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10 Jun 2010

Franchisors must comply with new disclosure and dispute resolution requirements from 1 July 2010

From 1 July 2010 Australian franchisors will need to comply with expanded disclosure requirements which not only will mean they must make changes to their disclosure documents, but also must begin collecting new types of information.

The changes to the Franchising Code and Trade Practices (Industry Codes — Franchising) Amendment Regulations, released last week by the Australian Government, come from the Government's responses to the Parliamentary Joint Committee on Corporations and Financial Services’ report, Opportunity not opportunism: improving conduct in Australian franchising, and the expert panel report, Strengthening Statutory Unconscionable Conduct and the Franchising Code of Conduct.

New disclosure requirements

Franchisors will be required from 1 July 2010 to disclose additional types of information to prospective franchisees, including:

  • details of future payments by the franchisor to third parties (where such payments are within the knowledge or control of the franchisor, or are reasonably foreseeable by the franchisor)
  • whether the franchisor will require the franchisee to undertake unforeseen significant capital expenditure not disclosed by the franchisor before the franchisee entered into the franchise agreement
  • the circumstances in which the franchisor has unilaterally varied a franchise agreement in the last three financial years
  • the circumstances in which unilateral variations to a franchise agreement may take place in the future
  • whether a confidentiality obligation will be imposed on the franchisee, and the type of matters that could be covered by the confidentiality obligation
  • that franchising is a business and, like any business, the franchise (or franchisor) could fail during the franchise term and this could have consequences for the franchisee; and
  • whether the franchisor will attribute their costs, including legal costs, incurred in dispute resolution, to the franchisee.

But old disclosure requirements will still apply to existing franchisees

The new disclosure regime will apply to franchise agreements entered into on or after 1 July 2010, which raises a practical problem for franchisors.

In effect they will have to handle two forms of disclosure documents - the current form must be provided annually and upon request to existing franchisees, but the new one to prospective franchisees.

End of the franchise arrangements

Franchisors will need to give more information on:

  • what, if any, options the prospective franchisee will have to renew or extend the agreement, or to extend its scope
  • entitlements and calculation of exit payments
  • what will happen to unsold stock, marketing material, equipment and other assets purchased when the agreement was entered into
  • whether the prospective franchisee can sell the business at the end of the agreement, and, if so, whether the franchisor will have first right of refusal, and how market value will be determined
  • whether the franchisor will consider any significant capital expenditure undertaken by the franchisee during the agreement in determining what will happen at the end of the franchise agreement, and the extent to which the franchisor has required significant capital expenditure by its franchisees over the last three financial years
  • whether the franchisor will amend the franchise agreement on or before the transfer or novation of a franchise agreement.

Six months' warning before the end of the arrangement

Franchisors will now have to tell franchisees, at least six months before the franchise agreement ends, whether the franchise agreement will be renewed or not.

This period drops to one month if the franchise agreement is for less than six months.

Dispute resolution

Both franchisees and franchisors will have new obligations when they use dispute resolution processes under the Franchising Code.

Basically, they will have to:

  • attend and participate in meetings at reasonable times
  • explain clearly what they are trying to achieve through the mediation process
  • observe any confidentiality obligations that apply during or after the mediation process
  • not take action during the dispute, including by providing inferior goods, services, or support, which has the effect of damaging the reputation of the franchise system; and
  • not refuse to take action during the dispute, including not providing goods, services or support, if the refusal to act would have the effect of damaging the reputation of the franchise system.

Disclosing information from the last three financial years - staggered implementation

Some of the new disclosure requirements require franchisors to disclose information relating to the previous three financial years. Because franchisors might find it difficult to collate and produce the information, these disclosure requirements will come into force gradually.

For the first year that the regulations operate, franchisors would have to provide information for one financial year.

After the second year of operation, they would have to provide two financial years' worth of information.

Only from 1 July 2013 onwards would franchisors need to provide all three years' worth of information.

What franchisors need to do now

First, ensure that your disclosure documents reflect the new requirements - and that you are set up to handle the dual-disclosure document regime introduced by the changes.

Secondly, make sure that your systems flag franchising arrangements that are close to their end, and that you send out your intentions to the franchisees in time.

Thirdly, ensure that yoursystems are capturing the new types of information that must be disclosed - and that you adjust your disclosures in line with the staggered implementation set up by the Regulations.

 

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Disclaimer

Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.