PROPOSED CHANGES TO THE FRANCHISING CODE
The Government issued its response to the inquiry into the operation and effectiveness of the Franchising Code of Conduct report on 20 August 2020.
The Government examined the feasibility of a number of the recommendations made in the Report.
The Government recognised the importance of the franchising sector to the economy as a source of jobs and growth and supported the finding that action is needed to improve fairness and transparency for franchisees.
However, a number of recommendations made in the Report will not be adopted so as to avoid unnecessary red tape.
Interestingly, the Opposition introduced a Bill into the senate on 2 September 2020. The Bill focuses on introducing arbitration into the dispute resolution process but also proposes further increases to penalties for breaching the Franchising Code of Conduct.
Until the changes are made final it is hard to say whether all of the proposed reforms in the Response will be made and what this means from a practical perspective. The Government has not announced its timing for introducing its amendments to the Franchising Code. It is expected to occur later this year or early next year. The Opposition Bill may impact this timing.
GOVERNMENT RESPONSE AND KEY CHANGES
KEY DISCLOSURE INFORMATION FACT SHEET
- Require a franchisor to prepare and give to a prospective franchisee a Key Disclosure Information Fact Sheet containing prescribed financial and other information. This may be for a new (greenfield) franchise or an existing franchise.
- Require a disclosure document to be made available both in electronic and hardcopy form.
- To clarify that the Information Statement (Annexure 2 to the Franchising Code) must be provided to prospective franchisees separately and prior to providing the disclosure document and other disclosure materials.
- Amend the Information Statement (Annexure 2 to the Franchising Code) to include reference to the ACCC’s franchisee manual and emphasise key rights and information.
- Implement technical changes to clause 13 of the Franchising Code to increase transparency about retail leases with the exception that franchisors will not need to provide documents they do not possess.
- Require a franchisor’s interest in a leasing arrangement to be disclosed in the Key Disclosure Information Fact Sheet.
- Amend the Franchising Code so that any financial information must be part of the disclosure document and require disclosure documents to include a statement on the accuracy and appropriateness of the franchisor’s financial information.
SUPPLY ARRANGEMENTS AND REBATES
- Require franchisors to disclose information on supplier rebates, commissions and other payments and to disclose any master franchisor controls and/or rebates from suppliers. Disclosure of financial information will be improved through the introduction of a Key Disclosure Information Fact Sheet.
COOLING OFF PERIODS
- To clarify that the cooling off and disclosure periods are measured in calendar days and clarify that the 14-day disclosure period must begin at least 14 calendar days before signing a franchise agreement.
- Allow a franchisee to terminate the franchise agreement at any time up to 14 days after the last of certain events have occurred such as the agreement being signed, payment is made, disclosure documents are received and, if applicable, a copy of the terms of the lease being received.
- Cooling off rights will be extended to the transfer of an agreement to a new franchisee and where the franchisee enters a substantially new agreement with the franchisor (a deemed transfer) but not to renewals or extensions. This means a purchaser of a franchise off an existing franchisee may terminate after settlement as a result of cooling off. A practical solution for a franchisor would be to ensure that the form of the contract does not allow settlement to occur, and for it to remain conditional on, the cooling off period to expire.
- The Government will amend the relevant clauses of the Franchising Code to apply recent automotive franchising changes to the broader franchising sector:
(a) Prohibiting franchisors requiring franchisees to undertake significant capital expenditure except where it has been disclosed before entering into the franchise agreement, is legally required, or is agreed to by the franchisee during the term.
(b) Imposing an obligation on the franchisor to discuss expenditure prior to entering into an agreement.
(c) Requiring disclosure of the circumstances under which the franchisee is likely to recoup the expenditure.
(d) Specifying, as far as practical, the amount, timing and nature of the expenditure to be provided.
MARKETING AND COOPERATIVE FUNDS
- Clarify requirements relating to the treatment and reporting of cooperative funds where regular payments are required to cover advertising and marketing activities.
- The Government will amend the Information Statement and use educational materials to improve franchisees’ understanding that, if the franchisor becomes insolvent, they may lose the benefit of shared funds such as marketing funds.
DISPUTE RESOLUTION AND VOLUNTARY ARBITRATION
- To clarify that if the person conducting the dispute resolution process determines it is appropriate to conduct a multi-party process the franchisor cannot refuse to take part in that process.
- A voluntary arbitration has been proposed and some in the sector have concerns as to how effective this would be. One of the views internationally on Australian franchising law is the success of its mediation process. Some concerns are that franchisees may view arbitration as their ‘golden ticket’ and be less likely to engage in the mediation process as effectively as has occurred in the past.
- Amend disclosure requirements to ensure end-of-term arrangements for franchisee goodwill are clearly specified.
- Require franchisors to clarify a franchisee’s entitlement to goodwill in the franchise agreement and include this information in the Key Disclosure Information Fact Sheet.
- Amend the Franchising Code to include provisions to facilitate a negotiated early exit of the franchise agreement (that balances the rights and interests of the franchisor and the franchisee). The banking sector have previously opposed such early exit arrangements as they lend to both franchisees and franchisors based on the contract term.
- Amend clause 29 of the Franchising Code to require the franchisor to provide the franchisee with seven days’ notice of a proposed termination in special circumstances, so that a mediator or arbitrator can assist the parties to negotiate.
RESTRAINT OF TRADE CLAUSES
- Increase prospective franchisees’ awareness of the effect of restraint of trade clauses and clarify what constitutes a breach of clause 23 of the Franchising Code.
- Amend the Information Statement to warn prospective franchisees of the need to obtain advice about restraints of trade before entering the agreement.
COMPLIANCE AND ENFORCEMENT
- Double the civil penalty for breaches of the Franchising Code from 300 to 600 penalty units.
- Amend the Franchising Code to apply penalties for breaches of clauses that relate to the use of marketing funds.
BAN ON PASSING ON LEGAL FEES
- The Government will prohibit (and have pecuniary penalties for) franchisors passing on the legal costs of preparing, negotiating and executing documents to the franchisee (except where it is already incorporated into a joining fee). To consider making amendments relating to retrospective variations to an agreement by a franchisor.
- There is some contention as to what legal costs relate to, and whether this includes the management of the documentation process (normally called a ‘Documentation Fee’) or simply passing on legal costs for negotiating the terms of the franchise agreement. It is considered that passing on legal costs for negotiating terms deters franchisee from requesting amendments for fear of increased legal costs.
- One practical solution for franchisors would be to increase their initial franchise fees, renewal fees and transfer/assignment fees to cover the ‘Documentation Fee’. Franchisors and other parties involved need to be careful as it is proposed that pecuniary penalties will apply for a breach.
OTHER RELEVANT ACTIONS
The Response identified a number of other actions the Government intends to take including:
- Create a public register of franchisors;
- Create a franchising specific website to make it easier to access information support for the sector; and
- Improve the efficiency of dispute resolution assistance and make it clearer that the ASBFEO (Small Business Ombudsman) can assist with franchise disputes. The Opposition has introduced a bill to introduce arbitration as part of the dispute resolution process.
A copy of Response can be accessed here.
The information contained in this article is general in nature only. Please contact Rouse Lawyers if you wish discuss in more detail.