Franchising Code of Conduct

Franchising Code of Conduct

On the First of January 2015 the Franchising Code of Conduct that was established by the Trade Practices (Industry Codes—Franchising) Regulations 1998 (Cth) was repealed and replaced by the Competition and Consumer (Industry Codes—Franchising) Regulation 2014 (Cth) (“the Code”).  The Code’s purpose was to update outdated provisions and to reflect modern drafting practices and changes in the franchising sector.

The main changes implemented by the Code include:

  • A new general obligation for parties in a franchise agreement to act in good faith;
  • Financial penalties and infringement notices have now been incorporated in the Code for serious breaches;
  • New disclosure obligations, including a new information statement to be given to all prospective franchisees contained within the Code;
  • Prohibiting franchisors to impose significant capital expenditure bar limited circumstances; and
  • A requirement for greater transparency with the use of money provided from franchisees for marketing and advertising.

Obligation to Act in Good Faith

The new obligation to act in good faith applies to any matter arising under a franchise agreement or the Code. This obligation also extends to disputes or negotiation relating to a proposed agreement. If the matter reaches the Court, there shall be consideration as to whether the party had acted honestly and not arbitrarily and whether there was cooperation provided by the party to achieve the agreement. However, this is a non-exhaustive list and the Court may take other considerations into account. It is important to note that this obligation may not be excluded in any way under a franchise agreement itself or other documents that are in relation to a franchise agreement. Further, if a franchisee chooses not to renew an agreement or extend an agreement this does not mean the franchisor has not acted in good faith. Any breach of an obligation to act in good faith may result in civil penalty.

New Disclosure Requirements

There is a number of new disclosure obligations now required under the Code.  Franchisors must provide an Information Statement to a prospective franchisee as soon as practicable after an expression of interest. The information statement is located in Annexure 2 of the Code.  There is also a new format provided for the Disclosure Document which now contains information that previously was not required to be disclosed. Some of the new information required includes:

  • Disclosure of Master Franchise details;
  • Information in respect to online sales (the Franchisor must disclose the rights of both the franchisor and franchisee to conduct online sales and any corresponding ability or intention of the franchisor to conduct online sales); and
  • End of term details including option to renew and a statement regarding a franchisee’s rights at the end of an agreement.

Generally, a disclosure document must be updated at the end of each financial year. An exception is now provided where the franchisor did not enter into any agreements or, only one agreement for a financial year and the franchisor does not intend to enter into one for the following year. It is important to note however that if a franchisor has a request from a franchisee asking for an updated disclosure document; it must be updated to reflect the franchisee’s position for that financial year.

Changes to the Franchise Agreement

Capital Expenditure Reforms

Significant capital expenditure must not be required by a franchisor. The exceptions to thinclude:

  • whether the expenditure was included in the disclosure document;
  • if majority of franchisees approve the expenditure;
  • if the requirement for capital expenditure adheres to legislative obligations;
  • if the franchisor considers it a necessary investment which is justified by a written statement; or
  • if the expenditure is agreed upon by the franchisee.

The purpose of these requirements is to prevent an obligation imposed by a franchisor for capital expenditure that is unjustified or without notice.

Restraint of Trade and Marketing and Advertising

A restraint of trade clause shall no longer be enforceable if certain options are not available for a franchisee:

(i)            If a franchisee wishes to have the franchise agreement renewed and they have not breached the agreement and abided by copyright and confidentiality clauses;

(ii)           if the franchisor decides to not renew the agreement and provides none or minimal compensation to the franchisee;

then the restraint of trade clause shall be unenforceable.

Marketing and advertising fees are now required to be maintained in a separate bank account by the franchisor. The franchisor must also contribute the same amount as a franchisee for any franchisor operated stores.

Dispute Resolution

There is now a new framework provided in the Code for a dispute resolution process. This new process also allows for internal dispute resolution. The new procedure forbids a franchisor requiring a franchisee to attend any mediation or litigation outside of the State the franchise is operating within. Any clause in a franchise agreement reflecting this shall be null and void. Further, a franchise agreement must not impose all dispute resolution costs upon the franchisee. Costs shall be paid equally unless agreed upon otherwise.

 When do you need to comply with the Code?

The Code has commenced 1 January 2015. If any new agreements occur after this date, then they must comply with the new requirements. There is a grace period provided for franchisors existing disclosure documents however they must be fully updated by 31 October 2015. There are some exceptions for the new requirements in specific Code provisions for agreements from 1 October 1998 however this shall cease to apply if the agreement is in any way varied after 1 January 2015.

Any existing franchisors should take the time to review and update their current franchise agreements and disclosure documents to ensure compliance with the new Code. As there are now penalties imposed due to  lack of compliance, the review process is even more important.

