Friday, June 04, 2010

Australia Franchising Code Requires Additional Disclosures, Notice of Nonrenewal

This posting was written by John W. Arden.

Revisions to the Australia Franchising Code of Conduct, announced yesterday, will add categories of presale disclosures that must be provided to prospective franchisees and require franchisors to provide six months’ notice of nonrenewal, among other things.

“These amendments seek to increase franchisor disclosure on a number of different matters and to establish guidance to franchisees and franchisors on the conduct expected of them during dispute resolution processes,” said an explanatory statement issued by the authority of the Treasurer.

“The amendments should place franchisees in a better position to understand the risks of entering into a franchising system by giving them clearer information up front about the terms and conductions on offer.”

The amendments contained in Select Legislative Instrument 2010 No. 125 will become effective on July 1, 2010 and apply to franchise agreements entered on or after that date.

Changes to the disclosure document include the following:

Nonrenewal. A new clause 20A requires franchisors to inform franchisees, at least six months prior to the end of the franchise agreement, of their decision to renew or not renew the franchise agreement. Where franchise agreements are for less than six months, franchisors must give one month notice.

Good faith. A new clause 23A requires inclusion of a statement that nothing in the Code limits any common law obligation to act in good faith.

Dispute resolution. A new subclause 29(8) includes a listing of conduct expected of franchisors and franchisees when engaging in dispute resolution processes, such as attending and participating in mediation and observing duties of confidentiality.

Franchise business failure. Item 22 requires franchisors to provide a statement that franchising is a business and, like any business, the franchise (or franchisor) could fail during the term of the franchise agreement, with consequences to the franchisee.

Other payments. New item 13.6 requires franchisors to disclose details of payments by the franchisee payable to the franchisor (or its associate) or collected by the franchisor for another.

Capital expenditures. Item 13A.1 mandates that franchisors disclose whether a franchisee will be required to undertake significant capital expenditures not foreseen or disclosed before the signing of the franchise agreement.

Unilateral contract variation. Item 17A provides that a franchisor disclose the circumstances in which it has unilaterally varied a franchise agreement within the previous three fiscal years and the circumstances in which unilateral variations may take place in the future.

End of franchise arrangements. Item 17C requires a franchisor to disclose the process that will determine arrangements at the end of the franchise agreement, including options to renew or extend the agreement, exit payments to the franchisee, repurchase of inventory or assets, the franchisee’s right to sell the business, and the franchsior’s right of first refusal in such sale.

In addition to the new disclosures, the amendments make minor technical changes to the formatting of the disclosure document.

Full text of the revisions appears here on the Commonwealth of Australia Law website. An updated version of the Franchising Code of Conduct will appear in the CCH Business Franchise Guide.

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