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Australia Introduces New Duty of Good Faith




by:
Robyn Chatwood
Babette Marzheuser-Wood
Dentons Canada LLP - Toronto Office

 
July 29, 2014

Previously published on July 1, 2014

Australia is set to amend the mandatory Franchising Code of Conduct (the Code) and the Competition and Consumer Act (the CCA). The changes are likely to take effect on 1 January 2015.

By way of background, the Code is mandatory legislation and applies to various commercial arrangements for distribution or licensing of goods or services regardless of whether or not these are described as franchises. The Code is heavily biased towards franchisees.

Any agreement falling within the definition of a “franchise agreement” under the Code will be subject to the legal requirements of the Code. These include mandatory disclosure prior to the entry into the agreement and inclusion in the agreement of certain minimum rights and obligations regarding transfer, termination and resolution of disputes. It is easy to be unwittingly caught by the Code as it applies to any agreement (including oral agreements) in which a right is granted to carry on a business of offering, supplying or distributing goods or services in Australia under a system or marketing plan substantially determined, controlled or suggested by the franchisor. For such an agreement to be a franchise agreement under the Code, the business must be substantially associated with a trade mark of the franchisor and payment of fees by the franchisee must also be required (subject to certain exclusions). These are easy criteria for many commercial arrangements to meet.

The draft amendments intend to give effect to the policy reforms announced in April in the Government's "Future of Franchising" statement. Of greatest significance are reforms targeted at stronger enforcement, changes to disclosure, and obligations for franchisors and franchisees to act in good faith in their dealings with each other.

  • There are a number of changes to the disclosure requirements. Some are of assistance (for example, the dropping of the requirement on franchisors to summarise the terms of the franchise agreement in the disclosure document). However, there is a new requirement for disclosure of information about online trading - designed to enable franchisees to assess the viability of the franchise.
  • There are new penalties for breaches of the Code. Certain breaches can result in civil penalties of up to A$51,000. A failure to comply with the disclosure requirements will attract a new civil penalty.
  • The Australian Competition and Consumer Commission (the ACCC), which is the primary regulator of the Code and the CCA, will have new powers to issue infringement notices and fines up to A$8,500. Importantly, the ACCC has audit powers to obtain documents upon which the franchisor has relied to support its statements in the disclosure document.
  • There is a new obligation on all parties to act in good faith which will apply during the franchise relationship and also when they are discussing and negotiating or disputing the franchise agreement. This obligation is defined as "to act honestly and not arbitrarily" and "to cooperate to achieve the purposes of the franchise agreement".

Franchisors and licensors have until the end of the year to understand and comply with the changes.



 

The views expressed in this document are solely the views of the author and not Martindale-Hubbell. This document is intended for informational purposes only and is not legal advice or a substitute for consultation with a licensed legal professional in a particular case or circumstance.
 

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