It has been over two years since the Parliamentary Joint Committee’s Fairness in Franchising Report (Report) recommended changes to the Franchising Code of Conduct (the Code). The regulation that includes the changes to the Code has now finally been released – Competition and Consumer (Industry Codes — Franchising) Amendment (Fairness in Franchising) Regulations 2021 (Cth).
After considerable lobbying by various parties, the final version of the changes see some controversial changes to disclosure as well as some new processes to handling disputes. The changes are to commence on 1 July 2021 subject to some transitional rules which we will explain below.
The purpose of the changes, as outlined by the government, is to improve the fairness and transparency of franchising – hopefully this will be the case with these changes.
Changes to Entering a Franchise Agreement
Key Fact Sheet
In addition to the disclosure document, prospective franchisees must now be provided with an additional Key Disclosure Information Fact Sheet (“KFS”) containing the most critical information from the franchisor’s disclosure document. As at the date of this article, that document has not been provided by the government. It is to be published on the ACCC website.
The KFS will need to be provided at least 14 calendar days before entering into a franchise agreement or paying non-refundable money. The purpose of the KFS is to assist franchisees in making an informed decision before entering into a franchise agreement and the franchise network. A prominent theme in the Report was that disclosure documents were too long and not often read fully by franchisees. On this basis, the KFS was established, although it should be noted that the KFS is not envisaged to be a substitute for the disclosure document.
The Key Fact Sheet:
- will follow a standard format to make it easy to read;
- will highlight the most critical information from the disclosure document;
- will only include information that is in the disclosure document or information that is required to be given under the Code; and
- like the disclosure document must be updated within four months after the end of each financial year.
- Information statements must now be provided to prospective franchisees before the other disclosure materials. The content of the Information Statement will now be published separately – this has already been updated and is available on the ACCC website. Franchisors will need to ensure that this updated version is provided to prospective franchisees.
- Disclosure documents must now be provided in printed form, electronic form or both, if requested by prospective franchisees. Whilst it is common practice for most franchisors to provide print and electronic forms of their disclosure document, it is important they are aware that there is now an express obligation to do so if requested.
- Franchisors will need to disclose the percentage of franchisees in the franchise system that were a party to a mediation, conciliation or arbitration or was pending in the previous financial year.
- Where a franchise premises is subject to a lease held by the franchisor or an associate of the franchisor, a copy of the lease or occupancy agreement and any written disclosure information about the lease provided by the landlord to the franchisor or its associate must then be provided to the franchisee alongside the disclosure documentation within the 14 day disclosure period. If this information is not provided, the franchisees will have the right to “Cool Off “ extended by up 14 days until it is provided.
- Franchisors and master franchisors or associates who receive a rebate or other financial benefit from one or more suppliers must now supply:
- the nature of the rebate/financial benefit, the name of each business providing it and the amount received in the previous financial year expressed as a single aggregate percentage of total group purchases from that supplier;
- whether the rebate or other financial benefit is shared directly or indirectly with the franchisee;
- if so shared – the method for working out how much is shared or retained by the franchisor or master franchisor or associate; and
- a description of each such benefit.
- The rebate/financial benefit does not need to be disclosed if:
- the franchisee is permitted to acquire the goods or services from sources without the franchisors approval, or
- the whole of the rebate or benefit from that supplier is to be returned to the franchisee directly as a payment into a co-operative fund controlled or administered by or for the Franchisor.
- The benefit is an incentive received by franchisors, master franchisors or associates in connection to premises.
- Disclosure documents are to include details as to whether the franchise agreement provides for arbitration of disputes, early termination of the franchise agreement by franchisors and franchisees and circumstances those rights can be exercised.
- If earnings information is provided, franchisors will now be required to specify whether earnings information in the disclosure document is accurate to the best of the franchisor’s knowledge, unless otherwise stated.
- A franchisor also has new obligations in relation to significant capital expenditure. Specifically, a disclosure document must now contain as much information as practicable about the expenditure, including the rationale for the expenditure, amount, timing, anticipated outcomes and risks associated with the expenditure. This information must be discussed before entering, renewing or extending the franchise agreement. The discussions need to include whether the Franchisee is likely to recoup the expenditure. It would now be wise for franchisors to maintain a record of such discussions. Previously, franchisors could require capital expenditure where the franchisor considered the capital investment necessary but under the new changes to the Code, this avenue will no longer be available.
Changes to Operating a Franchise
Franchisors Legal Costs Relating to Franchise Agreements
Franchisors can no longer require a franchisee to unilaterally pay legal costs associated with the preparation, negotiation or execution of a franchise agreement (or any associated documentation). However, certain legal costs can be passed on where they have been correctly identified, defined and specified and are not in respect of legal costs incurred after the franchise agreement has been entered into.
Prohibition on Franchisor Varying a Franchise Agreement Retrospectively and Unilaterally
The new version of the Code has adopted a similar provision from the Food and Grocery Code of Conduct, which now prevents franchisors from retrospectively varying the terms of a franchise agreement unless the franchisee, or a majority of affected franchisees, agree to the change.
