The reform space
Whilst changes to the Code have been anticipated for some time, the exact detail has only just become legislated.
Australia’s Parliamentary Joint Committee on Corporations and Financial Services released its Fairness in Franchising Report in 2019. The Committee’s report identified weaknesses in parts of the Australian franchising sector that particularly impact small business owners who run franchises.
In 2020 the Australian Government released its response to the Committee’s findings, and then released an Exposure Draft proposing a swathe of changes to the Code. The proposed changes were intended to “introduce new measures to protect franchisees”, “improve the information available to franchisees” and “lift franchisor standards of conduct”.
Submissions in response to the Exposure Draft closed on 4 December 2020 and the final form of the proposed amendments was released on 1 June 2021.
Under the new Code, the Information Statement which the franchisor must provide the franchisee has been updated to a new standard form.
Further, in addition to its existing disclosure obligations, a franchisor must now:
1 supply the prospective franchisee with a “Key Facts Sheet”, which summarises the information found in the Disclosure Document (which is contained in Annexure 1 of the Code);
2 disclose to the prospective franchisee, in the Disclosure Document, additional information concerning capital expenditure, marketing funds, rebates and earnings information; and
3 if it intends to sublease premises to the prospective franchisee, provide them with the lease.
There are also now further limits on what a franchise agreement can provide for.
Among other things, a franchise agreement now cannot:
1 require a franchisee to undertake significant capital expenditure during the term of the franchise agreement;
2 require a franchisee to pay any of the franchisor’s legal costs of preparing, negotiating or executing the franchise agreement unless a fixed amount of Australian dollars is specified in the agreement; or
3 allow the franchisor to unilaterally vary the franchise agreement with retrospective effect, without the franchisee’s consent.
Termination of agreements
When it comes to termination, the new Code has extended the “cooling-off” period following entry into a franchise agreement, during which the franchisee may terminate, from 7 days to 14 days, and this will apply to agreements being transferred as well as those being entered into for the first time.
Further, in addition to existing termination rights, franchisees now have a right to propose to terminate a franchise agreement at any time, following which the franchisor must provide a written response (which must include a reason for any refusal to terminate) within 28 days.
Alternative dispute resolution
The new Code introduces a more exhaustive alternative dispute resolution (ADR) mechanism whereby all franchise agreements must allow for disputes to be resolved through both mediation and conciliation, and may be resolved through arbitration.
Finally, the civil penalties which are applicable in the event of a breach of the Code have been doubled from approximately AUD 50,000 to AUD $100,000.
The majority of the changes took effect on 1 July 2021, with some of the changes relating to the Disclosure Document not commencing until November 2021.
Competition and Consumer (Industry Codes—Franchising) Regulation 2014 (Code) available on IDI’s Australia legislation page
Read also IDI’s updated report on franchising in Australia
Tony Conaghan, IDI Country Expert for franchising in Australia