Franchising Reform Update: Exposure Draft

Franchising

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DATE PUBLISHED: April 6, 2021

For some time we have been providing updates on the Franchise Code of Conduct (the Code) and the commentary surrounding its potential reform. Now, it seems as though the Code is finally poised for a facelift, with the Australian Government’s exposure draft having closed to public submissions earlier this month.

The proposed changes seek to remedy the perceived imbalance between franchisors and franchisees. This article explores some of the changes that stakeholders can expect:

1.    DISCLOSURE OBLIGATIONS

Transparency in disclosure prior to establishing the relationship has long been a focus of the legislation. This area can expect a significant fine-tune. Some highlights are as follows:

  • Introduction of a ‘Key Facts Sheet’ – this will act as a short-hand summary of the critical aspects of the disclosure document. The precise content and form are yet to be agreed upon.
  • Additional information – franchisors will be required to provide further disclosure on capital expenditure (e.g. amount, timing and nature) and supplier rebates (e.g. nature of the benefit, identity of the supplier and details of any sharing of the benefit across the network).
  • Electronic or hard copy disclosure – the franchisee will be able to choose its preferred form of disclosure.
  • Accuracy of earnings information – franchisors will be required to acknowledge that earnings information is accurate to their knowledge unless otherwise stated.

2.    RESTRICTION ON PASSING ON LEGAL COSTS

It is commonplace for franchisors to pass on the costs associated with the preparation, negotiation and execution of the disclosure document and franchise agreement. The amendments seek to prohibit this activity by way of pecuniary penalties for offenders.

The prohibition will not extend to including legal costs under the umbrella of ‘joining fees’, however, it is aimed to reduce the risk that franchisees are liable for unknown amounts.

3.    MARKETING AND COOPERATIVE FUNDS

The reforms seek to improve clarity and accountability in the space of cooperative funds. Amongst the proposed changes are:

  • Re-drafting to substitute references to ‘advertising fees’ with ‘marketing funds and other cooperative funds’;
  • Expansion of obligations in relation to master franchisors; and
  • The introduction of civil pecuniary penalties for contraventions of the relevant sections.

4.    DISPUTE RESOLUTIONS

One aim of the exposure draft is to provide franchisors and franchisees with access to more affordable dispute resolution processes. This is to be achieved by:

  • Introducing voluntary binding arbitration and conciliation;
  • Enabling franchisees to engage in multi-party dispute resolution with other franchisees to resolve a dispute with the franchisor; and
  • Expanding the adviser functions of the Australian Small Business and Family Enterprise Ombudsman.

5.    EARLY EXIT

The exposure draft seeks to introduce a mechanism by which a franchisee can formally advise the franchisor if they desire to leave the franchise system. Franchisees may provide notice to which franchisors will be required to respond within a 28-day time frame. From this point, negotiations will commence with dispute resolution processes available if necessary.

6.    COOLING OFF PERIODS

Cooling-off periods will be subject to a number of changes including:

  •  A general extension from 7 to 14 days;
  •  Application to the transfer of existing franchises; and
  • The start date to be taken from the later of:
    • the commencement of the agreement; or 
    •  the date that the first non-refundable payment is made.

7.    TERMINATIONS

The Code currently allows franchisors to terminate agreements for a variety of ‘special conditions’. These included where the franchisee became bankrupt or insolvent, failed to hold a relevant license, acted fraudulently, or endangered public safety.

The exposure draft seeks to introduce a 7 day notice period should the franchisor wish to terminate for one of these reasons. The franchisee may then challenge the termination through dispute resolution avenues. In some cases, the franchisor may freeze the franchisee’s operations until such a dispute resolution has come to a close.

8.    DOUBLING PENALTIES

The maximum civil pecuniary penalty for breach of a provision is set to double from $66,600 to $133,200.

It is anticipated that most of the proposed changes will take effect from 1 July 2021. That being said, some of these changes are still in draft format. Their incorporation will be determined by how quickly the Bill can be introduced and passed through Parliament.

Watch this space for further updates as we follow the process.

If you require any further assistance or advice concerning adjustment to the anticipated reform of the Code, please do not hesitate to contact a member of our Commercial Division.

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