With 25% of the country currently in lockdown, and many franchised businesses focusing on how to support their franchisees (and ensure that the SME sector can continue to create jobs and support Australia’s economic recovery), the Federal Government has used this time to formally respond to the deficiencies in the Franchising Code of Conduct.
As you will be aware, these changes are in response to the Parliamentary Joint Committee’s Fairness in Franchising Report published on 14 March 2019, when the economy and the world generally was in a very different situation.
Over the last 12 months, the franchise sector has faced the challenges of COVID-19 and lockdowns head on and created opportunities for more Australians to support local business, become entrepreneurs themselves, and potentially move into regional areas to create employment opportunities in those communities. In response to industry feedback following the release of the draft changes in late 2020, the government aims to address the issues identified and provide prospective franchisees with the ability to make more well-informed decisions before entering into franchise agreements.
Below is a brief summary of some of the key changes with links to the Government’s Explanatory Statement and new Code.
These changes are set to commence on 1 July 2021 but are subject to various transitional rules.
Updated Key Disclosure Information Fact Sheet
Franchisors will now be required to provide prospective franchisees with a “key fact sheet”. The purpose of the Key Disclosure Information Fact Sheet is to provide prospective franchisees with a snapshot of the most important information in a franchisor’s Disclosure Document to assist in their decision-making process.
This document will need to be provided to prospective franchisees together with the existing documents required to commence the 14-day disclosure period before the parties enter a franchise agreement or make a non-refundable payment under the franchise agreement.
Greater Disclosure Requirements In The Disclosure Document
Franchisors will be required to disclose more information about the franchise system in their Disclosure Documents.
There is now a requirement for franchisors to disclose whether the franchise agreement provides for the resolution of disputes through arbitration as well as summarise the parties’ rights to end the franchise agreement early.
The recently introduced capital expenditure provisions for automotive franchises will extend to the whole franchising sector. Here, the rights of franchisees will be strengthened by introducing clearer disclosure requirements around future capital expenditure.
Where the franchisor, master franchisor or an associate of the franchisor receives a benefit from a supplier, the franchisor will be required to provide details such as the nature of the rebate, the name of each supplier providing the rebate, and the total amount of rebates or other financial benefits received in the previous financial year from each supplier, expressed as a single aggregate percentage of total group purchases from that supplier.
The obligation to disclose whether or not the rebates will be shared with franchisees remains. There are exceptions to the obligations to disclose this level of details regarding rebates. A franchisor will not be required to disclose these details if the franchisees can acquire goods from alternative suppliers without the franchisor’s approval or where the whole of the rebate is to be returned to the franchisee.
Marketing Fund
The Code now imposes penalties for breaching franchisor obligations in respect of the control and operation of marketing funds.
Passing on Franchisor’s Legal Costs to Franchisees
Franchisors will be prohibited from entering into a franchise agreement that requires the franchisee to pay for legal costs associated with the franchise agreement or documents related to the franchise agreement. To ensure compliance, and to deter such contract terms from being applied, a civil penalty will be introduced for breaches of this prohibition.
This prohibition does not prevent the franchisee and franchisor from agreeing to the passing on of the legal costs of preparing the franchise agreement if a particular amount is specifically quantified in the agreement.
Franchisee’s Right to Terminate
The duration of the cooling off period that applies to new franchise agreements will now be extended to 14 days. This gives prospective franchisees more time to reassess entering a franchise agreement after all necessary information has been received.
Previously, a cooling off period did not apply to a transfer of an existing agreement from an outgoing franchisee to an incoming one. Franchisees who are taking over an existing franchise business will now also be afforded a cooling off period. The cooling off period expires at the earlier of 14 days from the day after becoming the franchisee for the purposes of the franchise agreement, or once the incoming franchisee takes possession and control of the franchised business.
Franchisees will also be able to propose the early termination of a franchise agreement, and the terms on which the proposal will be put into effect. The franchisor must then provide a response to the franchisee’s proposal, including reasons for refusing the request (if this is the case), within 28 days. The parties are obliged to act in good faith during negotiations for early termination. The response must be substantive in nature. For example, it is likely that a mere statement that the proposal will not be considered will not be adequate to meet this requirement.
Franchisor’s Right to Terminate Without Notice
Franchisors now have to give franchisees 7 days written notice before terminating a franchise agreement in the circumstances where a franchisor could previously terminate a franchise agreement immediately.
There have also been new provisions included in the Franchising Code of Conduct, which allow franchisees to put a temporary hold on a franchisor’s right to terminate by activating the dispute resolution process.
Restraints of Trade
The Code will be updated to ensure that only a serious breach of an agreement by a franchisee is relevant to the enforceability of a restraint of trade provision. The Code does not and will not define the term ‘serious’. The franchising sector is diverse, and what amounts to a serious breach may differ between franchise systems, and will often depend on the circumstances.
Dispute Resolution
A lack of access to cost-effective and determinative dispute resolution, and the presence of imbalances in bargaining power and resources between the parties, has been a key issue underlying dispute resolution in the franchising sector. The dispute resolution avenues available to parties will now be expanded under the changes.
Reference to ‘mediation’ in parts of the Franchising Code of Conduct will be replaced with reference to ‘an ADR process’. This allows a franchise agreement to contain a clause that requires conciliation and mediation processes to be conducted in the jurisdiction in which the franchised business is based.
Further, franchise agreements will be prevented from containing clauses that require mediations and conciliation to be conducted in jurisdictions outside of the one in which the franchised business is based.
Dispute resolution assistance functions will now also be conferred to the Australian Small Business and Family Enterprise Ombudsman.
What do the Changes to the Franchising Code of Conduct Mean For You?
For further clarification regarding the changes to the Franchising Code of Conduct, reach out to our Melbourne-based Franchising Team for a free consultation.
