Changes to the Franchising Code of Conduct

The current Franchising Code of Conduct (Old Code) is scheduled to “sunset” (meaning it will automatically expire unless extended or replaced) on 1 April 2025, with the Competition and Consumer (Industry Codes–Franchising) Regulations 2024 (Cth) (New Regulations) coming into effect on the same date.^[1]

The New Regulations^[2] are set to introduce significant reforms to the franchising sector.  These reforms align with the Australian Government’s response to the 2023 independent review of the Old Code, which included agreeing, fully or in principle, to all twenty-three (23) recommendations made by Dr Michael Schaper.^[3]

Expansion of motor vehicle dealership protections

Under the New Regulations, protections previously limited to motor vehicle dealerships will now be extended to all franchise agreements.  This ensures that franchisees – regardless of industry – receive greater protection against unfair terminations and sudden changes to franchise agreements.

These new protections include:

Section 42: Expands the scope of clause 46A from the Old Code to apply to all franchise agreements, requiring compensation for early termination, including for outstanding stock, specialty equipment, and other necessary purchases made by the franchisee.

Section 43: Expands the scope of clause 46B of the Old Code to apply to all franchise agreements, requiring franchisors to only enter into franchise agreements that provide the franchisee with a reasonable opportunity to recoup any capital investment required to be made.

Compensation for early termination

Under section 42 of the New Regulations, franchisors will be required to compensate franchisees if their franchise agreement is terminated early due to the following reasons:

• closure of the franchise network; and/or
• exit from the Australia market; and/or
• a change in the franchisor’s distribution model.

This section aims to protect franchisees from sudden disruptions in their business operations and ensures they are not financially penalised due to decisions made by a franchisor.

Compensation will include reimbursement for:

• any outstanding stock;
• essential specialty equipment;
• branded products or merchandise purchased at the franchisor’s direction; and
• items that cannot be repurposed for a similar business.

Additionally, compensation is required for any other necessary purchases made by a franchisee to operate the franchise in accordance with the agreement or the franchisor’s operations manual.^[4]  A contravention of section 42 or any of its subsections by the franchisor will attract a civil penalty of up to:

• $500k for an individual; or
• $10m for a Body Corporate.

Reasonable opportunity for investment

Under section 43 of the New Regulations, franchisors can now only enter into a franchise agreement if it offers the franchisee with a reasonable opportunity to recoup any capital investment required under the agreement.

Section 43 of the New Regulations state:

“A franchisor must not enter into a franchise agreement unless the agreement provides the franchisee with a reasonable opportunity to make a return, during the term of the agreement, on any investment required by the franchisor as part of entering into, or under, the agreement.”

This means that franchisors must ensure that the franchise agreement provides the franchisee with a reasonable chance to recover any capital investment made, with non-compliance potentially leading to a civil penalty.  Notwithstanding this, franchisors are not expected to:

• guarantee profits; or
• protect franchised businesses from inherent risks.

The explanatory statement issued by the Minister for Small Business outlined the Government’s interpretation of what constitutes a “reasonable opportunity”:

“What is considered a reasonable opportunity will be specific to the terms of each agreement, the costs paid by the franchisee and the length of the agreement.  Franchisors are not expected to provide a contractual guarantee of a profit or the success of the franchisee’s business. It is not intended to remove the inherent risks of running a business but is intended to ensure that the term of a franchise agreement is consistent with the level of capital investment required.“

Links and further references

Legislation

Exposure Draft of the Competition and Consumer (Industry Code- Franchising) Regulations 2024

Explanatory Statement to the Competition and Consumer (Industry Codes–Franchising) Regulations 2024

Treasury Consultation Paper Competition and Consumer (Industry Codes–Franchising) Regulations 2024

Further information about franchise systems?

If you need advice on the changes to the Franchising Code of Conduct or are considering creating a franchise system, contact us for a confidential and obligation-free discussion:

Disclaimer

This article contains general commentary only.  You should not rely on the commentary as legal advice.  Specific legal advice should be obtained to ascertain how the law applies to your particular circumstances.

[1] Commonwealth of Australia, Explanatory Statement to the Competition and Consumer (Industry Codes–Franchising) Regulations 2024 (Explanatory Statement, 2024) https://treasury.gov.au/sites/default/files/2024-10/c2024-572110-explanatory_statement.pdf accessed 2 December 2024.

[2] Commonwealth of Australia Exposure Draft for the Competition and Consumer (Industry Codes- Franchising) Regulations 2024 (Exposure Draft, 2024) https://treasury.gov.au/sites/default/files/2024-10/c2024-572110-ed.pdf accessed 12 December 2024.

[3] Australian Government, Competition and Consumer (Industry Codes–Franchising) Regulations 2024: Treasury Consultation Paper (Consultation Paper, Commonwealth of Australia, 2024) https://treasury.gov.au/sites/default/files/2024-05/p2024-525558.pdf accessed 2 December 2024.

[4] Australian Government, Explanatory Statement: Competition and Consumer (Industry Codes–Franchising) Regulations 2024 (Explanatory Statement, Commonwealth of Australia, 2024) https://treasury.gov.au/sites/default/files/2024-10/c2024-572110-explanatory_statement.pdf accessed 2 December 2024.

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