It is essential that business owners should be familiar with the Franchising Code of Conduct to better understand the rights and obligations of a franchisee and franchisor.
Mandated by the Australian Competition and Consumer Commission (ACCC), the Franchising Code of Conduct:
- Regulates franchisor and franchisee actions
- Aims to ensure that prospective franchisees are properly and sufficiently informed about franchise agreements before entering them
- Requires for additional information on the ability of the franchisor and franchisee to sell online
- Provides for a cost-effective dispute resolution approach for both franchisees and franchisors
- Provides for and ensures that parties act in good faith in their dealings with one another
- Mandates financial penalties and infringement notices when serious breaches of the Code are committed and are established to be true
- Prohibits franchisors from imposing capital expenditure except in limited situations.
What you need to know
Franchisors are required by the Code to provide at least a two-page information statement detailing some of the key risks and rewards of going into the franchising business.
The franchisor must then provide the franchisee with a disclosure document, the executable copy of the franchise agreement, and the copy of the Code at least 14 days before both or all parties enter into agreement and/or make a non-refundable payment.
The disclosure document should include the following:
- Details of operational costs and fees to be paid
- Contact details of current and former franchisees
- Exclusive territory information
- Conditions for renewal
The franchise agreement serves as the contract between the franchisee and the franchisor. This contains details of the rights and obligations of the franchisee.
Franchisees should consult a legal and accounting professional for advice and speak with franchising experts to prepare themselves with regards to a new venture. As with any other business venture, franchising does not guarantee success. The business decisions made and the potential risks will ultimately define how franchisees will fare as a new franchising venture.
Dispute resolution and its entailments
Franchisees are entitled to terminate a franchise agreement within seven days of entering into said agreement (or an agreement to enter into a franchise agreement) and/or make a payment under the agreement. This cooling off period does not cover a renewal, extension, or transfer of an existing agreement.
If a dispute arises, the Code requires that parties try to arrive at a resolution by outlining in writing:
- Nature of the dispute
- Expected outcome
- Course of action to settle the dispute.
If parties still have not arrived at a resolution and/or dispute settlement within three weeks, both parties may then refer the matter to mediation services. This mediation is an informal negotiation facilitated by an independent third party.
The mediation process aims to negotiate an outcome that is acceptable and beneficial to both franchisor and franchisee.
Upon request, the Office of the Franchising Mediation Adviser can appoint one to assist parties. Both the franchisee and the franchisor can also agree to appoint a private professional and franchising expert.
Another alternative is to request the Australian Small Business & Family Enterprise Ombudsman (ASBFEO) or the Business Commissioner to appoint a mediator.
The Code and the ACCC
The ACCC promotes the Franchising Code to ensure that both franchisor and franchisee know their rights and obligations before, during, and after entering a franchising deal or after a deal has been completed and/or terminated.
The ACCC undertakes enforcement and compliance activities to encourage and ensure compliance of the Code. Thus, the ACCC is given power to issue infringement notices to individuals and firms and seek financial penalties—including penalties against directors—for certain breaches of the Code.