From 1 July 2021, changes to the Franchising Code of Conduct (Code) [1] will be rolled out to address the perceived power imbalance between franchisors and franchisees.[2] The amendments follow the Parliamentary Joint Committee on Corporations and Financial Services’ (Committee) report which outlined issues with non-compliance, false and misleading representations and unconscionable conduct on the part of franchisors. After extensive consultation, the Committee reached a general consensus that reform was required to restore confidence in the industry and improve fairness for franchisees.
Code
The Code is a national mandatory code regulated by the Australian Competition and Consumer Commission (ACCC) that governs how franchisors and franchisees can act when entering into, and carrying out, a franchise agreement. Under the Code, the ACCC has the ability to investigate alleged breaches, issue infringement notices and apply to a court to impose penalties. Individuals can also take their own legal action for breaches.
The new amendments will have implications for both franchisees and franchisors who will need to be aware of their obligations under the Code to avoid facing penalties for non-compliance.
2021 amendments
The upcoming changes include:[3]
- increased disclosure obligations for franchisors;
- limit on capital expenditure;
- strengthened dispute resolution mechanisms;
- an extended cooling-off period; and
- more lenient procedure for terminating franchise agreements.
1. Increased disclosure obligations
The amendments will introduce more stringent disclosure obligations on franchisors who must provide certain financial and non-financial information to better assist franchisees in undertaking adequate due diligence before entering into a franchise agreement. It will also clarify that the 14-day disclosure period must begin at least 14 calendar days before signing a franchise agreement.
Under the provisions, franchisors will need to provide a new ‘Key Facts Sheet’ (three versions depending on the complexity of the franchise) and an amended Information Statement which will encourage franchisees to participate in free online training programs designed to assist them in better understanding their rights under the Code. It is hoped that the increased disclosure obligations will ensure franchisees make informed, educated and reasonable assessments of the value of a franchise.
2.Capital expenditure
Under the new amendments, a franchisor cannot require a franchisee to undertake significant capital expenditure unless the expenditure is:
- disclosed before entering into a franchise agreement;
- part of renewing or extending the term of an existing franchise agreement;
- approved by a majority of the franchisees;
- incurred to comply with legislative obligations; or
- expressly agreed to by the franchisee.
The purpose of limiting capital expenditure is to ensure franchisors and franchisees share the risk and reward of franchise agreements and to limit exploitation of franchisees.
3. Dispute resolution mechanisms
The dispute resolution process under the Code will be amended to expand the resolution options by including conciliation and voluntary binding arbitration to ensure the process is fair, timely and cost effective. Part of this amendment will also include appointing a franchising arbitration adviser and ensuring the Australian Small Business and Family Ombudsman can assist with franchise disputes and write to the ACCC advising of systemic issues.
4. Extended cooling-off period
The cooling-off period is set to be extended from 7 days to 14 calendar days to allow the franchisee sufficient time to decide whether they wish to proceed with an agreement. This amendment is hoped to increase certainty around the timing and triggers off the cooling-off period to ensure franchisees have sufficient time to make an informed decision.
5. Terminating franchise agreements
In addition to the extended cooling-off period, the amendments will deal specifically with termination and exit by including a regime for franchisees to negotiate an early exit and widening the ‘special circumstances’ provisions for termination.
A franchisee will be able to notify the franchisor that they wish to exit an agreement at any point in time and for any reason. Upon being notified of an intention to exit, the franchisor will have 28 days to respond and if there is a disagreement, undertake the dispute resolution process under the Code. The rationale behind the exit provisions is to ensure franchisees can exit an unviable franchise in a manner that is fair, reasonable and limits financial loss.
What this means for franchisors
It is important that franchisors understand the new amendments to avoid potentially harsh penalties, particularly by:
- ensuring complete disclosure includes the Key Facts Sheet, updated Information Statement and refers to the most recent Code;
- confirming all franchise agreements are up to date and compliant with the new amendments;
- familiarising oneself with the new amendments to be ready for any questions that franchisees (existing or new) may have (and seeking legal advice where necessary);
- being aware that franchisors can no longer make franchisees pay all or part of the legal costs in preparing, negotiating or executing franchise agreements (unless incorporated into joining fees); and
- being aware that penalties for a breach of the Code will double from 300 pecuniary penalty units to 600 units (being a maximum fine of $133,200).
What this means for franchisees
It is important that franchisees understand the new amendments, particularly:
- all additional obligations placed on franchisors to ensure a franchise agreement is compliant, fair and reasonable;
- all franchisee rights including the ability to exit an agreement early, object to unfair capital expenditure, request additional disclosure material and refuse to pay certain legal costs; and
- the right to make a complaint, kick start the dispute resolution process or commence proceedings for any potential breach of a franchise agreement by a franchisor.
If you would like further information as to how these changes may affect you or your franchise agreement, please contact Mahoneys commercial Partner, Anthony Harrison, or Lawyer, Sabrina Austin on (07) 3007 3777 or aharrison@mahoneys.com.au or saustin@mahoneys.com.au.
[1] Competition and Consumer (Industry Codes—Franchising) Regulation 2014 (Cth).
[2] Australian Government, 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 report: Fairness in Franchising (August 2020).
[3] Exposure Draft, Competition and Consumer (Industry Codes—Franchising) Amendment (Fairness in Franchising) Regulations 2020 (Cth).
Written
Back to articles