Business Law

Franchising code reforms

B2B Editor29 May 2014

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The Government is proposing amendments to the Franchising Code of Conduct (the Code); these are tipped to redress a perceived imbalance of p ower in the franchisor – franchisee relationship.

The forecast changes include:

* introduction of an obligation on both parties to act in good faith;

* substitution of some disclosure obligations with a ‘short information sheet’;

* an obligation on the franchisor not to require a franchisee to undertake significant capital expenditure;

* removal or limit of post-franchise restraints of trade in certain circumstances; and

* preventing franchisors from requiring dispute resolution to occur outside the State or Territory the business is located in.

The Government is also proposing to give additional powers to the ACCC by allowing it to:

* seek civil pecuniary penalties of up to $51,000 from the Court for a breach of the Code; and

* issue infringement notices of up to $8,500 without having to seek a court order.

The changes are expected to take effect from 1 January 2015 and will apply to franchise agreements entered into on or after 1 January 2015 and franchise agreements which are renewed on or after 1 January 2015.

So what does this mean for franchisees?

If the restraint provisions are more lenient, franchisees are more likely to retain the benefit of the goodwill they have developed in their store or location; reward for their years of hard work. Franchisors won’t be able to unreasonably restrain franchisees from “going out on their own” in the same or a similar industry.

The proposed reforms, particularly with the tougher penalties hanging over the heads of franchisors, could reduce the number of disputes between the parties and ensure that the parties make genuine good faith efforts to resolve any disputes; minimising costs and allowing everyone to get on with their businesses.

But there is still a significant amount of red tape. Whilst the “short information sheet” should be easy to understand and give a snapshot of the risks and rewards of franchises, it is unlikely to actually be “short” and won’t necessarily tell people anything different to what is in the current disclosure documents. A change in system may simply mean more costs for franchisors, who could push these onto franchisees through increased service fees.

Result: Some franchisors are better than others, but the proposed changes will certainly go some way to addressing the power imbalance that franchisees have felt over the years. Whatever you decide to do get legal, financial and accounting advice before entering into a franchise and know your rights.

Mark Love, Legal Director, Business Law 9th Floor, Canberra House, 40 Marcus Clarke Street, Canberra ACT 2601 E: [email protected] T: 02 6274 0810 |