Understanding the Franchise Code of Conduct

If you’re looking into purchasing a franchise, it’s important to understand that you will become bound by a code of conduct once you enter into that franchise. Known as the Franchise Code of Conduct, this code is a mandatory set of rules that all franchised businesses must abide by, and regulates the conduct of franchising participants towards each other. The code is determined by the Australian Competition and Competitor Commission (the ACCC), and is available in full on the ACCC website.

Not only this, franchise agreements built upon this code of conduct may change as the code itself changes. In July of 2021, the ACCC made changes to the franchising code of conduct that both franchisors and by which franchisees will be impacted.

Let’s take a look at the Franchise Code of Conduct – including its recent changes – so that you can be better equipped to handle your franchise.

What Does the Franchise Code of Conduct Involve?

The franchising code of conduct regulates the code of conduct in the workplace of franchising participants. This covers a number of areas, including:

Good Faith

The code determines that both the franchisor and the franchisee must act in good faith towards the other, with neither party taking advantage of the other. This applies to all aspects of the partnership, including negotiations before entering a franchise agreement. Examples of good faith within a franchisor-franchisee relationship include honesty, fairness, co-operation in order to achieve the franchise’s goals and, having regard to the interests of each party.

Disclosure

The disclosure document is one of the most vital parts of a franchise agreement, acting as a means to ensure franchisors comply with the franchising code of conduct. It includes important information such as:

• Details of all the current franchisees in the franchise system, as well as the franchisees who have left the system in the last three years
• Details of any relevant legal action (if any) being taken against the franchisor
• All financial and business details of the franchisor, including details of the costs and fees required to commence and operate the franchise.

The franchisor must also give the franchisee a copy of the Franchising Code of Conduct and an executable franchise agreement.

Franchise Agreements

The Franchising Code requires that a franchisor provide a franchisee with certain rights, including fourteen-day cooling off periods, the right for the franchisee to associate with other franchisees, and a dispute resolution clause that complies with the code.

Termination

Termination of a franchisee is also dictated by the code. For example, a franchisee may breach a franchise agreement, in which case a franchisor must follow the stipulations in the code and provide a notice in writing, allowing the franchisee a reasonable chance to amend the breach.

Dispute Resolution

These steps have been established in order for a franchise partnership to settle issues fairly. These steps include a written notice of the dispute, direct negotiation between franchisor and franchisee, appointment of a mediator, and mediation.

What Has Changed?

For a full breakdown of the changes to the Franchising Code of Conduct, we recommend visiting the ACCC website. Many of the changes made are franchisee-friendly, and include enhanced disclosure obligations, protection for franchisees, and improved dispute resolution processes. We’ve outlined some key points below.

Disclosure

As of July 1^st 2021, some new changes to disclosure have come into effect. In addition to a disclosure document, a franchisor must provide a Key Facts Sheet to franchisees prior to entering into, renewing or extending the details of a franchise agreement. This means that, if you enter into a new franchise, the franchisor must provide you a summary of key information about the franchise you are entering. This is a new requirement.

Changes have also been made in order to increase the scope of information in the franchisor disclosure document, providing the franchisee with further vital information including lease details, financial benefits, a summary of termination rights, and, if a franchisor proposes to give earnings information it must be provided at the time of disclosure.

Termination

New cooling off periods have been introduced for franchise agreements, and franchisees may now propose termination at any time, provided each subsequent proposal sets out different reasons for termination. However, a franchisor does not have to agree to terminate but must state reasons for their refusal to do so. A franchisor can also no longer terminate a franchise agreement with immediate effect, including special circumstances and, must give a reasonable time for the franchisees to remedy the breach.

Other Changes

A range of other changes have also come into effect, including, (but not limited to):

• Expanded dispute resolution process
• A franchisor can no longer require the franchisee to pay part or all of the franchisor’s cost of legal services for the preparation, negotiation or execution of the agreement or related documents
• Annual audited financial statements must be provided by franchisors who administer marketing funds
• Significant capital expenditure can no longer be required
• Franchisors may not make changes to franchise agreements in retrospect.

The Takeaway

The Franchising Code of Conduct is an essential part of the franchisor-franchisee business model, and ensures both parties are accommodated when entering into a franchise agreement. If you’re interested in taking charge of your career via a franchise opportunity with Sleepy’s, please visit our franchising information page, or get in contact with us today!