In March 2007, we reported on the changes to the Franchising Code of Conduct (Code) which were recommend by the Matthews Committee (Committee), following a review of the Code's disclosure provisions. Some of the key recommendations were accepted by the Government and, after months of consultation with key industry stakeholders, these amendments were tabled in Parliament last week. The amendments to the Code's disclosure provisions will come into effect on 1 March 2008. Some of the amendments are significant and will require more detailed disclosure by franchisors regarding their franchise operations.

Purpose of amendments

In announcing the amendments, the Minister for Small Business, the Hon Fran Bailey MP, said:

'This is a great step forward for small business…Prospective franchisees will have more information before signing on the dotted line'

The purpose of the amendments is to increase the transparency, quality and timeliness of disclosure to existing and prospective franchisees.

This article examines some of the key changes to the disclosure provisions of the Code, and outlines some of the recommendations, which were originally accepted by the Government, but which have not ultimately resulted in changes to the Code.

Key changes to the Code

At least 14 days before the franchise agreement is expected to be signed, franchisors must now provide franchisees with a copy of the franchise agreement in the form it is to be executed, along with the disclosure document. This change reflects what is largely the current practice amongst franchisors.

A copy of the Code will also have to be provided to franchisees with the disclosure document. It is no longer sufficient to direct franchisees to the Office of Small Business website.

Franchisors will be required to disclose details of undertakings given under section 87B of the Trade Practices Act 1974 (Cth) (TPA), not more than 14 days after the undertaking is given. An example of such an undertaking is one given voluntarily by a franchisor to the Australian Competition and Consumer Commission (ACCC) in settlement of Court proceedings (or threatened legal action), alleging breaches of the TPA.

Franchisors will be required to disclose materially, relevant facts within 14 days of the franchisor becoming aware of them rather than the current 60 days.

In one of the most significant changes to the Code, franchisors will be required to disclose the names and contact details of each ex-franchisee in the last 3 financial years, unless the ex-franchisee requests that it be withheld. This later exception obviously reflects concerns over privacy laws. This provision will operate prospectively. The justification for this amendment is to provide prospective franchisees with information regarding the viability of the franchisee, practical issues in running a franchise, and assistance of the franchisor. Franchisors who have disgruntled ex-franchisees or existing franchisees will obviously be concerned by this amendment.

The current provisions of the Code relating to rebates will be extended to require franchisors to disclose the name of the business providing the rebate or financial assistance. Interestingly, the Government had earlier accepted a recommendation made by the Committee that franchisors also be required to disclose the amount of rebate and method of calculation, although this suggested amendment has not been made.

The current exemption relating to foreign franchisors has been removed. Foreign franchisors will therefore now be bound by the Code. In response to the Committee's report, the Government also agreed in principle in February 2007 (subject to consultation with industry) to remove the current exclusion from the Code of franchise agreements, where certain conditions were satisfied, including where sales under the franchise are likely to be less than 20% of the franchisee's gross turnover. However, with some minor amendment, this exclusion still applies.

Another significant amendment is that general waivers (disclaimers) relating to prior written or verbal representations will no longer be permitted in franchise agreements. This probation will operate retrospectively to franchise agreements, which were entered into after 1 October 1998.

During the review process, there was a great deal of debate regarding this proposed amendment, with the ACCC arguing that the High Court's decision in Poulet Frais Pty Ltd v The Silver Fox Company Pty Ltd ATPR 42-075 may place franchisees in a vulnerable and disadvantageous position, since a franchisee's decision to purchase a franchise is often influenced by prior written representations. It was envisaged that franchisors would seek to use broad disclaimers in sales literature in an attempt to avoid liability under the Code and the TPA.

If the scope of the franchise agreement is extended, for example, the franchisee's territory (as well as the term), a current disclosure document will need to be provided to franchisees.

The financial details included in a disclosure document will be extended, where applicable, to include the consolidated entity to which the franchisor belongs, if requested by a franchisee. Foreign franchisors are able to use local accounting standards and auditors.

Disclosure documents will now be required to include:

the business experience of all officers of the franchisors (as defined in the Corporations Act 2001) who have management responsibilities;
materially relevant facts about franchisor directors, including details of any court actions, offences and judgments involving them;
details of the history of the franchised territory or site; and
conditions which deal with obligations for a franchisee regarding the selection of a site or premises.
The scope of disclosure has also been extended in relation to the definition of 'serious offence', which will now include a contravention of the Corporations Act. Perhaps an unintended consequence of this amendment, is that it broadens the scope of the grounds on which a franchisor can immediately terminate a franchise agreement, under section 23 of the Code to include where the franchisee is convicted of a contravention of the Corporations Act. It is currently limited to an offence for which a person, if convicted, would be liable to a term of imprisonment for at least 5 years.

The current exemption relating to the annual auditing of marketing funds remains (which is if 75% of franchisees agree that an audit is not required), however that agreement or vote must be renewed every 3 years.

In line with current provisions of the Corporations Act, financial reports as well as an updated disclosure document (upon request) must be supplied within 4 months (instead of the current 3 months) at the end of each financial year. The effect of this clause and the timing of the amendments, means that franchisors will be required to have an amended disclosure document in place by 1 March 2008 and a further updated disclosure document by the end of October 2008, within the new timeframe.

Franchisors can no longer refuse a request by franchisees to whom the short form disclosure documents applies (Annexure 2) for any additional information contained in the long-form disclosure document (Annexure 1). It is noteworthy that the Government originally signalled its support for the removal of short-form disclosure documents, but they have been retained.

Further, franchisors are no longer permitted to summarise the conditions of a franchise agreement; they must refer to the relevant provisions of the franchise agreement. This is a sensible amendment.

The definition of 'associate' of a franchisor has been extended to include a person who supplies real property to a franchisee. This change means that franchisor will be required to disclose details of rental and other property expenses.

Where a franchise agreement is terminated during the cooling off period, a franchisor can charge a franchisee for reasonable expenses incurred by the franchisor, but the expenses or their method of calculation will need to be set out in the franchise agreement.

The changes to the Code undoubtedly place more onerous disclosure obligations on franchisors and will require amendments to disclosure documents. Further changes to the Code have also been foreshadowed. It is recommended that franchisors take immediate steps to amend and update their disclosure documents in time for the introduction of the amendments on 1 March 2008. A breach of the Code remains a breach of the TPA and the ACCC, which was heavily involved in the review process, will no doubt vigorously pursue franchisors who do not comply with the Code's amendments.

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