Major changes to the Franchising Code of Conduct

On Wednesday 2 April 2014, the Federal Government released an Exposure Draft of a revised Franchising Code of Conduct (Code) and changes to relevant provisions of the Competition and Consumer Act 2010.

The exposure draft foreshadows a number of important changes to the Code, including:

• a statutory duty of good faith on both franchisors and franchisees;
• increased enforcement powers, allowing the ACCC to:
  • seek civil penalties of up to $51,000 per breach, for breaches of certain provisions of the Code; and
  • issue infringement notices of up to $8,500 per breach, without seeking a court order, for breaches of the civil penalty provisions of the Code;
• franchisors must give prospective franchisees an information statement (in a prescribed form) containing an overview of the risks and rewards of franchising, early in the recruitment process;
• restrictions on forcing franchisees to undertake significant capital expenditure;
• franchisees may avoid restraint clauses in circumstances where the franchisor elects not to renew a franchise agreement and the franchisee was not in breach;
• changes to the wholesale price exemption in the payment limb of the franchise test; and
• substantial changes to the prescribed form of the disclosure document.

Franchisors will welcome some of the changes, including that franchisors do not need to re-disclose if a franchisee requests changes to the franchise agreement during the 14 day disclosure period and the simplification of disclosure obligations for master franchise relationships.

However, on the whole, the changes will increase the regulatory burden on franchisors and limit their rights in certain areas. The prospect of civil penalties and infringement notices for non-compliance will make it more important for franchisors to strictly comply with the Code.

The Government has announced a public consultation period regarding the proposed amendments, which will end on 30 April 2014. However, the Government has indicated that the scope of the consultation will be confined to technical aspects of implementing the amendments, not substantive changes.

The expected implementation date for the changes is 1 January 2015, and it is likely that most of the changes will be enacted in their proposed form.

Prior to the implementation date, franchisors will need to make major changes to their disclosure document and review their franchise agreement.