Australia: What are the new Franchising Code of Conduct updates?

The Franchising Code of Conduct (the Code) is changing radically as a result of legislative change, with implications for both franchisors and franchisees. These updates stem from the long-awaited follow up to a national parliamentary enquiry, which reviewed the Code's operation and effectiveness. The updates, introduced on 1 June 2021, commence on 1 July. Franchisors need to act quickly to ensure their documentation and contract formation processes comply with the new law.

The Code Update, introduced by way of the Competition and Consumer (Industry Codes—Franchising) Amendment (Fairness in Franchising) Regulations 2021, affects many aspects of a typical franchise network's operations. This article outlines the fundamental changes and actions franchisors need to undertake.

The Key Franchising Code of Conduct Changes

The fundamental changes that impact franchisors include:

• providing a Key Fact Sheet to franchisees as part of your disclosure bundle;
• changes to the prescriptive information statement (see the new statement here); and
• extending the cooling-off period to 14 days.

There are also changes to dispute resolution processes, disclosure obligations, exit and termination requirements, and several other areas outlined below.

Dispute Resolution Changes

The Code Update offers different dispute resolution options, including mediation, arbitration and conciliation. Ask your lawyer to review and update dispute resolution clauses in your franchise documentation immediately, to apply to all agreements entered into or renewed by 1 July 2021.

Also, multiple franchisees can now be parties to the same dispute resolution process with the franchisor, where their complaints overlap. The individual disputes, however, remain separate. As a result, a franchisor need not resolve with all franchisee parties or may come to different settlement terms with each individual party.

Disclosure Document Obligations

You must update disclosure documents by 31 October. Franchisors will now need to provide more detail on:

• goodwill at the end of the franchise;
• rebates received;
• interests in leases (including any rebates received); and
• significant capital expenditure. This change is one of the most noteworthy changes, with franchisors now having to disclose the rationale, amount, timing, outcomes, benefits, and expected capital expenditure risks.

However, a Key Fact Sheet is also being introduced. Additionally, there is a new information statement that franchisors must provide before issuing franchise documents (i.e. at the recruitment phase).

Exit and Termination Requirements

There are three fundamental changes to exit and termination requirements under the Code Update.

1. Early Termination

Franchisees will have the right to request early termination at any time. If you, as the franchisor, refuse, you must provide substantive reasons as to why.

2. Notice Requirement

Previously, franchisors could terminate immediately under certain circumstances (abandonment, insolvency or fraud, for example). Under the changes, a seven-day notice requirement is introduced, providing franchisees with the opportunity to dispute the termination. As a result, if a dispute occurs, franchisors then have certain obligations to comply with.

3. Cooling-off Period

Cooling-off periods are extended to 14 days and apply to franchises sold between franchisees. The cooling-off period will only start when all documentation, including lease documentation, is received.

If your franchise agreement contains exit, cooling-off and termination provisions that mirror the Code, these will need to be updated.

Marketing Funds

Failure to comply with the marketing fund reporting requirements will now result in civil penalties, so it is crucial that your marketing fund reporting is compliant before 31 October 2021. One way to help bolster compliance is by including a detailed clause in your agreement, setting out the reporting that you as a franchisor will provide.

Legal Costs

Unless legal costs are pre-determined within the franchise agreement, a franchisor can no longer pass on their legal costs to franchisees.

Variation of Franchise Agreement

Franchisors will no longer be able to unilaterally and retroactively vary the terms of a franchise agreement unless the franchisee provides express agreement. Consider adding a variation clause into your franchise agreement to ensure that you comply with Code updates.

Restraint of Trade

If a franchisee does not renew their franchise agreement, your ability to enforce restraint of trade clauses has changed. It will now depend on whether the franchisee is in serious breach of the franchise agreement immediately before the franchise agreement expires.

New Vehicle Dealership changes

New vehicle dealerships have additional provisions. If you operate a new vehicle dealership, ask your lawyer about your specific industry-specific changes.

Code Update Checklist

Undertake the following actions to ensure compliance with the Code:

• When issuing franchise documents, the new information statement is being provided, effective immediately.
• The Key Fact Sheet, introduced by the Code Update, has been prepared and is provided as part of the disclosure bundle.
• The Franchise Agreement is updated to reflect the Code changes to ensure compliance for any agreements entered into or renewed from 1 July 2021, including clauses pertaining to:
  • dispute resolution;
  • exit and termination;
  • legal expense recovery;
  • restraint of trade and goodwill protection.
  • cooling-off periods;
  • variations to the Franchise Agreement.
• The Disclosure Document is updated by 31 October 2021.
• Marketing Fund reporting is updated by 31 October if applicable.

Key Takeaways

The Franchising Code of Conduct is changing significantly. As a franchisor, you need to attend to these changes immediately to be compliant by 1 July 2021 or risk significant penalties. To ensure you are ready, your lawyer should review your franchise agreement and other documentation, such as disclosure obligations and dispute resolution procedures. Key clauses in your Franchise Agreement that need review include dispute resolution, termination, cooling-off periods, legal costs and variation provisions.