As set out in our February 2021 Update, the Government has amended the Franchising Code of Conduct.
In November 2020, an exposure draft of the new Code was issued and feedback and consultation. The amendments arose from the Government’s enquiry into “Fairness In Franchising” and subsequent report and recommendations (August 2020). The original report identified examples of conduct in the franchising sector involving breaches of the current Franchising Code, false and misleading representations and unconscionable conduct. The amended Code now introduces new measures to protect franchisees, improve the information available to franchisees and focus on improving franchisor standards of conduct. These changes will have a significant impact the manner in which franchisors currently engage with their franchisee’s particularly new franchisees. Non compliance will likely result in pecuniary penalties and other sanction.
The key amendments are as follows:
- Dispute Resolution: From June 2021, all disputes are now subject to a broader suite of alternative dispute resolution mechanisms including conciliation and voluntary arbitration as part of the dispute resolution process & the introduction of new requirements for Franchisors to participate in a multi-franchisee dispute resolution process (previously a franchisor could insist on dealing with each franchisee individually);
- Disclosure – Key Fact Sheet: From July 2021, all Franchisor’s must provide a new mandatory key facts sheet as part of pre-agreement disclosure. The fact sheet is created via a designated website and contains information similar to that contained int eh Disclosure Document;
- Disclosure Document – Disclosure: From November 2021, the Disclosure Document will include significant new details including disclosure requirements relating to rebates (including the new obligation to disclose the total amount of rebates or other financial benefits received in the previous financial year from each supplier, expressed as a single aggregate percentage of total group purchases from that supplier). The Code also imposes increased disclosure obligations in relation to marketing fund reporting obligations & increase disclosure obligations in relation to leases.
- Franchise Agreement – Termination: The Code now provides franchisees with an explicit avenue to request early termination of a franchise agreement whereby a Franchisor must provide a reply within a nominated timeframe.
- Franchise Agreement – Termination Dispute Notice: Franchisor’s are now required to give 7 days notice before seeking to terminate for ‘special circumstances’. The Franchisee has a right to object to the such termination by providing a termination notice and thus seeking to mediate the issue.
- Franchise Agreement – Cooling Off: A franchisee can now rescind (‘cool off’) out of a franchise agreement within 14 days from signing the agreement or when related party leasing documents are served (whichever is the latter).
- Franchisor Limitations: The Code, now prohibits the Franchisor from seeking to recover undisclosed significant capital expenditure and from contractually passing on future legal costs associated with the agreement where those costs are indeterminate at the time the agreement is signed. There are prohibitions upon franchisors from unilaterally varying an agreement with retrospective effect unless the written consent of the franchisee is obtained. The Code also now requires that only a serious breach of an agreement by a franchisee is relevant to the enforceability of a restraint of trade provision
The reforms proposed by the Code will take some time to play out especially as the Disclosure updates are not required until later this year. Having said that, the Code changes whilst beneficial to franchisee’s also make the whole franchising process more complex for both franchisors and franchisees.
We will in the next few updates set out some of the implication from the above changes.
For more information contact: Heath Adams Director-Lawyer.