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The introduction of amended disclosure provisions to the Franchising Code of Conduct which came into effect on March 1 will provide greater protection for franchise buyers, but has caused confusion among franchisors with the possibility that some amendments may be interpreted differently.
In parallel with the introduction of the Code changes, is the further uncertainty created by the Ketchell case, where the NSW Supreme Court found a franchise agreement to be unenforceable due to a technical breach of the Code. Leave to appeal this case to the High Court has been granted, and may proceed with funding assistance from the franchise sector.
Partial relief from the confusion was offered when the Small Business Policy Division (previously the Office of Small Business) informed Franchise News & Events, a fortnightly franchising news bulletin that the wording in Clause 16 of the Code amendments (which deals with prohibition on release from liability) would be modified so that it applies from March 1, 2008, and not retrospectively to October 1, 1998. The acknowledgement that the wording in this clause could have been interpreted in a way other than intended should give the franchise community hope for optimism that other elements of the new Code that currently cause confusion may be further clarified.
Either way, key changes to the Code such as the requirement to include a list of former franchisees who have left, sold or been terminated in the last three financial years remain. This requirement has been met with grudging acceptance by some franchisors concerned about the inconvenience of dredging through old files and determining franchisee consent to comply with this provision. For those franchisors reluctant to, or otherwise incapable of providing this information, the perception that they have something to hide can become a reality in the mind of a franchise buyer.
Item 6.4 in Annexure 1 of the Code has always required a franchisor to disclose the number of franchised businesses that were transferred, ceased to operate, terminated, not renewed or bought back by the franchisor. A new item 6.5 now requires that for each of these events, the name, location and contact details of the franchisee are also included if available, or unless the franchisee has requested in writing that the details not be disclosed.
Attempts to circumvent this provision strike at the intent of the Code to establish transparency for franchisees in dealing with franchisors, and have the potential to reflect badly on franchisors. Indeed as both the number of past franchisees and the contact details for each are required to be disclosed, a potential franchisee will be naturally curious if the number of past franchisees and the number of contact details supplied are not a close match. Given that past franchisees have the right not to have their details included, some will take this option. But in the main, it would be likely that those former franchisees, who have had both good and bad experiences in their business relationship with the franchisor, would be willing to speak to a potential new franchisee.
This provision, arguably addresses the information imbalance between franchisees and franchisors at the point of entry more so than any other provision in the Code. The proof of the pudding is in the eating and when franchisees can talk to others who have eaten and moved on, they will better understand the quality of the meal.
In the meantime, any further clarification on those elements of the amended Code provisions which are the source of ongoing uncertainty would be most welcome by franchisors.
Copyright, Jason Gehrke 2008
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