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Are you aware of changes to the Franchising Code? |
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| Focus: |
Franchising Code |
| Industry Focus: |
Franchising |
| Date: |
22 August 2007 |
| Author: |
Brisbane Franchising Team |
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Dibbs Abbott Stillman Lawyers restructured on 1 March, 2009.
The Sydney, Brisbane and Canberra offices are now DibbsBarker.
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2006 Matthews Report – Changes to the franchising code
In 2006 the Matthews Report was conducted into Franchising in Australia. Some of the findings of this report have been incorporated into the Franchising Code as part of the Trade Practices (Industry Codes — Franchising) Amendment Regulations 2007 (No. 1) (the Amendments). The Amendments were tabled in Parliament on the 15 August 2007, and will be effective from the 1 March 2008. The key amendments are as follows:
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At least 14 days before the Franchise Agreement is signed, the Franchisor must provide the prospective Franchisee a copy of the agreement in the form in which it is to be executed (section 10)
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Franchisors are obliged to disclose any undertakings made under s87B Trade Practices Act (Annex 1, para 4.3 (f))
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Details of previous franchises granted over the territory or site of the current franchise must now be provided by the franchisor. This must be provided in a separate document, with the disclosure document (section 11(3))
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Franchisors are obliged to disclose materially relevant facts (eg changes in majority ownership of the franchisor, judicial proceedings, judgments etc) within 14 days of becoming aware of them, rather than the previous 60 days (section 18(1))
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In the event of an obligation by the franchisee to sign related documents (eg lease, licence, security arrangement etc) then these must also be provided 14 days prior to the signing of the franchise agreement, or if not available at that time, when they become available (Annex 1 paras 18.1 – 18.2)
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If a rebate or other financial benefit is gained by the franchisor, or an associate of the franchisor, the name of the business providing the rebate must also be disclosed (Annex 1, para 9.1 (j))
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If money is paid into a marketing or other cooperative fund, then the financial statement for this fund must be provided to the franchisee within 30 days of its preparation. If an auditor’s report is required for this fund, then this must also be provided within 30 days of its preparation (section 17(1)(c))
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The franchisor must provide the franchisee audited financial statements within 4 months of the end of the financial year, not 3 months as previous (Sections 6.1 and 17(1)(a))
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The franchisor must provide the names and details of other franchisees (if available) unless the franchisee has agreed in writing that their details not be disclosed (Annex 1, para 6.5; 6.6)
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It is now a requirement that the following be added to the front page of the Disclosure Document:
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]Regarding Annex 2 Short Form Disclosure only: The Franchisee will be able to ask the Franchisor questions regarding the disclosure document, and material contained within this Annexure (Annex 2 para 12.1). The franchisor must answer these questions, and there are no longer ‘reasonable circumstances’ in which this information can be withheld (Section 6C)
We will provide further information on these changes over the coming weeks.
Franchisor unable to sue for franchise fees
In the recent case of Ketchell v Masters of Education Services Pty Ltd handed down on 19 July 2007, the NSW Supreme Court of Appeal considered whether a franchisor has the right to sue for unpaid franchise fees when they have not collected from the franchisee all the documentation and certificates required under the Code.
The Facts
The Franchisor (Master of Education Services Pty Ltd) brought an action to recover unpaid franchisee fees against a Franchisee (Ketchell). The Franchisee argued that no franchisee fees were payable as the Franchisor did not comply with clause 11(1) of the Franchising Code.
Clause 11(1) provides that a franchisor ‘must not’ enter into a Franchise Agreement without receiving from a franchisee a written statement stating that they have read and have had a reasonable opportunity to understand the disclosure document and the Code. Here, no written statement was received by the Franchisor.
The key question before the court was whether the Fanchisor’s contravention of clause 11(1) meant the franchise agreement was unenforceable and illegal. If this was the case the Franchisor would be unable to recover the outstanding franchise fees.
Held
The Court held that as the Code prohibited the making of the franchise agreement in the absence of a clause 11(1) statement from the franchisee, the franchise agreement could not be enforced.
Section 51AD of the Trade Practices Act together with clause 11 directly prohibits the making of the franchisee agreement and the recovery of the monies claimed. The franchisor was therefore unable to recover the outstanding franchisee fees.
Lesson Learned
It is vital that franchisors receive from the franchisee all the appropriate certificates and documentation required under the Code. A failure to receive these documents may mean that the franchise agreement is unenforceable.
All franchisors should ensure that they receive from a prospective franchisee the following:
And either:
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- A signed statement that the prospective franchisee has been told of the kind advice that should be sought and has decided not to seek it.
If you have any questions about the provisions set out above, or any other matters, please do not hesitate to contact a member of our National Franchising Team.
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