Franchising Code amendments locked in

Franchising and legal compliance teams: take note 7 min read

Long-awaited amendments to the Australian Franchising Code have finally been implemented.

Changes take effect on 1 July 2021, other than changes to dispute resolution provisions (which came into effect on 2 June 2021), and changes to disclosure documents (which take effect from 1 November 2021). The amendments will increase the burden on franchisors, particularly in relation to pre-contractual disclosure, with new and amended documentation required going forward.

These amendments will require changes to franchise agreements entered into, renewed or extended on or after 1 July 2021. Amendments that expressly require changes to be made to disclosure documents will apply to disclosure documents given to franchisees from 1 November 2021. This means existing franchise agreements and disclosure documents will not need to be amended right away.
Some amendments do not require amendment to documentation, but will govern all agreements, regardless of their terms or when they were entered into. Most notably, these include the dispute resolution changes.
Further amendments to the regulatory framework are expected in the near future, namely increased penalties for breaches of the Franchising Code and creation of a Franchise Disclosure Registry.

Who in your organisation needs to know about this?

Franchising and legal compliance teams.

Overview of amendments and commencement

As flagged in our earlier Insight, the Federal Government has legislated changes to the Franchising Code to implement its response to the 2019 Fairness in Franchising Report. Although the changes were scheduled to take effect in mid-2021, the changes took longer to be legislated than commentators expected, and the amendments were finally made by regulation by the Governor-General-in-Council, just days before the first provisions commenced on 2 June 2021 – and were only made effective by registering on the Federal Register of Legislative Instruments on 1 June 2021. The table below summarises the key changes and the dates from which they take effect.

All franchise agreements, regardless of date (from 1 July 2021, except 2 June 2021 for dispute resolution changes)
More flexibility in dispute resolution (already commenced – see below) Marketing funds – new penalties for misuse and technical changes regarding financial statements for and administration of marketing funds Enhanced disclosure of information relating to leased premises where franchisors sub-lease to franchisees Franchisor must provide disclosure documents in a form requested by the franchisee (eg printed, electronic, or both)
All franchise agreements entered into, extended or renewed on or after 1 July 2021
Increased disclosure requirements, including a new Key Facts Sheet summarising the disclosure document, disclosures about significant capital expenditure (see below) and an amended Information Statement Extended and expanded cooling off period, to 14 days, and cooling off will apply to transferees of franchise agreements Franchisees can propose to terminate the franchise agreement at any time by giving a written proposal of termination to the franchisor and the franchisor must respond (no obligation to accept) Seven days' written notice required for terminations pursuant to clause 29 of the Franchising Code - franchisors can no longer immediately terminate in such circumstances, and where a franchisee disputes the termination, further limitations will apply Limitation on charging franchisees for franchisor legal costs relating to preparing, negotiating or executing the agreement Prohibition on franchisors unilaterally varying agreements retrospectively Franchisors cannot use trivial or historic breaches of franchise agreements to justify enforcing restraint of trade clauses where they would otherwise be unenforceable based on existing provisions relating to entitlement to goodwill Dispute resolution mechanisms must be set out in agreements Only for new vehicle dealerships – five formerly voluntary best practice principles are now mandatory
Disclosure documents given to franchisees on or after 1 November 2021 (including during the term of an agreement)
Greater detail to be disclosed about supplier rebates, including but not limited to the nature of the benefit and if that benefit is shared with the franchisee Greater detail to be disclosed regarding any lease interests Greater detail to be included about arbitration of disputes, the early termination of the agreement and rights relating to goodwill If the franchisor provides earnings information, a statement as to the accuracy of that information will be required

Key amendments and implications

The amendments include changes to a large number of provisions. Of greatest significance to most franchisors will be the following key changes.

Dispute resolution

Most dispute resolution changes commenced on 2 June 2021 and apply to disputes arising after that date under any franchise agreement, regardless of the terms of the individual agreement.

The amendments expand the avenues available for resolving a dispute under a franchise agreement, with the following key changes:

conciliation is available in addition to mediation;
arbitration can be used if the parties agree; and
a procedure is provided for multiple franchisees to run a dispute together.

Separately and in addition to these amendments to the Franchising Code, a class exemption issued by the Australian Competition and Consumer Commission now allows multiple franchisees to collectively bargain without requiring permission. This is expected to increase coordination between franchisees, supporting negotiation of franchise agreement terms in a group, as well as multi-franchisee settlement of disputes.

Franchisor pre-contractual disclosure

Several amendments will necessitate increased franchisor disclosure. The majority of this pre-contractual disclosure will occur via additions to the disclosure document. Franchisors will be required to discuss significant capital expenditure (see below). Franchisors will need to develop a new Key Facts Sheet, a short-form summary of the disclosure document. The Government has created a 'smart form' for the Key Facts Sheet, which can be accessed here.

Although not implemented in this tranche of amendments to the Franchising Code, a Franchise Disclosure Registry is expected to be established, which is likely to include a public register of disclosure documents. While updating disclosure documents over the coming months, franchisors should bear in mind their disclosure documents may become public documents.

Significant capital expenditure

The amendments place an increased emphasis on pre-contractual disclosure of significant capital expenditure that will be required from franchisees during the term of a franchise agreement. Franchisors will no longer be able to require expenditure simply because it is justified – the expenditure will need to be disclosed before entering the agreement or agreed to during the term.

Most franchisors will need to amend disclosure documents to provide greater detail regarding expenditure that may be required during the term of an agreement and circumstances in which such expenditure is likely to be recouped. These changes apply to any agreements entered into, extended or renewed after 1 July 2021. This means that, while the amendments that expressly require changes to disclosure documents will only apply to disclosures made after 1 November 2021, franchisors may need to make additional disclosures before then to comply with the new requirements regarding significant capital expenditure.

For the automotive sector, the same changes to disclosure requirements regarding significant capital expenditure were implemented last year for new vehicle dealerships. We assisted automotive clients with the exercise of responding to these changes. Other franchisors will now also need to consider what expenditure they may require franchisees to incur, as their ability to impose expenditure that is not disclosed in the disclosure document will now be far more limited.

Penalties

There are new civil penalties for breaches involving marketing funds. Even prior to this amendment, misuse of marketing funds has attracted substantial scrutiny with significant penalties imposed for misuse. Franchisors should continue their efforts to ensure they comply with marketing fund requirements.

Under the Exposure Draft for these amendments, released in November 2020, all civil penalties under the Franchising Code were set to double. This general increase in penalties did not appear in the final version of these amendments, but is expected to resurface in a separate amendment. Far more substantial penalty increases have also been floated that would see Franchising Code penalties rise to match the $10 million penalties available under the Competition and Consumer Act 2010 (Cth).

Full amendments

The amending regulation can be accessed here. The explanatory statement can be accessed here.

Actions you can take now

Consider whether you will be entering into, renewing or extending any franchise agreements on or after 1 July 2021 and plan ahead, taking these amendments into account.
Contact us for assistance with ensuring franchising documentation complies with these amendments.
Watch for further amendments, including the mooted increase in penalties and the proposed Franchise Disclosure Registry.

Franchising Code amendments locked in – what you need to know