Clause 31 of the Code, regarding marketing and advertising fees, has been completely re-drafted. The Report found that there was ambiguity surrounding marketing funds as the terms ‘marketing fund’ and ‘advertising fees’ were used interchangeably. The provisions pertaining to marketing funds are now clearly set out and changes include making a fund administrator subject to marketing fund provisions. A fund administrator includes franchisors, master franchisors and authorised associates who control or administer the fund.
Changes relating to ending a Franchise Agreement
The cooling-off period will be extended from seven days to 14 days under the new version of the Code. The cooling-off period will now formally begin after a first payment is made by the franchisee under their franchise agreement. Furthermore, the 14 day cooling-off rights will now also apply to those franchisees entering the franchise network via a transfer from an existing franchisee.
As pointed out above if the franchise is subject to a premises lease or occupancy agreement the franchisee will also be entitled to terminate the franchise agreement within 14 days after receiving from the franchisor or associate:
- the first document setting out the terms of the proposed lease or occupancy right or
- any latter document setting out the terms of the first document / the proposed agreement.
If the Franchisor or associate has not provided that information and the franchisee subsequently signs the lease or occupancy agreement, the 14 day right to terminate by the franchisee starts again.
A prominent theme in the Report was that franchise agreements stipulated how franchisees could exit their franchise agreement and their franchise network before the expiry date, however, this was not dealt with in the Code. Consequently, this concept of early exit was often in the franchisor’s favour. The new Clause 26B of the Code will now give franchisees similar rights as those given to franchisors. Franchisees will be able to give formal notice to franchisors proposing early termination, to which franchisors must provide a substantive written response within 28 days. If a franchisor refuses to agree to the termination for the reasons set out in the notice, they must provide the reasons for such refusal.
Restriction on Immediate Termination
Currently, franchisors have the power to terminate a franchise agreement without notice in special circumstances, providing the franchise agreement allows for such termination. Under the new changes, the Code will now have additional notice provisions relating to termination in ‘special circumstances’. While the franchise agreements may still allow the franchisor to terminate for a specified reason, the franchisor must now give seven days’ written notice of the proposed termination and grounds for termination. The franchisee is also able to dispute the proposed termination, with the changes to the Code providing that an ADR Practitioner may freeze the notice period for termination in order to determine the dispute. If the franchisee has disputed the termination notice, the franchisor must not terminate the agreement until 28 days after notice of dispute was given by the franchisee. If the franchise agreement provides that the franchisor may require the franchisee not to operate part of the business because of a breach is caused for special circumstances the Franchisor may by written notice require the franchisee not to operate part of the business because of that ground of breach.
Restraint of Trade
Restraint of trade clauses will no longer apply to franchisees unless a franchisee has committed a ‘serious breach’ of their franchise agreement. Unfortunately the term ‘serious breach’ has not been defined in this update of the Code. It can therefore be assumed that what is deemed a ‘serious breach’ will be determined on a case by case basis.
The Code amendments have introduced the ability for disputes to be handled via conciliation and voluntary arbitration.
In addition, functions previously handled by the Franchising Code Mediation Advisor have been transferred to the Australian Small Business and Family Enterprise Ombudsman (Ombudsman). The Ombudsman powers have been extended to encompass arbitration.
The conciliation or mediation is now called the ADR process and is to be handled by an ADR practitioner who is a conciliator or mediator.
The ADR process can be held by virtual attendance technology.
The Code changes include the ability to have multi-party disputes heard together with the sharing of costs. If the franchisor doesn’t agree to a single ADR, the ADR practitioner can conduct the ADR process despite the objection of the franchisor.
The Code changes make it clear that all disputes must be held in Australia.
No Additional Penalties Yet
One final notable omission to the changes to the Code relates to penalties. Under the previous draft amendments to the Code, where a franchisor breaches aspects of the Code carrying a civil penalty they were doubled, this has not been changed so the current penalty of 300 penalty units remain.
New Vehicle Dealership Agreements and Co-Operatives
The Code has been amended to include a new definition of motor vehicle dealership. It has been expanded to expressly incorporate agency models for sale of vehicles.
Also included is a new consideration whether a party has acted in good faith and provisions for compensation of a dealer in the event a manufacturer withdraws or rationalises its operations in Australia.
Amendments to the Code now explicitly exclude co-operatives registered under State or Territory Laws from being subject to the Code.
The amendments regarding dispute resolution apply to any dispute which arises after the changes commence – even if the agreement was entered into before the commencement of the amending regulations.
The majority of the remaining provisions only affect the agreement entered into, renewed or extended on or after 1July 2021.
Amendments to the disclosure documents apply to disclosure documents to be issued on or after 1 November 2021. Unfortunately for those franchise systems that have a different financial year, for instance a financial year ending December, they will need to create a new disclosure document from 1 November 2021 and not four months after the year end December.
- Most of the changes seem sensible but will unfortunately add more costs of administration.
- Franchisors will need to quickly ensure that their documentation and franchise system will be compliant by 1 July 2021, including by providing any additional information to prospective franchisees.
If you have any questions about the changes to the Code and how they may affect your rights and obligations, please contact our Corporate & Commercial team at Coulter Legal for assistance.