All in good faith… the new Franchising Code of Conduct

A new year brings with it new changes, and the law is no different, especially for franchisors and franchisees. The new Franchising Code of Conduct came into effect on 1 January 2015.

Officially known as the Competition and Consumer (Industry Codes – Franchising) Regulation 2014 (“Regulations”), it has brought in some changes that you should be aware of.

Good Faith

The most significant change is the requirement now that parties entering into a Franchise Agreement, or who are proposing to enter into a Franchise Agreement, must act in good faith in their dealings with one another.

This obligation kicks in from the early stages of the relationship between a franchisor and a would-be franchisee.

There is no set definition of what good faith means, however clause 6 (3) of the Regulations outline some factors the Court will likely consider when deciding if parties have acted in good faith:

• Have you acted honestly and not arbitrarily?
• Have you cooperated to achieve the purposes of the Franchise Agreement?

Despite the fact that there is no set definition for good faith, parties cannot limit it or contract out of it. And, if you breach your obligation to act in good faith, penalties may apply.

Additional obligations for Franchisors

If you are a Franchisor, there’s more that you will need to consider, including the following:

1.  Marketing Fund

Under clause 13 of the Regulations, if you operate a marketing fund, there are some new restrictions that you will need to abide by.

Firstly, a separate bank account must be maintained for marketing fees and advertising fees contributed by franchisees.

Secondly, there are also restrictions on how you can spend any marketing money. You must only spend marketing money on:

expenses that were disclosed in your disclosure statement; or are legitimate marketing or advertising expenses; or that have been agreed upon by a majority of franchisees; or

for the purpose of paying the reasonable costs of administering and auditing a marketing fund.

Finally, you will also be required to prepare an annual financial statement detailing the receipts and expenses of the marketing fund within 4 months of the end of each financial year.

2.  Disclosure Obligation

Division 2 of the Regulations now requires you to update your disclosure statement by 31 October 2015 so that it complies with the new Code. Until that date, you may use your existing disclosure statement provided that it meets the requirements of the previous Code.

3.  Information Statement

Clause 11 of the Regulations sets out the requirement that you have to provide an Information Statement to any prospective franchisees. A copy of the Information Statement can be found in Annexure 2 of the Regulations.

If you are a franchisor or franchisee and you would like to speak to someone about how these changes may affect you and your business, please contact John Wardlaw (Principal, Commercial Law) and Peter North (Senior Associate, Commercial Law) on (03) 9629 9629.