On 12 March 2021, the Australian Government announced amendments to the Franchising Code of Conduct (Franchising Code), which came into effect on 1 July 2021. In this article, we explore what those changes are and what it means for your business.
An overview of the Franchising Code
The changes that have come into effect are a direct consequence of an inquiry launched back in March 2019 into the operation and effectiveness of the Franchising Code. Following the inquiry, the Parliamentary Joint Committee on Corporations and Financial Services (Committee) released the 'Fairness in Franchising' report (Report).
In Australia, franchising law is governed by the Franchising Code, which was designed to address the power disparity between the franchisor and franchisee.
The Report found that the Franchising Code has failed to achieve this and accordingly makes several recommendations to mitigate the implications of this power imbalance between the franchisor and franchisee. This has called for significant changes to the Franchising Code as well as the power and responsibilities of the Australian Competition and Consumer Commission (ACCC).
What dates do I need to be aware of?
From 1 July 2021, the amendments will affect any agreements entered, renewed, or extended after that date. However, some transition periods will come into effect either before, or after the amendment date.
- Amendments made in relation to dispute resolution will apply to any dispute entered on or after 2 June 2021, regardless of a franchise agreement being entered, extended, or renewed prior to that date.
- Amendments made in relation to the disclosure requirements will affect disclosure documents given from 1 November 2021 onwards.
If you require further assistance in understanding how these amendments may impact any agreements you have entered into, we recommend getting in touch with our commercial lawyers for a confidential discussion on 02 9262 4003 or by submitting an online enquiry.
Key changes to the Franchising Code
So, what changes have been made?
- Dispute Resolution - More avenues for dispute resolution have been introduced to help mediate any conflicts between Franchisees and Franchisors. These include Multiple Party Dispute Resolution, Voluntary Arbitration and other new regulation being introduced about dispute resolution. These avenues may involve disputes being handled by written agreement between Franchisor and Franchisee; request from Australian Small Business and Family Enterprise Ombudsman (ASBFEO); and referral to an Alternative Dispute Resolution (ADR) Practitioner.
- Pre-entry Disclosure Information - Prior to entering into a franchise agreement, Franchisors are now required to provide more information to prospective Franchisee, at least 14 days prior to either entering into an agreement or making a non-refundable payment to enter into an agreement. In the event where a Franchisor has given information to a prospective Franchisee prior to 1 July 2021, and an agreement has yet to be entered into, the Franchisor must now also provide the prospective Franchisee with the additional information required under the new amendments. Franchisors are now required to provide the following (pre-entry) disclosure information:
- information concerning capital expenditure, marketing funds, rebates, restraints of trade, and in some circumstances earnings information;
- Key facts sheet containing disclosure documents and information;
- information concerning relevant leases, including copy of the lease or a summary of commercial terms;
- a copy of the existing franchise agreement and any other relevant document where a franchise is being transferred.
- Extended cooling-off period after entering into a franchise agreement, which has now been increased to 14 days.
- Franchisee can terminate within 14 days of receiving leasing information or propose an early termination of an agreement. In respect of transferring an existing agreement, after 1 July 2021, the cooling-off period ends:
- 14 days after becoming the franchisee (effective transfer of the franchise agreement); or
- the day on which the new franchisee takes possession and control of the franchised business.
- Termination of an agreement - The Franchising Code now allows early termination to be proposed by the Franchisee and for the Franchisor to respond in writing within 28 days of such a proposal on reasonably grounds. Additionally, the Franchisor can terminate without notice to the Franchisee on particular grounds.
- Marketing funds, which replaces the word 'advertising' previously used, and its obligations apply to the fund administrator.
- Franchisors are prohibited from passing on their legal costs to the Franchisee in respect of preparing, negotiating, or executing the franchise agreement unless a precise dollar figure is provided.
- Franchise agreements cannot be varied retrospectively unless agreed by the Franchisee or majority of franchisees affected.
- Restraint of trade provisions in the franchise agreement or ancillary documents are now more restrictive, for instance, if a Franchisee is not in a serious breach of the agreement(s) then the restraint of trade clause will not be effective.
- New Vehicle Dealership Agreements whereby dealers operating as manufacturers agents are now protected under the Franchising Code. See the Best Practice Principles reflecting the new mandatory obligations in the Franchising Code.
- Co-operatives (either registered under State or Territory co-operative laws) are now explicitly excluded under the Franchising Code, that is to say, if the Franchisor and Franchisee are both members of the same co-operative.
If you would like to learn more about these changes, the following resources may be useful:
- ACCC Information Statement for Prospective Franchisees
- Key Facts Sheet - Information for Smart Form (Franchisor)
- Franchising Model Disclosure Document
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.