Franchising Code changes closer to fruition

In November 2020, the Australian Government Department of Industry, Science, Energy and Resources (Government) released its hotly anticipated Exposure Draft proposing amendments to the Franchising Code of Conduct (Code).  The proposed amendments seek to implement the commitments the Government made in August 2020 in response to the Parliamentary Joint Committee’s March 2019 Fairness in Franchising Report (Franchising Report).  The Franchising Report identified a range of regulatory matters to be addressed in the franchising sector.

The proposed amendments seek, among other things, to bolster the disclosure obligations of franchisors and enhance the rights of franchisees to strike a more appropriate balance between the rights and obligations of prospective franchisees and franchisors.  If enacted, they will have a considerable impact on the franchising sector and franchisors will need to be even more closely aware of their obligations to avoid incurring penalties for non-compliance.

Background to the proposed amendments to the Franchising Code

The Franchising Report found that the existing regulatory framework resulted in a deeply entrenched power imbalance between franchisors and franchisees, manifesting as:

  • minimal disclosure requirements for franchisors resulting in information asymmetry;
  • unfair contract terms to the detriment of franchisees;
  • a meagre cooling off period post franchise agreement signing;
  • poor franchisee representation by the relevant Boards and Councils; and
  • an Alternative Dispute Resolution process that is not fit for purpose, largely leaving the burden of adjudicating franchising disputes to the courts.

New disclosure requirements – even more paperwork for franchisors

The proposed amendments include the requirement for franchisors to provide franchisees with a key facts sheet of the business, the requirements of which are to be laid out in the proposed clause 9A of the Code.  The contents of clause 9A are not provided in the Exposure Draft, but the accompanying Supporting Guide provides three (3) ‘mock-up’ key facts sheets as examples.  These include things such as:

  • the franchisor’s financial details;
  • ways to end the franchise agreement early; and
  • the prospective franchisee’s required contributions to cooperative funds, such as marketing funds, all of which, among other things, would need to be provided in the key facts sheet, if enacted.

Additionally, the requirements of an Information Statement, located in Annexure 2 of the Code, would be changed to include additional warnings about franchise agreements, such as restraint of trade clauses, employment laws, and information about ‘no agent’ and ‘entire agreement’ clauses.  The proposed amendments would also compel franchisors to provide the Information Statement to the prospective franchisee before any other required disclosure documents.

New prohibitions on franchisor activities

The proposed amendments are also aimed at prohibiting franchisors from engaging in certain activities with a view the rebalancing the relationships between franchisors and franchisees.

Franchisors would be barred from requiring franchisees to pay all or part of the franchisor’s costs of legal services relating to preparing, negotiating, or executing the agreement or related documents.  Although, the proposed amendments do not prevent franchisors from requiring franchisees to make a payment, before the franchisee starts the franchised business, of an amount that is specified to be for the franchisor’s reasonable legal costs in preparing, executing, or negotiating the franchise agreement.

The proposed amendments also extend the capital expenditure prohibitions.  This means that franchisors would not be permitted to require franchisees to undertake significant capital expenditure in relation to the business during the term of the agreement.  However, exceptions are available, such as expenditure disclosed before entering or extending agreements, costs incurred to comply with legislative obligations, or any expenditure agreed by the franchisee.  If this is the case, the franchisor would have to provide information such as the rationale, amount, timing, benefits, and risks of the expenditure.

Additionally, if the proposed amendments are enacted, franchisors will also be prohibited from making retrospective and unilateral amendments to franchise agreements without the franchisee’s consent.

Ending franchise agreements

The proposed amendments would extend the cooling off period from seven (7) days to fourteen (14) days.  This means that a franchisee could end the franchise relationship within 14 days of their first payment to the franchisor.  This will allow them additional time to obtain and consider any relevant information to see if the franchise agreement is right for them.

The proposed amendments would also allow franchisors to terminate the franchise agreement, but only under ‘special circumstances’ such as, among other things, when a franchisee:

  • becomes bankrupt or insolvent;
  • is deregistered by ASIC; endangers public health or safety; or
  • acts fraudulently.

New dispute resolution mechanisms

At present, the Code provides for mediation as the only alternative to litigation to seek to resolve disputes arising under franchise agreements.  However, it is proposed that the ADR process provided under Division 3 of the Code expand to include conciliation and binding arbitration by agreement.

The proposed amendments also provide for the addition of clause 40B of the Code, which would allow multiple franchisees to join together and require a common franchisor submit to multi-party dispute resolution.  In addition, to ensure fairness and equal representation for both franchisees and franchisors, all franchising ADR functions are to be performed by the Australian Small Business and Family Enterprise Ombudsman.

Stronger civil penalties

To more effectively deter franchisors from taking advantage of franchisees, the proposed amendments provide for an increase to civil penalties for breaches of provisions that carry civil penalties under the Code from 300 penalty units to 600 penalty units.  With one penalty unit currently valued at $222 as per the Notice of Indexation of the Penalty Unit Amount of 14 May this year, that would mean an increase from $66,600 to $133,200 penalty for non-compliance with the proposed amendments, should they be enacted.

Key takeaways

The amendments attempt to address the information asymmetry in franchise relationships.  The proposed amendments would require franchisors to disclose a lot more about their financial position and business as a whole.  They would also see a broadened alternative dispute resolution  process that provides franchisees with more cost effective options and, finally, added opportunities to leave the franchise early should they need to do so with only a handful of ‘special circumstances’ being given to franchisors as reasons to rightfully terminate the franchise agreement.

Related materials

Legislation

Competition and Consumer (Industry Codes—Franchising) Amendment (Fairness in Franchising) Codes 2020 (Cth)

Competition and Consumer (Industry Codes—Franchising) Code 2014 (Cth)

Non-legislative government documents

Supporting guide: Changes to the Franchising Code November 2020

Australian Government response to the Parliamentary Joint Committee on Corporations and Financial Services inquiry into the operation and effectiveness of the Franchising Code of Conduct Franchising Report: Fairness in Franchising (August 2020)

The operation and effectiveness of the Franchising Code of Conduct

Related articles

What are cooperative marketing funds?

Further information about franchising

If you are looking to adopt a franchise model for your business or are considering becoming a franchisee, please do reach out to us for assistance in navigating your legal rights and obligations.

 

Mitchell Willocks Lawyer

Mitchell Willocks B.Bus., LL.B., GDLP., LL.M., MQLS
Lawyer
Telephone: (07) 3221 0013
e: mwillocks@dundaslawyers.com.au

 

 

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.

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