On 6 November 2020, the Department of Industry, Science, Energy and Resources announced a number of proposed changes to the Franchising Code of Conduct (Code), with the release of its exposure draft and supporting guide.
The proposed changes are in response to the Parliamentary Joint Committee’s “Fairness in Franchising Report” published on 14 March 2019, which concluded that there were various deficiencies to the Code.
The aims of the proposed changes are to address the deficiencies identified and provide prospective franchisees with the ability to make more well-informed decisions before entering into franchise agreements.
The government is seeking feedback on the exposure draft Code by 4 December 2020 and we encourage our franchise community to have your say.
Updated Key Disclosure Information Fact Sheet
Franchisors will be required to utilise a Key Disclosure Information Fact Sheet. The purpose of the Fact Sheet is to allow prospective franchisees the ability to make a well-informed decision based on the most critical information in a franchisor’s Disclosure Document.
Three draft versions of the proposed Fact Sheet have been included in the exposure draft Code and all refer to information on rebates, financial data, leases and termination rights, all with varying levels of detail. The final version will be added to the Code once finalised.
Greater Disclosure Requirements in the Disclosure Document
Franchisors will be required to disclose more information about the franchise system in their Disclosure Documents.
Franchisors will be required to include information regarding arbitration of disputes, rights around early termination of the franchise agreement, and rights relating to goodwill. Franchisors will also be required to state whether earnings information provided in the Disclosure Document is accurate.
The proposed changes also seek to extend the recently introduced capital expenditure provisions for automotive franchises to the whole franchising sector. Here, the rights of franchisees will be strengthened by introducing clearer disclosure requirements around future capital expenditure, including disclosure of the amount, timing and nature of the expenditure and creating an obligation to discuss expenditure before a prospective franchisee enters a franchise agreement, including discussing the circumstances under which the franchisee is likely to get the expenditure back.
Franchisors will also be required to disclose information on supplier rebates, commissions and other payments, and where a master franchisor controls rebates from suppliers.
This controversial change is expected to receive feedback from franchisors and suppliers to franchisors who require strict confidentiality of their rebates.
Operating a Franchise
Franchisors will be prohibited from requiring a franchisee to pay any legal costs associated with the preparation, negotiation or execution of the agreement, or related documents. Legal costs, however, if quantifiable, may be included in the initial joining fees.
If a franchisor does pass on legal fees to a franchisee, it may be liable for a civil pecuniary penalty.
Franchisors cannot retrospectively vary the terms of a franchise agreement unless the franchisee or a majority of franchisees agree.
Ending the Franchise Relationship
The Government is proposing to extend the cooling off period for franchise agreements from 7 to 14 days. It also intends to clarify that the cooling off period begins only when the franchisee has received all necessary information about the franchise system, including a copy of the agreement they are entering into, any lease for the site of the franchise business and only once a first payment is made by the franchisee.
The ability of franchisees to negotiate to exit a franchise agreement before it expires is being introduced. Currently, the Code does not specify what a franchisee can do if they wish to leave the franchise system before the expiry of their franchise term.
The proposed amendments seek to allow franchisees to formally notify the franchisor that they wish to exit and start negotiations for the early termination of their franchise agreement. Franchisors and franchisees will also be able to use the dispute resolution process here if needed.
Restraints of Trade
Clause 23 of the Code sets out when a restraint of trade clause in a franchisee agreement is unenforceable. It is proposed that the restraint of trade clause will not apply unless a franchisee has committed a ‘serious’ breach of their franchise agreement. The Code will not, however, define ‘serious’.
The government is strengthening dispute resolution options in the Franchising Code by introducing conciliation and voluntary binding arbitration. This is intended to create more affordable dispute resolution options for the franchising sector. Mediation will still be the first step in dispute resolution.
Franchisees will also be able to come together as a group to resolve a dispute with a common franchisor. Franchisors will not be able to refuse to take part in a multi-party dispute resolution if a dispute resolution practitioner deicides it is appropriate.
Further, the Australian Small Business and Family Enterprise Ombudsman will be given all franchising dispute resolution adviser functions.
The maximum penalty available for a breach of a provision that carries a civil penalty will double from 300 to 600 penalty units. These changes will further deter conduct that breaches the Code.
We note that these changes are dependent on enabling amendments to the Competition and Consumer Act 2010 (Cth) passing Parliament.
What Happens Next?
If passed in early 2021, the proposed changes are set to come into effect on 1 July 2021.
In the meantime, we encourage our franchise community to provide feedback on the proposed changes by the deadline of 4 December at SmallBusinessFranchising@industry.gov.au or by visiting the Consultations page of the Department’s website.
Responses will be published online, unless you say you do not want your submission published. You may want your submission to be confidential because you wish to discuss details that are personal or commercially sensitive.
Further privacy information can be found on the Consultations page of the Department’s website.