‘Proposed changes to the Franchising Code of Conduct’

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By Cassandra Taylor, Associate, Billy Riddle, Lawyer and Luke Higgins, Law Graduate

On 10 November 2020, the Department of Industry, Science, Energy and Resources (the Department) released its Exposure Draft outlining several proposed changes to the Franchising Code of Conduct (the Code). The proposed changes aim to implement the commitments the Australian Government made in August 2020 in response to the Parliamentary Joint Committee’s Fairness in Franchising Report, which identified a range of regulatory matters to be addressed in the franchising sector. The proposed changes seek to increase the disclosure requirements from franchisors and improve the rights of franchisees in an effort to re-balance the rights of prospective parties.The Department is now seeking comment on the proposed changes from the franchising sector.

New and updated ‘Key Facts Sheet’

In an effort to assist prospective franchisees in making well-informed decisions when entering a franchise agreement, the proposed changes introduce a new format for the ‘Key Facts Sheet’. The Exposure Draft contains three ‘mock-up’ versions of a new Key Facts Sheet, each with different levels of detail. These changes are intended to better highlight the critical information in a franchisor’s preliminary disclosure document.

Entering into franchise agreements – new disclosure requirements

The proposed changes to the disclosure requirements in the Code aim to assist prospective franchisees in accessing and assessing useful commercial information about a franchise, prior to entering an agreement.

Key changes to the general disclosure requirements include:

  • Requiring the Information Statement to be provided before other disclosure documents; and
  • Requiring information in the disclosure document regarding the arbitration of disputes, early termination, and rights to goodwill.

Additionally, it is proposed that the recently implemented capital expenditure provisions, which apply to automotive franchises, will be extended to the entire franchising sector. In June this year, we wrote about how these changes affected automotive franchises.

The Exposure Draft amendments further require franchisors to disclose information on supplier rebates, commissions, and other payments where a franchisor receives a benefit from supplying goods or services to a franchisee.

The proposed changes also include informative changes to the standardised ‘Information Statement’, which must be provided to prospective franchisees at first instance. The final disclosure-related proposed change is a requirement for the franchisor to provide certain information about its lease over the franchise premises upon request by the franchisee.

Franchise operation – new prohibitions on franchisor activity

The Exposure Draft aims to restrict certain franchisor activities in order to re-balance the rights of franchisors and franchisees. First, the proposed changes seek to prohibit a franchisor from requiring a franchisee to pay for legal costs associated with the preparation, negotiation, or execution of the franchise agreement or related documents. This could mean that if a franchisor does pass on legal fees, it may be liable for a steep civil pecuniary penalty, particularly in light of the proposed regulatory changes to the penalty provisions (discussed further below). The changes however do not prevent franchisors from requiring franchisees to make a payment, before the franchisee starts the franchised business, of a particular amount that is specified to be for the franchisor’s reasonable legal costs in preparing, executing or negotiating the franchise agreement.

Second, the Exposure Draft includes a provision preventing a franchisor from retrospectively varying the terms of an agreement unless the franchisee (or the majority of affected franchisees) agrees to the change.

Third, the Exposure Draft introduces civil pecuniary penalties for a breach of clause 31 of the Code, which relates to the payment of marketing and advertising fees by franchisors.

Ending the franchise relationship

To ensure that franchisees can adequately consider all the necessary information regarding a potential franchise agreement, the Exposure Draft extends the cooling-off period for prospective franchisees from 7 to 14 calendar days.

The Exposure Draft also includes amendments that would grant franchisees the right, at any point during the term of the franchise agreement, to propose to the franchisor that they wish to exit the agreement. The franchisor must respond to this request in 28 days, and the parties will then be able to use dispute resolution processes if an outcome is not reached.

The Department maintains that franchisors must still have the power to terminate the franchise agreement in certain circumstances. However, the Exposure Draft includes additional notice provisions relating to termination in ‘special circumstances’, which include where a franchisee endangers public health or safety, acts fraudulently, or fails to hold a licence that is required by the franchise agreement. It follows that the proposed amendments will give franchisees time to commence dispute resolution if they dispute the grounds for termination.

Finally, the proposed changes alter the effect of restraint of trade clauses in situations where the franchisee has given written notice to extend the agreement on substantially the same terms as the franchisee’s current agreement (or terms that would apply to other franchisees or prospective franchisees) and the franchisor has chosen not to extend the agreement. Previously, restraint of trade clauses in such situations would only have no effect if the franchisee was not in breach of the agreement; this has been amended so that the franchisee must only avoid “serious breaches” for restraint of trade clauses to have no effect.

Dispute resolution

The Exposure Draft also seeks to strengthen the dispute resolutions options in the Code by introducing conciliation and voluntary binding arbitration. The proposed changes also delegate the franchising dispute resolution adviser functions to the Australian Small Business and Family Enterprise Ombudsman regardless of whether the parties satisfy the definition of a ‘small business’.

Regulatory framework – doubling the civil penalty provisions

In an effort to improve compliance with the regulatory framework of the Code, the Australian Government proposes to double the civil penalties for breaches of provisions that carries civil penalties (from 300 to 600 penalty units, or approximately $50,000 to $100,000).

Application and commencement date

The majority of the proposed changes are poised to come into effect from 1 July 2021. Changes to the civil penalty provisions will come into effect once the enabling amendments to the Competition and Consumer Act 2010 (Cth) pass Parliament.

If you have any further questions about any of the above, or need assistance with a particular matter, please don’t hesitate to contact Warren Scott, Partner (+61 3 9605 0984), Cassandra Taylor, Associate (+61 3 9605 0992) or Billy Riddle, Lawyer (+61 8568 9628).

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

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