Following the March 2019 release of the Parliamentary Joint Committee’s Fairness in Franchising Report, the government has now released a draft set of proposed changes to the Franchising Code of Conduct (Code).
These changes endeavour to restore public confidence in the franchising industry by giving further rights, balances and protections for franchisees.
The proposed changes
The changes are rather extensive:
- A “Key Facts Sheet” will need to accompany a franchisor’s Disclosure Document. This summarises certain items and information in the Disclosure Document and Franchise Agreement.
- A franchisee’s cooling-off period will be extended from 7 to 14 calendar days:
- This right will also apply to re-sales of franchised businesses by existing franchisees. This will have big implications for business sale transactions and Business Sale Contracts will need to be drafted carefully to cater for this.
- In certain circumstances the franchisee’s cooling-off period will be postponed if the franchisor holds the Head-Lease of the business premises (giving the franchisee a Sub-Lease or Licence to Occupy) and then provides the franchisee with a copy of the Lease after entry into the Franchise Agreement.
- Details about the rebates and commissions a franchisor receives from suppliers must be expanded upon within the Disclosure Document. This will include how they are calculated and shared with franchisees.
- Franchisors will be banned from charging a franchisee for the franchisor’s legal costs of preparing and negotiating the Franchise Agreement. A franchisor will however be permitted to charge a franchisee an upfront set amount in order to cover their legal costs.
- There will be additional disclosure obligations and restrictions on a franchisor’s ability to require a franchisee to incur the costs of items of capital expenditure. Capital expenditure includes things during the course of the Franchise Agreement such as upgrades/refurbishments to signage, equipment, vehicles and business premises.
- Disclosure obligations regarding marketing/advertising funds have been expanded. Penalties have been added for breaching these provisions.
- Voluntary arbitration will be introduced in addition to mediation for resolution of disputes. This means that the franchisee and franchisor must both agree to arbitration. In contrast to mediation where the mediator simply facilitates discussions and it’s up to the franchisee and franchisor to reach an agreed resolution, an arbitrator acts like a judge and can make a decision which is binding on the parties.
- A franchisor cannot reject a request for mediation with multiple franchisees at once (known as ‘multi-party’ mediation).
- Mediations and arbitrations will be overseen by the Australian Small Business and Family Enterprise Ombudsman (ASBFEO).
- Franchisees will now be entitled to initiate negotiations for an early exit from the Franchise Agreement. A franchisor must give reasons if they refuse to agree to an early exit.
- If a franchisor wishes to terminate a Franchise Agreement for ‘special circumstances’ such as the franchisee’s fraud, bankruptcy/insolvency or failing to hold a licence to carry on the business, then the franchisor must give the franchisee 7-days’ prior notice. This allows time for the franchisee to start the dispute resolution procedure.
- There will be restrictions on a franchisor changing the provisions of a franchisee’s Franchise Agreement after it has been signed (also known as ‘retrospective’ changes).
- The circumstances where a restraint of trade (or ‘non-compete’) clause is not enforceable will be clearer. These are clauses which operate once the Franchise Agreement ends.
- Penalties for certain breaches of the Code will increase from 300 to 600 penalty units. Based on the current value of a penalty unit, maximum penalties for each different breach will now total $133,200.
Where to from here?
The draft changes are open for public consultation until 4 December 2020. A final version of the changes and revised Code is then expected to be released in the early months of 2021. This means it’s likely that the final version of the changes and new Code will be different to the current exposure draft.
The changes will then take effect from 1 July 2021 (except for changes to dispute resolution provisions, which will take effect once the final version of the new Code is released).
Once the final version of the new Code is released, franchisors will need to carefully read and ensure they understand how the changes will operate. It will be essential to review processes and procedures to ensure compliance with the new laws. Updates to Franchise Agreements and Disclosure Documents will also need to be drafted to align with the changes.
Franchisees should also review the changes to understand how this will affect their rights under a Franchise Agreement.
The changes to the Code will also coincide with proposed changes to the Australian Consumer Law’s unfair contract restrictions which are expected to be released in 2021. It will now be illegal for a contract to include an ‘unfair’ term (as that is defined under the law) and there will be penalties for including them. The changes to criteria will also mean that many Franchise Agreements will be subject to these laws. Again, it is recommended that franchisors review their template Franchise Agreements to ensure that they do not contain unfair terms.
The team at Salerno Law are experienced in acting for both franchisors and franchisees in all aspects of franchising law.
Get in contact if you need our assistance.
Luke has specialised in franchising law since his admission into practice and has acted for a diverse range of franchisors and franchisees of a variety of franchise systems. He is also an active member of the Queensland Law Society Franchising Law Committee where he keeps on the forefront of the latest developments in laws affecting franchising, and contributes towards submissions to government on topical issues facing the franchising industry.
DISCLAIMER: This article is only meant to give you general information and should not be relied on as legal advice. Speak to one of our lawyers for more information.