franchisee would have the right to sell the business at the end of the term and whether the franchisor would have first right of refusal;
  • The statement must also state whether a franchise agreement may be amended, even when the franchisee is selling the franchise, and whether a franchisor will allocate their legal costs to a franchisee in the event of dispute resolution.

 

It is also required that prospective franchisees be informed of the categories of information that cannot be discussed with existing and former franchisees, such as the outcomes of mediation, settlements, intellectual property and trade secrets.

 

FRANCHISOR INITIATED CHANGES WHEN A FRANCHISEE IS TRYING TO SELL THE BUSINESS

In some cases, there may be legitimate commercial and regulatory reasons for a franchisor amending a franchise agreement when a franchisee is trying to sell the business. This may affect the franchisee’s ability to maximise the return on the investment.


Franchisors are now required to disclose whether there may be any changes at the time when the franchisee is selling a business before the agreement is signed. 

 

SUMMARY

 

The changes to the Franchising Code aim to provide more certainty for both franchisees and franchisors in their business arrangements and place further obligations of disclosure on the franchisor.

 

The changes take effect from 1 July 2010. There are no transitional arrangements so any franchisee that signs a franchise agreement on or after 1 July 2010 must be provided with a disclosure document that complies with the amended Code.

 

For further information regarding this article, please click here to contact Franchise Partner, Robert Toth at Wisewould Mahoney Lawyers

 

 

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