Thinking | 3 December 2020
Government releases draft amendments to the Franchising Code
By Jacqui Barrett, Rebecca Kazzi and James Pavlidis
Recently, the Federal Government released its exposure draft amendments to the Franchising Code of Conduct (Code).
The amendments to the Code are a response to the findings made by the Parliamentary Joint Committee in its Fairness in Franchising Report and the subsequent commitments made by the Government.
While the amendments are still in draft form, the major proposed changes to the Code include the following:
Termination rights for franchisees
The proposed amendments to the Code will strengthen a franchisee’s right to terminate franchise agreements.
Notably, a franchisee may terminate a franchise agreement within 14 days after the later of the franchise agreement being entered into, or a payment is made by the franchisee to the franchisor in relation to the agreement.
In circumstances where, immediately before the franchise agreement is entered into, there is a proposal that the franchisor lease premises for the franchised business to the franchisee or allow the franchisee to occupy premises under a right other than a lease:
- the franchisee may terminate the franchise agreement within 14 days after receiving from the franchisor a document setting out the terms of the proposed lease or right; and
- the franchisee may terminate the franchise agreement within 14 days after entering into the lease or being granted the right, if before doing so, the franchisee did not receive a document setting out the terms of the proposed lease or right.
Further, at any time, a franchisee may give the franchisor a written proposal for termination of their franchise agreement, despite the terms of the franchise agreement. A franchisor is required to give the franchisee a substantive written response to any such proposal within 28 days. If the franchisor refuses to agree to terminate the agreement, the response must include the reasons for the refusal.
The cooling off period during which a franchisee has a right to terminate a franchise agreement has been extended from 7 days to 14 days.
Access to alternative dispute resolution
The proposed amendments improve dispute resolution processes through the introduction of a Code complaint handling procedure. The amendments also introduce conciliation and voluntary binding arbitration between franchisors and franchisees.
Multi-party dispute resolution has also been introduced in the exposure draft. The relevant provision allows franchisees to come together in attempting to resolve disputes with their franchisors. Notably, a franchisor cannot refuse to partake in multi-party dispute resolution.
The proposed changes also delegate the Australian Small Business and Family Enterprise Ombudsman with franchising dispute resolution advisor functions to oversee the process, regardless of whether the parties satisfy the definition of a ‘small business’.
Disclosure requirements to prospective franchisees are strengthened under the proposed amendments.
Franchisors would be required to give a prospective franchisee a copy of a key facts sheet. The exposure draft does not contain the requirements for the key fact sheet and the contents will depend on the outcome of consultation on the exposure draft. The Government has separately published three mock-up key facts sheets and has invited the public to comment on which version would best help prospective franchisees to make an informed decision.
Further, prospective franchisees are to receive a copy of the information statement before the franchisor gives the prospective franchisee any other disclosure documents.
In its disclosure document, a franchisor will be required to provide more information about any financial benefits that it (or a master franchisor or associate) will receive from the supply of goods, including the nature of the benefit, the business providing the benefit and the method by which the benefit is worked out. If a benefit is shared directly or indirectly with the franchisee, the franchisor must also disclosure the method for working out how much of the benefit is retained and how much is shared.
Disclosure about capital expenditure
Under the proposed amendments, a disclosure document must include as much information as possible about capital expenditure. This is an extension of the capital expenditure provisions which were recently introduced in relation to automotive franchises, to the whole franchising sector.
A franchisor must provide information about the rationale for the expenditure, amount, timing and nature of the expenditure, and the anticipated outcomes and benefits of the expenditure.
Prior to entering into, renewing or extending the term or scope of the agreement, the franchisor and franchisee (or prospective franchisee, as the case may be) must have a discussion in relation to the expenditure, including about the circumstances under which the prospective franchisee considers that it is likely to recoup the expenditure.
Varying the terms of a franchise agreement
The exposure draft provides that a franchisor cannot vary a franchise agreement with retrospective effect without the consent of the franchisee.
The exposure draft proposes to double the civil penalties from 300 to 600 penalty units for breaches of relevant provisions. The Government’s rationale for the change is that increased penalties will deter conduct that breaches the Code.
As such, under the proposed amendments, the maximum penalty for a breach of a civil penalty provision of the Code will be $133,200.
Where to from here?
The Government is inviting feedback on the exposure draft. It is proposed that the amendments to the Code will take effect from 1 July 2021. It is intended that this will provide businesses with sufficient lead time to adjust their franchise agreements and disclosure documents to comply with the revised Code.
What do the changes mean for you?
While the amendments to the Code are still in draft form, franchisors should, in the course of the normal annual review of their disclosure document, consider making amendments to reflect the recommendation made by the Government.
Among other things, franchisors should consider amending their disclosure documents to include information about the arbitration of disputes, the early termination of franchise agreements and rights for franchisees relating to goodwill.
Where a franchisor requires significant capital expenditure of its franchisees, disclosure documents will need to be updated to set out details in relation to future capital expenditure (including the amount, timing and nature of such expenditure).
Both franchisors and franchisees should be mindful of changes to their rights in relation to terminating a franchise agreement, and in particular, the right for franchisees to negotiate to exit a franchise agreement before the expiry date.
Notably, franchisors and franchisees should also be aware that the new dispute resolution provisions will come into effect the day after the new regulation is registered (rather than 1 July 2021).
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