Upcoming changes for franchising – what you need to know

Since the introduction of the Competition and Consumer (Industry Codes-Franchising) Regulation 2014 (Cth), the franchising landscape has changed dramatically, which has created the need for adjustments to the Franchising Code of Conduct (the Code).

On 15 August 2023 the Australian Government announced a review of the Code by Dr Michael Schaper (the Review), the former deputy chair of the Australian Competition and Consumer Commission.

What will the Review focus on?

The scope of the Review is broad, including a general fitness for purpose check of the Code, in light of the recent changes to the unfair contract terms regime.  More specifically, the Review will also include a focus upon:

1. the protections afforded by Part 5 of the Code and whether these protections should be extended to other parts of the automotive industry;
2. the effectiveness of the current mandatory disclosure obligations under the Code;
3. the role of the Australian Competition and Consumer Commission and the Australian Small Business and Family Enterprise Ombudsman with respect to the Code;
4. the impact and effectiveness of reforms made to the Code between 2020 and 2022, including the introduction of the Franchise Disclosure Register (see our article here on the changes).

What is the ACCC’s view?

In September 2023, the ACCC made a submission to the Review. The ACCC’s view is that there are a number of persistent issues in the franchising industry that must be addressed. It is the ACCC’s view that:

1. many franchisees do not fully understand their limited rights or the significant risks;
2. the ACCC has limited ability to rapidly prevent harm to franchisees;
3. there is no binding alternative dispute resolution;
4. a single national regulator means that harm goes unaddressed; and
5. a Code will never adequately address these persistent issues.

According to the ACCC submission, the Code does not provide the ACCC or another government agency with sufficient powers to intervene and a more proactive approach is required to protect existing and potential franchisees.

The ACCC has proposed a licensing system for franchisors which would require franchisors to be licensed to offer franchises to combat these issues. A licensing system could impose requirements and conditions on franchisors that would address the power imbalance between franchisors and franchisees. It is the ACCC’s proposal that a potential licensing system would also provide the ACCC with more powers to promptly address and prevent harm.

Alternatively, if the government decides not to proceed with the proposed licensing system, the ACCC has recommended further amendments to the Code to address transparency for franchisees and the enforcement of the Code.

The ACCC has also identified that the Oil Code has fallen behind the Code and requires review to ensure fuel franchisees are adequately protected.

Where does Part 5 of the Code apply?

Part 5 of the Code was introduced to provide franchisees operating pursuant to New Car Dealership Agreements with additional protections, including the requirement for:

1. the agreement to provide for compensation if the agreement is terminated by the franchisor before it expires because the franchisor withdraws from the Australian market, rationalises its networks in Australia, or changes its distribution models in Australia;
2. franchisors and franchisees to notify each other of their intentions regarding the expiry of the new vehicle dealership agreement;
3. both parties to agree to a written plan to manage the wind down of the dealership in circumstances where either party notifies the other that they do not intend to renew the agreement or enter into a new agreement;
4. the agreement to provide the franchisee with a reasonable opportunity to make a return;
5. franchisors to not make franchisees to undertake significant capital expenditure based on the franchisor’s view that such expenditure is necessary as a capital investment in the franchised business.

Further to the above, the amendments allowed franchisees to new vehicle dealership agreements to request that the franchisor deal with disputes of the same nature together.  For further detail regarding the changes made pursuant to Part 5 of the Code, see our article here.

Currently, Part 5 of the Code only applies to new vehicle dealership agreements, which are defined as dealership agreements that predominantly deals with new passenger vehicles or new light goods vehicles (or both).  However, as noted above, the purview of these protections may be set to extend to other sections of the automotive industry, which could include heavy vehicle dealerships.

What are the changes to the unfair contract terms regime?

On 9 November 2022 the Australian Government introduced changes to the unfair contract terms regime through the Treasury Laws Amendment (More Competition, Better Prices) Act 2022 (Cth).  Under these changes:

1. the scope of application of the unfair contract terms regime under the Australian Consumer Law will be broadened; and
2. penalties will be imposed on individuals and corporations proposing or relying on the unfair contract terms.

For detail regarding the changes to the laws governing unfair contract terms, please see our article here.

Please note, the unfair contracts regime will only apply to standard form contracts.  Generally, a franchise agreement will be considered to be a standard form contract, noting the power imbalance present between the franchisor and franchisee. However, this is not the case for all franchise agreements.  If the franchise agreement has been amended as a result of negotiations, it is less likely that the franchise agreement will be considered to be a standard form contract.  If franchisors are unsure whether the unfair contracts regime applies to their contracts, they should err on the side of caution, noting the substantial penalties stemming from a failure to comply with the regime.

What does the above mean for franchisors?

With the findings of the Review being provided to the Minister for Small Business by the end of the calendar year, substantive changes to the Code before mid-2024 are not likely.   Further updates from the government in relation to the Review are expected in the coming months.

However, automotive sector participants should start considering how their operations will be affected in the event that the obligations contained in Part 5 of the Code are extended other forms of dealerships.

More broadly, it is extremely important for franchisors to consider the changes to the unfair contract terms regime, and update documents where necessary. A failure to do so could result in the franchisor facing significant penalties.

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