The Franchising Code of Conduct is set out in Schedule 1 of the Competition and Consumer (Industry Codes – Franchising) Regulation 2014 (Code).
The Code regulates the conduct of parties (or prospective parties) to a franchise agreement.
Obligation to Act in Good Faith
The Code introduces a positive obligation on each party to the franchise agreement (or prospective party to a franchise agreement) to act in good faith. A failure to discharge one’s obligation to act in good faith attracts a financial penalty. In determining whether a party has acted contrary to this obligation, the Court may have regard to whether the party acted honestly and not arbitrarily and whether the party cooperated to achieve the purposes of the agreement.
Importantly, a franchise agreement must not limit or exclude the obligation to act in good faith and if it does, the clause is of no effect.
The obligation to act in good faith does not prevent a party from acting in his, her or its legitimate commercial interests. For example, if a franchise agreement does not give the franchisee an option to extend the agreement or allow the franchisee to extend the agreement, this does not mean that the franchisor has not acted in good faith in negotiating or giving effect to the agreement.
A franchisor must give a copy of the Code, a disclosure document in the form prescribed in Annexure 1 of the Code and a copy of the franchise agreement to a prospective franchisee at least 14 days before the prospective franchisee enters into the franchise agreement or makes a non-refundable payment to the franchisor in connection with the proposed franchise agreement.
A franchisor must not enter into a franchise agreement, renew or transfer or extend the term of a franchise agreement or receive a non-refundable payment under a franchise agreement unless the franchisee (or prospective franchisee) has received, read and had a reasonable opportunity to understand the disclosure statement and the Code.
This will be evidenced by a signed statement from the prospective franchisee to the franchisor to the effect that the franchisee has received independent legal or business or accounting advice about the franchise agreement or franchise business or has been told about the kind of advice that should be sought but has decided not to seek it.
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We will shortly bring you Part 2 of the Franchising Code of Conduct that will discuss the prescribed information that must be included in the Disclosure Statement.