Fairness in Franchising: The Updated Franchising Code of Conduct

The Federal Government recently enacted the Competition and Consumer (Industry Codes – Franchising) Amendment (Fairness in Franchising) Regulations 2021 (Cth) (Regulations) and with it came a number of amendments to the Franchising Code of Conduct. As the name suggests, the amendments are substantially focused on implementing a fair balance of power between franchisees and franchisors.

The Regulations attempt to adjust the balance of power in favour of franchisees by providing additional rights to franchisees such as enhanced disclosure rights prior to entering a franchising agreement, improved protections during the terms of a franchise agreement, and increased rights in the case of disputes.

Key Changes

The key changes are summarised below.

Disclosure Obligations

Franchisors are required to provide to a prospective franchisee, prior to entry into an agreement, an Information Statement and the new ‘Key Facts Sheet’. The Information Statement has been updated in light of the Regulations and can be found here.

The new Key Facts Sheet must be completed by the franchisor and provided to a prospective franchisee. The additional information that the franchisor must supply in the Key Facts Sheet is extensive and includes a history of disputes with other franchisees, details about rebates, the franchisor’s interest in leases, information regarding earnings, the conditions around termination and any restraint of trade obligations, amongst other things. The new Key Facts Sheet can be found here.

Along with the two above documents, the franchisor must provide the prospective franchisee with the documents relating to the below:

Leases

Where the franchisor is leasing the premises and the franchisee will be subleasing or otherwise occupying the premises, the franchisee must be given a copy of the lease or a summary of the commercial terms.

The details that a franchisor must provide about their lease have widened and must be supplied within a month of either the franchisee occupying the premises or the signing of the agreement to occupy.

Capital Expenditure

If the franchisor requires the franchisee to undertake significant capital expenditure during the term of their agreement, they must specifically disclose the reasons for the expenditure, the amount and nature of the expenditure, and the anticipated benefits and risks.

This is an expansion of the franchisor’s previous requirements to merely consider the expenditure to be a ‘necessary’ capital investment.

Extended Cooling off Period

The cooling off period for franchisees has been extended from 7 to 14 days.

Termination

As well as the new disclosure documents now needing to state the early termination rights, the circumstances for early termination have also changed.

A franchisee may propose an early termination and the franchisor must reply to any such proposal within 28 days. A refusal by the franchisor to terminate must be given with reasons.

Previously, a franchisor was able to terminate the franchise agreement without notice for the special circumstances set out in the agreement. For any franchise agreement entered into after 1 July 2021, a franchisor must give 7 days’ notice for a special circumstance termination. If the franchisee disputes the termination, the franchisor cannot terminate the agreement for 28 days, however, it can require the franchisee to discontinue business operations during that time period.

Dispute Resolution

The amendments expand the avenues available for franchisees seeking dispute settlement, particularly through alternate dispute resolution (ADR). The franchisee now has access to conciliation, mediation and upon written agreement with the franchisor, voluntary arbitration as dispute resolution options.

Further, if an issue extends to more than one franchisee, the franchisees can now collectively seek multi-party ADR. This is a significant change for franchisees, as they may have more power raising a dispute with their franchisor with the collective weight of other franchisees along with them.

Notable Dates

It should be noted that the roll out of these amendments are staggered:

• The changes to dispute resolution took effect for disputes notified after 1 June 2021;
• The majority of the amendments took effect on 1 July 2021;
• The changes that relate to disclosure documents apply to any and all disclosure documents given on or after 1 November 2021.

Recommendations

Both franchisors and prospective franchisees should familiarise themselves with the new Key Facts Sheet and the new disclosure obligations that it comes with. Franchisors should look to implement changes into their practice and existing documents, whilst franchisees should become familiar with their new rights. Franchisors should update the terms of their standard agreement before entering into a new agreement with any proposed franchisee.

Whilst most of the changes only apply to franchise agreements entered into, renewed or extended on or from 1 July 2021, or in the case of the disclosure obligations those disclosure documents that are given from 1 November 2021, some of the changes such as dispute resolution will apply to existing agreements.

The above summary highlights some of the key changes introduced by the Regulations. If you have any questions about how the changes affect you or your franchise agreement, contact Gavin Parsons and Associates at gavin@gpalaw.com.au or on (02) 9262 4471.