NEW FRANCHISING CODE OF CONDUCT REFORMS: WHAT DO THEY MEAN FOR FRANCHISORS AND FRANCHISEES?
By Greg Thomas and Fiona Bucknall, Velocity Legal
On 1 June 2021, amendments to the Competition and Consumer (Industry Codes – Franchising) Regulation 2014 (Franchising Code) were released. Titled the ‘Competition and Consumer (Industry Codes – Franchising) Amendment (Fairness in Franchising) Regulations 2021 (Amendment), the amendment makes a raft of changes to the Franchising Code aimed at increasing fairness and transparency in franchising. Among other things, the Amendment provides for an expanded dispute resolution process, new rights for franchisees and obligations for franchisors. These changes implement a number of the Federal Government’s commitments following the parliamentary Fairness in Franchising report and follow lengthy consultations with the Franchise Council of Australia.
Many, but not all, of these changes will affect agreements entered into, renewed, or extended on or after 1 July 2021. However, amendments requiring a new franchisor’s disclosure document apply from 1 November 2021, and most amendments regarding dispute resolution apply to any dispute notified on or after 2 June 2021, even if the franchise agreement was in operation prior to the amendments being passed on 1 June 2021.
Read on for our breakdown of the most significant changes and what they mean for franchisors and franchisees.
Strengthened dispute resolution process
The dispute resolution functions previously assigned to the Franchising Code Mediation Advisor will now be conferred upon the Australian Small Business and Family Enterprise Ombudsman (Ombudsman). The Ombudsman’s role will also be expanded to include conciliation and voluntary arbitration. These reforms are aimed at improving access to cost-effective and determinate dispute resolution for franchisees and franchisors, as well as addressing imbalances in power and resources between parties in a dispute.
The changes to the Franchising Code also provide for multi-party disputes to be heard together with costs to be shared.
Pre-entry disclosure requirements
The amendments also introduce a number of new pre-entry disclosure requirements to improve transparency in the franchise bargaining process. At least 14 days before a franchise agreement is entered into or the payment of non-refundable money, a franchisor must provide a prospective franchisee with a number of documents, including:
a. a copy of the franchise agreement, in the form in which it is to be executed;
b. a copy of the franchise’s disclosure document, which must now require, if earnings information is provided, a franchisor to specify such information is accurate to the franchisor’s knowledge;
c. a new ‘key fact sheet’, which must be in the form published on the Australian Competition and Consumer Commission’s website;
d. a copy of the Franchising Code;
e. if premises are leased to the franchisor or an associate of the franchisor and are to be subleased to the franchisee, a copy of the lease where available; and
f. any other written information relating to the lease under State or Territory requirements, if relevant.
These pre-entry disclosure requirements must also be complied with by a franchisor in cases where an existing franchise agreement is transferred to a new franchisee. There are also civil penalties which franchisors may be liable for if they do not meet the disclosure requirements, so it is crucial that franchisors understand their obligations under the amended Franchising Code.
Updated information statements must be provided to prospective franchisees before the other disclosure materials.
Extended ‘cooling-off’ period for franchisees
A franchisee now has a 14-day ‘cooling-off’ period after signing a franchise agreement, increased from 7 days. The extended 14-day cooling off period also extends to franchisees who purchase an existing franchise from a vendor franchise, allowing those franchisees the same cooling off right as a purchaser of a new franchise.
The Amendment also grants franchisees a 14-day cooling off period after entering into a lease or an occupancy licence with a franchisor. A further 14-day cooling off period applies if the final terms of an agreement, lease or occupancy license are not substantially identical to the terms proposed by the franchisee, to give franchisees an opportunity to terminate the agreement if those new terms are not acceptable to the franchisee.
Termination and early exit
The provisions relating to the termination of franchise agreements are being amended to provide franchisees with a clear avenue to request the early termination of their franchise agreement. Once a request is made, the franchisor must respond to the proposal within 28 days – if the request is refused, the franchisor must give reasons for doing so.
These changes provide franchisees with a clear avenue to commence negotiations for the early termination of their franchise agreement, but the explanatory memorandum for the Amendment make it clear that the changes do not give a franchisee ‘a right to exit on demand’.
To address concerns with the ability of franchisors to immediately terminate franchise agreements, a 7-day notice provision is being introduced where a franchisor purports to terminate an agreement due to special circumstances. Franchisees will also be given an opportunity to contest the purported termination if they wish to dispute the grounds of the termination. However, a franchisor is able to stop a franchisee from operating the business while dispute resolution proceedings are underway by providing written notice.
The Amendment also tightens the prohibition on significant capital expenditure being required from franchisees by removing the exception for significant capital expenditure that a franchisor considers necessary and justified. Under the new provisions, a franchisor can only require the undertaking of significant capital expenditure if:
- it is required to comply with legislative obligations;
- it has already been disclosed in the disclosure document;
- it has been approved by a majority of franchisees (if the expenditure affects a majority of franchisees in the system); or
- it is agreed to by the individual franchisee affected.
The Amendment imposes further disclosure requirements on the Franchisor in respect of rebates/financial benefits received; for example, disclosing the amount received from a supplier expressed as a single aggregate percentage of total group purchases from that supplier.
Marketing fund penalties
The marketing fund and advertising fees provision under the Franchising Code has been completely re-drafted.
There are also new civil penalties for misuse of the marketing fund, to ensure franchisor accountability and deter non-compliance with marketing fund reporting requirements.
To address concerns that franchise agreements expose franchisees to unquantifiable legal costs not in existence at the time the franchise agreement is entered into, any legal costs incurred in preparing, negotiating and executing a franchise agreement must now be specified in the Franchise Agreement as a fixed amount to be passed onto the franchisee. A franchisor can no longer pass on legal costs for documents required after the franchise agreement is entered into, including for breach notices. Civil penalties apply if a franchisor enters into an agreement which requires the franchisee to pay for legal costs associated with the agreements or related documents.
Retrospective variation of franchise agreements
To address concerns relating to retrospective variation of franchise agreements, the Amendment inserts a clause which prevents a franchisor from varying an agreement with retrospective effect unless the affected franchisee consents, in writing, to the making of the variation.
These significant reforms have been hailed as a win for fairness in franchising and contain a number of measures aimed at creating a more level playing field between franchisees and franchisors. Time will tell whether the new Franchising Code will achieve this goal – in the meantime, franchisors should waste no time in updating their franchise agreements, disclosure documents and understanding their new obligations.
With over 30 years’ experience as a commercial lawyer, Greg is someone you can trust. He has experience acting for both corporate and private clients in complex transactions. Greg’s priority is providing practical and effective advice which meets his clients’ needs. Outside of the office, Greg keeps up with sports and is always partial to a great Netflix series.
Having just completed her law degree at Monash University, Fiona is an energetic self-starter who thrives on problem-solving. With a particular interest in employment law and litigation, Fiona is competent in researching complex legal issues and drafting technical advice. Fiona also has practice and business management experience and is a planner at heart. Outside of work, she is always planning her next big adventure, whether it’s to Bosnia or Bright.