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Franchisors to lift their game under proposed law changes

in Business Law by Eileen Nguyen on

On 2 April 2014, the Government released its proposed amendments to the Franchising Code of Conduct (the Code), a mandatory industry code that regulates the conduct of franchisors and franchisees.

The changes flow from an independent review of the existing Code that was undertaken in April 2013.  In our experience, the majority of franchisees are ordinary Australians who want to free themselves from their job and to run their own business.

However, buying into a franchise can be a fraught process which pits a large franchisor against an often inexperienced franchisee.  The Code changes seek to address the power imbalance between franchisors and franchisees, improve the integrity of the franchising industry and provide franchisees with easy to understand information which identifies at the outset, the “risks and rewards” of a franchised business.

At the front end and before buying into a franchise system, the prospective franchisee must be given disclosure information.  One of the significant proposed changes to the Code is the introduction of heavy civil penalties for franchisors who fail to comply with their disclosure and notice obligations.  While the proposed change will go some way towards ensuring franchisors provide disclosure documents to the franchisee, the proposed changes also seek to simplify the disclosure.

Changes to franchisor disclosure requirements will eliminate redundant information.  Franchisors will also be required to provide prospective franchisees with a standard information statement (limited to 2 pages) setting out the risks and rewards of operating a franchise.

If the amended Code comes into operation, franchisees will be better protected against franchising agreements that disproportionately favour the franchisor, particularly in relation to dispute resolution.  For example, a franchisor will no longer be able to demand that a franchisee pay the franchisor’s costs of resolving a dispute (which is the current situation).

Another major change is the creation of an obligation for the parties to a franchise agreement to act in good faith, that is, to “act honestly and not arbitrarily” and to cooperate with one another.  The parties cannot contract out of this obligation, which also applies during negotiations between a prospective franchisor and franchisee.

Slater and Gordon often acts for franchisees who have suffered losses as a result of poor or incomplete or misleading disclosure by franchisors.  While the proposed amendments will go some way to addressing the power imbalance between franchisor / franchisee, any prospective franchisee should seek accounting and legal advice before sinking their life savings into a franchised business.

Eileen Nguyen
Commercial & Project Litigation, Associate
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