The above process is only a summary of the changes that have occurred since the introduction of the new Code. It is important that any franchisors, franchisees or prospective franchisees receive advice in relation  to all documentation surrounding a franchise agreement to ensure all obligations are now complied with. JHK Legal is experienced in assisting all parties involved in a franchise agreement including those looking to update their franchise agreements to adhere to the new legislative provisions. If you have any enquiries or require assistance with your franchise agreement, please do not hesitate to contact our office.

Author: Brittany Biron, Graduate Lawyer

Published: February 2015

Self representation services in the Federal and Federal Circuit Courts and How They Impact Creditors

With the increase in Default Judgments being awarded by state Courts, it has been viewed that an influx of bankruptcy and wind up proceedings in both the Federal and Federal Circuits Courts issued by creditors in attempts to enforce judgments is beginning to occur.

This influx has also seen a higher number of unrepresented litigants who are unaware of the legal proceedings and appearing at the hearing unprepared and unaware of the legal process causing unnecessary delays within the Court System.

In response to the high volumes of unrepresented litigants in insolvency proceedings, the Federal Government, in conjunction with the Courts and Justice Connect (a pro-bono service) have created a Self Representation Service to assist all parties involved with insolvency proceedings.

What is the Self Representation Service?

The Self Representation Service is essentially designed to work in a similar vein as how Legal Aid duty lawyers work in the Magistrates’ Court of Victoria.

The Self Representation service provides an in-Court pro-bono service providing access to lawyers and financial councillors for unrepresented litigants. The Service was launched in both the Federal and Federal Circuit Courts in both Melbourne and Sydney in August 2014 and allows for unrepresented litigants to gain independent legal and financial advice they might not otherwise have access to.

The Effect of the Service on creditors

Whilst on the surface, the service’s main aim is to assist unrepresented litigants on a pro-bono basis; the broader goal is to assist all parties who have commenced legal proceedings in Bankruptcy or Winding Up.

More often than not, lawyers when dealing with unrepresented litigants are forced into awkward situations where they are dealing with a litigant who is more often than not asking for advice on how to run their case. The service provided by Justice Connect removes the risk of solicitors for applicants finding themselves in situations whereby they may be in breach of their duty to the client.

The greatest advantage of the program for creditors is that it means matters can be dealt with in a timely manner. In the event that a Respondent makes an appearance at the first return date of a bankruptcy or wind up hearing, it is our experience that there is a fairly high chance they generally have no idea what the proceedings are about or how to deal with them. You can also almost guarantee that in most situations like this the Court will look to adjourn the matter (often for weeks at a time) to allow a Respondent to a) potentially seek legal advice and b) provide necessary affidavits as to their financial position to Applicants and supporting creditors.

The advantage of having lawyers and financial counsellors readily available means that the Court can stand the matter down and refer the Respondent to Justice Connect. Financial Counsellors in their initial consultation have been successful in various matters referred to them obtaining the Respondents financial details and determining their solvency. This in turn means they will either be able to put forward a potential payment plan (doing away with the often long winded process of awaiting liquidators and trustees to pay out a dividend from an estate or asset pool of a company), or even suggesting the Respondent go Bankrupt or have their company wound up.

The Counsellors are also able to assist Respondents in preparing necessary Affidavits of Financial Position that paint a better picture of a person or company’s solvency. Often we receive Affidavits from Respondents that are inaccurate or lack substantial detail. By  Respondents obtaining assistance from lawyers and counsellors, creditors are able to get a better understanding as to what is available in persons estate or company’s asset pool and make a more informed decision as to whether or not the expense of such proceedings are justifiable.

Issues raised by insolvency practitioners

Whilst the service to date has been relatively successful, there are still some issues that need to be ironed out. One glaring issue is that Counsellors have been known to cross the line from providing financial advice to providing legal advice. This presents a problem as it may potentially lead to Respondents receiving incorrect advice and potentially stalling proceedings. Questions have also been raised as to where a financial counsellor’s duty lies, as unlike legal practitioners, they have no duty to the Court. Given the service is in its infancy, you can expect that these issues will be addressed over time, however in the interim they are worth keeping an eye on.

Conclusion

Based on early results we have experienced with the Self-Representation Service currently running, it is clear that while some wrinkles need to be ironed out over time, on a whole the program is of great benefit to all parties involved. As mentioned above, the program is of great assistance to Creditors allowing for matters to be dealt with in a timely manner thus meaning a quicker payout and avoiding unnecessary costs. The program is due to be reviewed by the University of Melbourne later this year, and if the review yields positive feedback, then it is a safe bet that further funding will be provided to continue the service.

Author: Dylan Trickey, Lawyer

Published: February 2015