Franchising Code of Conduct – Everything You Need to Know

Author: Ian Aldridge, Progressive Legal

Franchising has become a popular business model worldwide, providing entrepreneurs with opportunities to start their own ventures under established brand names. The Australian government introduced the Franchising Code of Conduct to ensure a fair and transparent relationship between franchisors and franchisees.

The Competition and Consumer (Industry Codes – Franchising) Regulation 2014 (Cth), otherwise known as the Franchising Code of Conduct, is a regulatory framework enforced by the Australian Competition and Consumer Commission (ACCC). It governs how a franchisor and franchisee should conduct themselves before entering a franchise agreement, during the term of the agreement, and upon its termination. 

What is the Purpose of the Franchising Code of Conduct? 

The purpose of the Franchising Code of Conduct is to ensure that there is a fair and balanced relationship between franchisors and franchisees. It promotes transparency and includes special provisions to protect the rights of both parties involved.

It ensures that all parties are prescribing to certain standards and maintaining integrity within the franchise system as a whole. The code also provides a structured dispute resolution process, encouraging parties to resolve conflict through mediation before proceeding to litigation

What are the Key Provisions of the Franchising Code of Conduct? 

Duty to Act in Good Faith

The code promotes a relationship of good faith and mutual trust between franchisors and franchisees. Both parties are required to act honestly, reasonably, and cooperate in achieving the purposes of the franchise agreement. A franchisor’s conduct will lack good faith if they do not provide full disclosure of their business operations or deny the franchisee the benefits of a contract.  

Duty to Disclose

The Franchising Code of Conduct establishes strict requirements for disclosure. The code requires franchisors to provide a disclosure document to potential franchisees. The disclosure document contains essential information about the franchisor’s business, including financial details, business history, and ongoing obligations. This ensures the franchisee has all the information they need to make an informed decision.  

Furthermore, a franchisor must provide prospective franchisees with lease documents if they are leasing a premises and allow the franchisee to occupy the premises.  

The documents a franchisor will need to provide franchisees include: 

• A disclosure document;  
• A key facts sheet;  
• An information statement on the code; 
• A franchise agreement; and 
• lease documents (if applicable). 

Marketing Fund and Accounts

The code regulates the establishment and management of marketing and advertising funds by franchisors. It requires transparency in the use of these funds and mandates regular financial reporting to franchisees regarding the marketing activities and expenditures. 

Cooling Off Period

The code provides a cooling-off period for franchisees after entering into a franchise agreement. This period allows franchisees to reconsider their decision and, if they choose to do so, withdraw from the agreement within 14 days without facing penalties or consequences.  

If a franchisee does not provide a notice of withdrawal within the timeframe, the signed franchise agreement will be enforced upon them. This period only applies to new franchisees. It does not apply to renewals, extensions, or transfers of existing franchises.  

Dispute Resolution

The code establishes a dispute resolution process to resolve conflicts between franchisors and franchisees. This process encourages mediation and alternative dispute resolution methods before resorting to litigation, aiming to facilitate fair and efficient resolution of disputes. This helps address issues quickly and reduces the negative impact on the franchising industry.  

If you need legal assistance in dispute resolution our dedicated team are here to guide you. Make an enquiry below.

Who Does the Franchising Code of Conduct Apply To? 

Franchisors

Franchisors are entities that grant franchise rights to other individuals or businesses. They are responsible for the overall management of the franchise system. They often provide, support, training, materials, marketing, and other various resources to franchisees. They receive a certain amount of fees and royalties from each franchisee that is using their brand name. It is common to going into franchising to expand the reach of your business. 

Franchisees

These are individuals or businesses that choose to use a franchisor’s brand and business model to operate under. They enter into an agreement with a franchisor to pay fees and royalties in exchange for the right to operate a franchise outlet.  This allows them to enter a business with a successful base for them to build upon, potentially have a higher rate of success, and become part of a more recognisable brand. 

Master Franchisees

A master franchisee is responsible for developing the franchise network in a particular region. Master franchisees have more autonomy than standard franchisees. They act as an intermediary between the franchisor and franchisees. They recruit new franchisees, promote the franchisor’s brand, and ensure compliance with the franchise agreements.  

Sub-franchisees

Sub-franchisees are individuals or businesses that enter into agreements with master franchisees to operate under a particular franchise system within a specific territory. 

Franchise brokers and consultants

The code may apply to franchise brokers or consultants who provide services related to franchise arrangements. These entities must comply with the relevant provisions of the code when assisting franchisees or franchisors in their business transactions.  

Who Regulates the Franchising Code of Conduct?  

The Code is regulated by the Australian Competition and Consumer Commission (ACCC). They take action against franchisors that are acting against public interest. Offending franchisors are normally reported to the ACCC by concerned franchisees or consumers. 

If the ACCC finds a franchisor that is breaching the Franchising Code of Conduct, the ACCC can take certain actions: 

• Investigate: The ACCC can gather evidence and investigate the behaviour of a franchisor if there is an alleged breach.  
• Issue warnings: The ACCC can issue formal warnings to franchisors, advising them to take the necessary actions to rectify non-compliance of the code. 
• Enforce penalties: The ACCC can take legal action against the franchisor. This can lead to fines or penalties imposed via the court system.  

What is the penalty for violating the Franchising Code of Conduct? 

Franchisors who violate the Franchising Code may have to face severe penalties. These penalties apply to a range of clauses and carry a maximum penalty of up to $133,200 in most instances. However, for specific breaches, corporations can face a higher penalty, for example: 

1. A fine of $10,000,000. 
2. Three times the value of the benefit obtained by the franchisor. 
3. If the Court cannot determine the value of the benefit, 10% of the annual turnover of the franchisor in the prior 12 months from the contravention. 

For Example:

Jim’s Group Pty Ltd, the franchisor of Jim’s mowing, was required to pay $24,420 in penalties for breaching the Franchising Code of Conduct in 2022. They were required to pay this after receiving two infringement notices for breaching the code. 

The first notice was related to a failure to disclose certain information to a prospective franchisee, as required by the Franchising Code of Conduct. The ACCC claimed that the disclosure document provided by Jim’s Group understated the number of former franchisees and did not include the contact details of those former franchisees. 

The second notice was for making a false or misleading representation regarding the cooling off rights of franchisees. Jim’s Group misrepresented that the cooling off period ended 14 days after entering into the franchise agreement or making a payment to the franchisor. The Franchising Code of Conduct declares that the cooling period ends after 14 days of signing the agreement, even if they have previously paid a deposit.  

Key Takeaways

The Franchising Code of Conduct plays a crucial role in regulating the relationship between franchisors and franchisees. It provides a framework that promotes transparency, accountability, and fair business practices within the franchising industry.  

If you do require any advice in relation to the Franchising Code of Conduct, contact our experienced franchising team. All you need to do is make an enquiry below or contact our office at 1800 820 083.   

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