The Proposed Changes to the Franchising Code of Conduct

In August 2020, the Australian Government released the Fairness in Franchising report (the Report). This was a long awaited response to the Joint Committee on Corporations and Financial Services Inquiry (JCCFSI) as to the operation and effectiveness of the Franchising Code of Conduct (the Code). The Exposure Draft of Changes to the Franchising Code of Conduct (the Exposure Draft) was provided in early November, which lays out a plan to introduce, and expand upon, the new measures in the Report. 

Here is a breakdown of the proposed changes:

Entering a Franchise Agreement

The Exposure Draft proposes changes, aimed at easing the process for franchisees to access useful commercial information about the franchisor, prior to entering into any contract. These amendments are an attempt to break down the complicated information provided to franchisees in order to mitigate the possibility of due diligence, and improve disclosure by franchisors.

The proposed changes include:

• Sufficient information and awareness is to be provided to the franchisee about the franchisor, prior to contract formation. 
• The non-financial disclosure document is to be made available to the franchisee, both in an electronic and hardcopy, before contract formation.
• Financial disclosure is required in the form of a Key Information Fact Sheet for franchisees. This sheet will provide a franchisor’s accurate and appropriate financial information.
• Franchisors will be required to disclose information pertaining to supply arrangements and supplier rebates.

Operating a Franchise

In order to maximise the franchise’s value, and ensure a beneficial cooperation between the franchisor and the franchisee, the proposed changes look to heavily regulate capital expenditure.

The proposed changes include:

• Franchisors are prohibited from requiring the franchisee to undertake significant capital expenditure associated with entering into, renewing, or extending the scope of the franchise agreement.
• Provided the disclosure document for an agreement discloses the rationale for any future expenditure, the franchisor must include all practicable information pertaining to any expenditure. Furthermore, such a disclosure must be discussed with the franchisee prior to the agreement.
• Further information must be provided to the franchisees with regards to the use of marketing and advertising costs by the franchisor. The Exposure Draft imposes civil pecuniary penalties for failing to provide such information.

Exiting a Franchise Agreement 

The proposed changes convey that both the franchisees and franchisors should be able to part from an agreement in a way that is reasonable and fair to both parties. 

The proposed changes include:

• Franchisees’ will be provided with a 7 to 14 day ‘cool off’ period, which essentially allows the franchisee to terminate the agreement after the ‘last of certain events’ have occurred (ie. the contract is signed).
• The franchisee may propose to the franchisor at any time during the franchise agreement, that they wish to terminate the contract. With this, the franchisor must respond to this request to terminate within 28 days. Provided an outcome is not reached, both parties will be awarded the right to utilise dispute resolution processes.
• In an attempt to resolve confusion surrounding trade clauses, situations where restraints on trade clauses are not to have effect has been amended. Now, franchisees need only avoid “serious breaches” of an agreement, opposed to a mere breach of an agreement.

Regulatory Framework, Compliance and Dispute Resolution

Though the proposed changes are heavily geared towards enhancing transparency between franchisees and franchisors, the Exposure Draft also introduces changes relating to compliance with the new regulatory framework, and dispute resolution. 

Here is what these these changes include:

• The new code will introduce “conciliation and voluntary binding arbitration”, in an attempt to improve and strengthen dispute resolution. 
• A doubling of civil penalties for breaches of the new regulatory framework will be enforced. This means that penalties will increase from 300 to 600 penalty units, or $50,000 to $100,000 fines.

When Will This Commence?

From 1 July 2021, the majority of these proposed changes will become effective. 

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