Franchising Code of Conduct Amendments
The Australian Government has made changes made to the Franchising Code of Conduct (the Code) in an effort to balance the powers between franchisees and franchisors. These changes are a result of the recommendations of the Fairness Franchising Report, an Exposure Draft of the proposed changes to the Code, and subsequent to the Parliamentary Inquiry about the franchising sector and the Code’s efficiency.
The changes to the Code took effect on July 1, 2021.
What does it mean for franchisors and franchisees?
Franchisors must update standard disclosure documents, franchise agreements and compliance manuals to be in line with the changes to the Code so as to avoid penalties which have increased. They should also be aware of how the amendments will affect their existing franchise agreements and any additional disclosures required.
Franchisees should also be knowledgeable with the amendments to the Code and repercussions on future business relations with franchisors.
Information Statement Change
Franchisors must provide the updated Annexure 2 – Information Statement to prospective franchisees when issuing franchise documentation. The Information Statement should be given to the franchisee at the earliest possible opportunity after the franchisee has expressly signified their interest in the franchise through a form.
Proposed changes to the disclosure obligations (disclosure documents given to franchisees on or after November 2021)
In additional to other disclosure obligations, franchisors must now provide to franchisees at least 14 days before the franchisee enters into a franchise agreement or makes a non-refundable agreement, among others:
- Financial benefits
- Lease
- Percentage of franchisees in the franchise system
- Goodwill
- Amendments will require changes to franchise agreements entered into, renewed or extended on or after 1 July 2021. Amendments that expressly require changes to be made to disclosure documents will apply to disclosure documents given to franchisees from 1 November 2021.
- Franchisors should immediately respond by updating standard disclosure documents, franchise agreements and compliance manuals to be in line with the changes to the Code so as to avoid any potential penalties.
- Franchisees, on the other hand, should also be knowledgeable with the amendments to the Code and their repercussions on future business relations with franchisors.
- Most franchisors are required to have registered on the new Franchise Disclosure Register by 14 November 2022.
- The changes made to the Franchising Code of Conduct (the Code) is an effort to balance the powers between the franchisees and the franchisors. These changes were made in response to the Parliamentary Joint Committee’s report on Fairness in Franchising.
Information as to rebates and other financial benefits that franchisors receive from suppliers.
A copy of the lease or a summary of the commercial terms of the lease.
The percentage of franchisees in the franchise system that were a party to any alternative dispute resolution processes that occurred in the previous financial year.
The prospective franchisee’s rights relating to any goodwill generated by the franchisee.
The franchisee is also required to give disclosure through a Key Facts Sheet and additional information regarding capital expenditure, marketing funds, rebates and earnings information.
All franchise transfers including those where new franchise agreements are not required, will be compelled to provide disclosure documents.
The disclosure document can be given in printed or electronic form.
Capital Expenditure
Franchisors may not require franchisees to engage in capital expenditure unless it is:
(a) specified in the disclosure document before the franchise agreement is entered into, is renewed, or its term is extended;
(b) permitted by a majority of the franchisees;
(c) made in order to comply with legislative obligations;
(d) acknowledged by the franchisee/s.
Marketing Funds
Under marketing funds, the term ‘franchisors’ has changed to ‘fund administrators’ which includes franchisors, individuals and master franchisors who operate a fund. In addition, the fund administrator maintains a separate account with a “financial institution” instead of a “bank”.
The obligations regarding marketing and cooperative funds remain the same.
Cooling-Off and Termination
The franchisee cooling off period has been extended form 7 days to 14 days that starts on the later of (instead of earlier of) entry into an agreement or the paying of money under an agreement.
A franchisee is able to propose early termination of the franchise agreement and the terms on which the early termination will occur without a limit to the franchisee’s reasons for termination.
Franchisors should respond to the proposal within 28 days, applying mandatory good faith obligations. Should the franchisor dissent with the proposal, the franchisor should state the reasons for refusal. The usual dispute resolution processes in the Code are then applied.
If the franchisor should outrightly refuse a termination request, the franchisor is deemed to have violated the Code’s good faith obligations and to have acted unjustly.
The draft code also allows the franchisor to terminate the agreement under the ‘special circumstances’ termination rights stated in the Code where the franchisor may terminate with only a seven-day notice to the franchisee for certain specified grounds.
If the franchisee does not agree to the termination, the parties can resort to an alternative dispute resolution process, including arbitration, if mutually agreed.
Passing on Legal Costs
Franchisors must not contractually pass on legal costs to the franchisee beyond those relating to the preparation, negotiation, or execution of the franchise agreement or future legal costs that are unquantifiable at the time the agreement is signed.
Franchise Disclosure Register
A new Franchise Disclosure Register will be launched in early 2022 to allow public access to key information about franchised businesses. If you’re a franchisor, creating and maintaining a public presence on the Franchise Disclosure Register will part of complying with the Code and failure to comply can result in penalties. Franchisors will have an ongoing obligation to publish the latest disclosure documentation on the Register. By 14 November 2022, all franchisors must create a profile for their franchise system and publish the latest disclosure documentation on the Franchise Disclosure Register.
Other Relevant Changes
The franchisor cannot change the franchise agreement with retroactive effect unless the franchisee agrees or the majority of the franchisees affected by the change agree.
The mediation definition will be replaced with Alternative Dispute Resolution options that include arbitration, conciliation and mediation.
Restraint of trade provisions in a franchise agreement will now only be effective if a franchisee has committed a serious breach of the franchise agreement.
Further amendments to the Code come into effect on 15 April 2022 and significantly increase the penalties that a franchisor may incur for contravening specific provisions in the Code.
Takeaway Points:
Jaclyn-Mae Floro, BCompSc
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Disclaimer. The material in this post represents general information only and should not be taken to be legal advice.
