Changes to the Franchising Code of Conduct

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By Billy Riddle, Lawyer and Matthew D’Angelo, Seasonal Clerk

In March 2019, the Parliamentary Joint Committee on Corporations and Financial Services released its Fairness in Franchising Report (Report). The Report highlighted the need to improve the fairness and transparency of the franchising sector and address power imbalances between franchisors and franchisees.

In November 2020, we wrote about several proposed changes to the Franchising Code of Conduct (the Code), view here. In June 2021, the Federal Minister for Employment, Workforce, Skills, Small and Family Business, the Hon Stuart Robert MP announced that most of the changes to the Code will apply on 1 July 2021. This article explores the final changes to the Code. Unless otherwise stated, the changes outlined below commence on 1 July 2021.

Dispute Resolution and Complaints Handling

Amendments to the Code strengthen the dispute resolution process, introducing conciliation and arbitration as alternative options to mediation, and commenced on 2 June 2021. Under the reforms, the Australian Small Business and Family Enterprise Ombudsman (Ombudsman) is now empowered to appoint persons who can provide services of arbitration, conciliation or mediation.

The reforms also introduce a multi-franchisee dispute resolution process, whereby franchisees with similar disputes arising under franchise agreements with the same franchisor can refer the matter to a single ADR practitioner. In these circumstances, the franchisor is required to attend the ADR process to try to resolve the dispute. Failure to attend contravenes a civil penalty provision worth 300 penalty units, which equates to a fine of up to $66,600.

Disclosure before entry into Franchising Agreements

Disclosure obligations under the Code have become more onerous, with an increased number of documents that must be provided to franchisee’s, alongside the franchisor’s existing preliminary disclosure document to better highlight critical information.

Key Fact Sheet

Franchisors must now give prospective franchisees a ‘key fact sheet’. The contents of the key facts sheet will be provided in a form to be published on the ACCC website.

The key fact sheet must be provided at least 14 days before entering into a franchise agreement or before the prospective franchisee makes a non-refundable payment in connection with the proposed franchise agreement, whichever occurs first. The franchisor must update the key fact sheet within 4 months after the end of each financial year.

As of 24 June 2021, the ACCC are yet to make the key facts sheet available.

Lease Terms

Where a franchisors lease, sublease or grant a licence of their premises to franchisees, franchisors must now provide a copy of the lease terms and written information concerning the lease to the franchisee.

Information Statement

The ACCC’s information statement has been updated here and must be provided to prospective franchisees, prior to being provided the other related disclosure documents.

Termination of Franchise Agreements

Cooling off Period

The Code has been modified to provide franchisees with an express right to terminate a franchise agreement after entering into the agreement. As expected, the cooling off period has been extended from 7 calendar days to 14 calendar days. However, the cooling off period will only apply once franchisees have received a document setting out the terms of the proposed lease.

Proposal to Terminate

Franchisees now have an explicit avenue to request the early termination of their franchise agreements. Under the amended Code, franchisees may give franchisors a written proposal to terminate their franchise agreements, provided that the reasons for termination are set out in the proposal. Franchisors must provide franchisees with a substantive written response to the proposal within 28 days.

Significant Capital Expenditure

In June 2020, we wrote about how changes to capital expenditure provisions affected automotive franchises, view here. The Code now extends the prohibition on requiring significant capital expenditure to the entire franchising sector, which was previously only applicable for automotive franchises.

Marketing Funds and other Cooperative Funds

The Code will now ensure consistency in the civil penalties imposed on franchisors who maintain a marketing fund but fail to comply with reporting obligations. Fund administrators who fail to maintain a separate account for payments to the marketing fund attract a civil penalty of 300 penalty units (up to $66,600). These changes reflect the seriousness of the impact that a breakdown of trust in relation to the use of marking funds can have on a franchise system and aim to deter the inappropriate use of funds.

In addition, the Code now provides that fund administrators must prepare an annual financial statement detailing all of the fund’s receipts and expenses for the last financial year within 4 months after the end of the last financial year.

Franchisor’s Legal Costs Relating to the Franchise Agreement

Franchisors will now be prevented from entering into franchise agreements which require franchisees to pay all or part of the franchisor’s legal costs associated with the franchise agreement where the costs are indeterminate at the time of signing the agreement.

Retrospective Unilateral Variation of Franchise Agreements

Franchisors will now be prohibited from varying franchise agreements with retrospective effect unless franchisees provide written consent to the variation.

Leasing of Premises

A series of amendments to the Code improve the flow of information where franchisees sublease a premises that is being leased to franchisors. The intention behind the amendments is to alleviate the risk of conflicts of interest arising in relation to the business premises. For example, franchisors must provide details of any incentive or financial benefit that the franchisor or associate of the franchisor is entitled to receive as a result of the lease or agreement to lease.

Restraints of Trade

Restraint of trade provisions are only enforceable where a franchisee is in serious breach of the franchise agreement or any related agreement. Previously, less serious forms of breach were relevant to enforceability of a restraint of trade provisions.

New Vehicle Dealership Agreement

There have been changes to the provisions relating to new vehicle dealership agreements. The definition of a motor vehicle dealership now includes a business of selling motor vehicles where the franchisee automotive dealer sells the motor vehicles as agent for the franchisor as principal.

There is also an increased emphasis on the fair compensation of franchisee automotive dealers. For example, franchisors are now required to compensate franchisees where the franchise agreement is terminated prematurely because the franchisor withdraws from the Australian Market, rationalises its networks in Australia or changes distribution models in Australia.

For further information, please do not hesitate to contact us.

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