Is it time to write a new franchise agreement?

By Sarah Stowe | 29 Oct 2015 View comments

Don’t forget you might need to update your franchise agreement by 31 October.

The Franchising Code of Conduct that started on 1 January 2015 included significant changes to disclosure documents. Under the transitional provisions, you as a franchisor were given until 1 November 2015 to update your existing disclosure document.            

That means if you have not updated your disclosure document yet, you need to make sure that it is done by the deadline of 31 of October and ready to use on 1 November.

The Code does not actually require any changes to be made to the franchise agreement however there are a number of clauses that you should look at closely just to make sure that you are not in breach of the new Code.

Those clauses are:

Indemnities

All franchise agreements have indemnities where the franchisee will indemnify you in regard to any action they may take and also indemnify you for costs. You need to make sure that there is no indemnity that the franchisee will pay your costs arising out of mediation. Under clause 43 of the Code costs are to be borne equally unless the parties otherwise agree.

Mediation and jurisdiction

Mediation and jurisdiction clauses need to be looked at. The Code now states that a franchise agreement must not contain a clause that requires the mediation of a dispute to be conducted in any other state or territory outside that in which the franchise business is based.

Therefore if you have a franchisee in Queensland and your head office is in Victoria, you will need to come to Queensland for the mediation unless the parties agree otherwise. The jurisdiction for bringing any action is also to be the state or territory where the franchise business is situated.

Restraint

Restraint clauses will need to be considered in light of the new clause 23 regarding enforceability of restraints after the agreement expires if certain conditions are met. You should have a good look at clause 23 when you are amending your agreement. There is no need for you to put into the document that you will pay the franchisee any compensation and in fact your document can say that nothing in the agreement implies that the franchisee will be paid anything. That is the decision that you will need to make at the time of termination and if you are going to pay genuine compensation for goodwill to the franchisee.

End of term notice

Clause 18 of the code requires you give the franchisee notice at least six months before the end of the term if you intend to extend the agreement or enter into a new agreement if the agreement is longer than six months. If it is less than six months then it only one month’s notice is required. It is not mandatory that this be in the franchise agreement.

Withholding consent

The grounds for withholding consent on a transfer have changed slightly so you need to make sure that your conditions for withholding consent comply with clause 25. You might remember the old Code provided that you could withhold consent if agreeing to the transfer would have a significantly adverse affect on the franchise system. That is no longer in the Code but there is no reason why you cannot add it to the list of circumstances in which you may reasonably withhold consent. In other words you can leave it in even though it is not in the new Code.

Termination

Termination for special circumstances has also changed. The agreement to terminate is no longer included in the special circumstances termination. This is one of the amendments that actually makes sense because if you and the franchisee agree to terminate then that is not really a time when you would give immediate notice of termination. There is nothing that stops you doing that and it is now covered by clause 29(2) of the Code. You just need to make sure that you update your termination provision.

Holding over

Have a look at the holding over provision and make sure that it does not create an extension of the franchise agreement which would mean that you would need to give further disclosure to the franchisee. It is one of those clauses that needs to be well drafted to make sure that you do not fall foul of the Code by accident.

Purpose clause

Some people are suggesting that you need a 'purpose clause'. Clause 6(3) has a statement that a court can take into account whether a party cooperated to achieve the purposes of the agreement. If you put a clause in that says something like “the purpose of the agreement is to advance the business interests of a franchisor”, that would probably fairly much be ignored by a court because they would see the purposes being much greater than that. It is doubtful that a purpose clause would be of any assistance.

What to do next

If you do not update your franchise agreement to cover these things then be careful to make sure that anything you do does not breach the new Code. There are many provisions in the Code that carry the 300 penalty units (currently $51,000) as the civil penalty and you do not wish to inadvertently breach the Code.

So the suggested course of conduct before 31 October is:

  • Make sure that your disclosure document is updated to comply with the new schedule 1.
  • Make sure that you have either your accounts prepared or the auditor’s certificate available. If you are operating a new system that has not existed for two or more financial years then you need to have a statutory declaration of solvency and an independent audit report. These are new requirements.
  • Do a complete review of your franchise agreement just to make sure that you have no Code compliance issues.

If in doubt always consult with your lawyer.