Franchising Code changes in force

In November 2020, the Department of Industry, Science, Energy and Resources (Government) released its Exposure Draft proposing amendments to the Franchising Code of Conduct (Code).  The proposed amendments sought to implement the commitments the Government made in August 2020 in response to the Parliamentary Joint Committee’s March 2019 Fairness in Franchising Report which identified a range of regulatory matters to be addressed in the franchising sector.  Since the Exposure Draft’s release, multiple changes have come into force under the Code.  This article outlines these changes.

A broader alternative dispute resolution process available to franchisees

According to section 2 of the Competition and Consumer (Industry Codes—Franchising) Amendment (Fairness in Franchising) Regulations 2021 (Cth) (Amendments), franchisees have been able to take advantage of the broadened scope of Alternative Dispute Resolution (ADR) processes available to them from 2 June 2021.  This ADR process now includes conciliation and arbitration.[1]  An important addition, the inserted clause 40B of the Code, allowing multiple franchisees to join together and require franchisors to submit to multi-party dispute resolution, came into force on 2 June.[2]  Furthermore, 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.[3]

Key fact sheets

Schedules 2-11 of the Amendments will come into force on 1 July 2021.[4]  Most notably, franchisors will need to provide franchisees with a key facts sheet of the business, the requirements of which are laid out in the new clause 9A(1) 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.

Changes still to come

Increased cooling off period from seven (7) days for fourteen (14) days

The Amendments extend the cooling off period from seven (7) days to fourteen (14) days meaning a franchisee could end the franchise relationship within two (2) weeks of their first payment to the franchisor allowing them additional time to obtain and consider any relevant information to see if the franchise agreement is right for them.[5]

The Amendments also allow franchisors to terminate the franchise agreement, but only under ‘particular grounds’ which are, when a franchisee:

  • no longer holds a licence that the franchisee must hold to carry on the franchised business;
  • becomes bankrupt, an insolvent under administration or a body corporate;
  • is a company that is deregistered by the Australian Securities and Investments Commission;
  • voluntarily abandons the franchised business or the franchise relationship;
  • is convicted of a serious offence;
  • operates the franchised business in a way that endangers public health or safety; or
  • acts fraudulently in connection with the operation of the franchised business.[6]

If a franchisor wants to end the franchise agreement, the franchisor must give written seven (7) days’ notice to the franchisee with the relevant ground.[7]

Other amendments worth noting are coming into force on 1 July are:

  • an Information Statement must be given to the franchisee by the franchisor before the other required disclosure documents are provided.[8]
  • any additional information that may be relevant regarding leasing and premises must be given to the franchisee by the franchisor.[9]
  • franchisors must provide relevant documents in the formats requested by the franchisee being either electronic and/or hard copy.[10]
  • franchisors cannot require capital expenditure without the requirements being first adequately disclosed and discussed.[11]
  • franchisors prohibited from contractually allowing themselves to avoid all or part of the legal costs pertaining to the preparation, negotiation or execution of a franchise agreement.[12]
  • franchisors cannot unilaterally vary a franchise agreement retrospectively without the franchisee’s consent.[13]

Stronger civil penalties

To deter franchisors more effectively from taking advantage of franchisees, breaches of the Code result in liability to increased civil penalties 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 2020, that means an increase from $66,600 to $133,200 penalty for non-compliance with the Code provisions that carry civil penalties.

Takeaways

The Amendments have brought multiple changes into force with more to come  as of 2 June 2021, franchisees have been able to take advantage of using conciliation and arbitration as an ADR process.  Additionally, multiple franchisees can now join together and require a common franchisor submit to multi-party dispute resolution.  Further changes will commence on the 1 July 2021.  Most notably, the required provision of a key facts sheet of the business, the extended the cooling off period from seven (7) days to fourteen (14) days, the franchisor’s right to terminate the agreement on ‘particular grounds’, tight limits of capital expenditure requirements and the increase in civil penalties as a result of non-compliance with the Code.

Links and further references

Related articles

What are cooperative marketing funds?

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

Further information

If you need advice on your obligations as a franchisor or franchisee, contact us for a confidential and obligation free and discussion:

Malcolm BurrowsMalcolm Burrows B.Bus.,MBA.,LL.B.,LL.M.,MQLS.
Legal Practice Director
Telephone: (07) 3221 0013 (Preferred)
Mobile: 0419 726 535
e: mburrows@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.

[1] Competition and Consumer (Industry Codes—Franchising) Amendment (Fairness in Franchising) Regulations 2021 (Cth) div 3.

[2] Competition and Consumer (Industry Codes—Franchising) Amendment (Fairness in Franchising) Regulations 2021 (Cth) div 3.

[3] Competition and Consumer (Industry Codes—Franchising) Amendment (Fairness in Franchising) Regulations 2021 (Cth) sch 1 s 1.

[4] Competition and Consumer (Industry Codes—Franchising) Amendment (Fairness in Franchising) Regulations 2021 (Cth) s 2.

[5] Competition and Consumer (Industry Codes—Franchising) Amendment (Fairness in Franchising) Regulations 2021 (Cth) sch 3 s 8.

[6] Competition and Consumer (Industry Codes—Franchising) Amendment (Fairness in Franchising) Regulations 2021 (Cth) sch 3 s 8.

[7] Competition and Consumer (Industry Codes—Franchising) Amendment (Fairness in Franchising) Regulations 2021 (Cth) sch 3 s 8.

[8] Competition and Consumer (Industry Codes—Franchising) Amendment (Fairness in Franchising) Regulations 2021 (Cth) sch 2 s 7.

[9] Competition and Consumer (Industry Codes—Franchising) Amendment (Fairness in Franchising) Regulations 2021 (Cth) sch 8.

[10] Competition and Consumer (Industry Codes—Franchising) Amendment (Fairness in Franchising) Regulations 2021 (Cth) sch 2 s 4.

[11] Competition and Consumer (Industry Codes—Franchising) Amendment (Fairness in Franchising) Regulations 2021 (Cth) sch 4 s 2.

[12] Competition and Consumer (Industry Codes—Franchising) Amendment (Fairness in Franchising) Regulations 2021 (Cth) sch 6 s 1.

[13] Competition and Consumer (Industry Codes—Franchising) Amendment (Fairness in Franchising) Regulations 2021 (Cth) sch 7 s 2.

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