The Government has indicated that they propose to amend the Franchising Code of Conduct. In November 2020, an exposure draft of the new Code was issued and feedback and consultation is underway. The amendments arise 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 (if adopted) will introduce 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 proposed in the draft version of the Code are as follows:
1. Disclosure Requirements
1.1 Disclosure (in the form of the mandated Disclosure Document) has been a fundamental part of the regulatory regime for many years. Aimed at giving relevant information to franchisee’s for their proper and informed decision making, the Disclosure Document is a fundamental part of the Code’s protections. The key changes proposed to the Disclosure are:.
- In addition to the usual requirements of disclosure a “Key Facts Sheet” must now be provided. This document will be aimed at highlighting critical information for prospective franchisees to consider.
- The disclosure document will now also require disclosure as to the arbitration of disputes, early termination methods and rights to goodwill.
- In terms of supply arrangements, Franchisor’s will be required to give greater transparency as to the benefits the Franchisor y may receive from the supply of goods or services to the franchisee.
2. Implied Terms in the Franchise Agreement
2.1 The Code will also imply certain terms into all franchise agreements, these terms are meant to re-balance the power dynamics of a franchisor issuing ‘take it or leave it’ contracts. Those changes include:
- Franchisors are prohibited from requiring franchisees to pay all or part of the franchisor’s costs of legal services relating to preparing, negotiating or executing the agreement or related documents;
- Franchisors are not be permitted to require franchisees to undertake significant capital expenditure in relation to the business during the term of the agreement unless such expenditure is disclosed before entering or extending agreements, costs incurred to comply with legislative obligations or any expenditure agreed by the franchisee. If this is the case, the franchisor must provide information such as the rationale, amount, timing, benefits and risks of the expenditure.
- Franchisors are prohibited from varying franchise agreements retrospectively and unilaterally without the franchisee’s consent.
- The cooling off period is extended from 7 to 14 days after entering into a franchise agreement and in circumstances where there is a transfer of an agreement (i.e. on sale).
- Franchisees will also be able to propose to terminate the agreement at any time, and the franchisor must respond with a written response within 28 days. If the Franchisor does not accept a right to terminate, the matter can then be referred to a dispute resolution process.
- Franchisors right of immediate termination on certain grounds (such as insolvency, fraud, safety and convictions of serious offences) is now subject to the giving of 7 day’s notice of termination.
3. Dispute resolution
3.1 The Code nominates the franchising dispute resolution advisor functions to the Australian Small Business and Family Enterprise Ombudsman. In practice, the ASBEFO has been operating as the ‘concierge’ for such disputes since at least 2020.
3.2 More importantly, the Code now introduces an option for the parties to ‘arbitrate’ disputes in lieu of mediation or court action. Proposed as a costs saving exercise, the arbitration process may result in quicker adjudication of issues in a less formal setting.
There is no doubt that whilst the franchising sector is heavily regulated (especially in comparison to other business sectors and other overseas jurisdiction) that regulation has not resolved the problems that face the sector. The numerous enquiries, reports and multiple amendments to the ‘codes of conduct’ indicate that problems still occur within the sector that impact the livelihoods of all participants. The proposed reforms are complex and whilst seeking to address the interests of franchisors and franchisees, the changes will likely lead to complication and administrative difficulties for Franchisors and ultimately franchisees trying to navigate the system.
Written by Heath Adams.