What's New in Franchising - June 2010

The changes are part of the Government’s response to two reports into franchising delivered by the joint committee and an expert panel. The changes will act in addition to The Trade Practices Amendment (Australian Consumer Law) Bill 2009 passed earlier this year, which enhanced ASIC and the ACCC’s consumer law enforcement powers and introduced a provision regulating unfair contract terms. This legislation will also commence on 1 July 2010.

The changes to the Code commence on 1 July 2010. Therefore, any franchise agreements entered into on or after this date will be affected. There are no transitional provisions and given the closeness of the commencement date franchisors need to urgently implement strategies to deal with the changes.

Franchisors have had some relief from the new Code obligations in that a ‘stepped’ introduction to some of the additional disclosure requirements introduced by the reform will apply. Specifically, the changes require franchisors to disclose information about unilateral variations of the franchise agreement or unforseen significant expenditure in the last 3 years. Under the new changes franchisors will only have to provide such information for one financial year after the first year of operation of the provisions (2010- 2011) and so on. It is intended that this will provide franchisors with adequate time to collate this information and will minimise compliance burdens. The additional disclosure provisions will be fully operational by 2013.

A number of significant changes have been implemented. Franchisors need to be aware of the main changes which:

• require franchisors to provide upfront disclosure to franchisees about end of term arrangements and whether the franchisee has a right to renew. Franchisees must also be informed about whether or not the franchisor intends to renew or enter into a new agreement. The amount of notice required depends on the term of a franchise agreement. For agreements of more than 6 months duration 6 months disclosure is required. For agreements of less than 6 months 1 months notice is required
• require franchisors to include in disclosure documents an express statement recognising that franchising is a business and, like any other business, the franchise could fail
• set out a non-exhaustive list of behaviours expected of franchisors and franchisees when engaging in dispute resolution processes. These behaviours require both parties to attend and participate in meetings; make their intentions clear at the start of the mediation process and for franchisees not to engage in any conduct which may damage the franchise reputation.

Franchisors will also be required to disclose to franchisees:

• the circumstances in which the franchisor has unilaterally variated the franchise agreement in the last 3 years and when unilateral variation could take place
• whether the franchisee will be required to undertake any unforseen significant capital expenditure that was not disclosed to them prior to the franchise agreement being entered into
• whether significant capital expenditure undertaken by the franchisee will be considered in determining what happens at the end of the franchise agreement (i.e. whether or not to renew the agreement) and whether, during the last 3 financial years, the franchisor has considered any significant expenditure undertaken by franchisees to determine these arrangements
• whether the franchisor will amend the franchise agreement on or before selling the franchise
• whether increased confidentiality obligations exist; and
• whether the franchisee will be responsible for costs incurred by the franchisor in dispute resolution.

While the reforms are intended to increase transparency and the amount of information given to franchisees, they are not intended to replace franchisees seeking independent legal advice and completing their own due diligence.

The changes will also include an acknowledgement that nothing in the Code limits the common law requirement of good faith but good faith will not be specifically defined. A number of minor amendments to the Code, intended to increase clarity and understanding of the Code, will also be included. Interestingly, there is no mention of the short form plain English pre-disclosure document previously referred to by the Government.

Given the comprehensive changes to the Code, once the amendments are enacted they will allowed to operate for a period of three to five years without further change to provide sufficient time to evaluate their effectiveness.

To prepare for the changes a number of measures will need to be taken by franchisors. In particular:

• franchisors will have to amend their disclosure documents to deal with the new changes and this may not necessarily occur when they do their annual update
• procedures should be reviewed and changed to deal with additional disclosure requirements and any additional pre contract information or statement as well as end of term arrangements
• franchisors must consider renewal arrangements carefully and much earlier than they may otherwise have under their existing agreements. They will also need to develop policies to manage the exit of those they do not intend to renew. This will require the process to start far earlier, particularly when non renewal is linked to non performance or non compliance.

© DibbsBarker 2009