Franchise Code reforms: balancing rights and obligations between franchisors and franchisees

The recently released Competition and Consumer (Industry Codes – Franchising) Amendment (Fairness in Franchising) Regulation 2021 makes significant reforms to the Franchising Code of Conduct (Code), which will give franchisees a right to be provided with more information and remedies, particularly with respect to dispute resolution, disclosure and termination.

Many of the amendments will affect franchise agreements entered into, renewed or extended on or after 1 July 2021, however dispute resolution reforms will apply to disputes notified from 2 June 2021 and changes to the disclosure document will apply from 1 November 2021. These reforms follow a 2018 parliamentary inquiry that called for fairer and more transparent franchising laws.[1]

The 2021-22 Federal Budget, released last month, allocated $4.3 million for a new Franchise Disclosure Registry to assist potential franchisees in making informed decisions.[2] The current amendments to the Code do not include the obligation to place documents on the Registry, but we expect this change will be introduced as soon as the Registry is ready.

The Government has also previously proposed amending the Competition and Consumer Act 2010 (Cth) and the Code to double the maximum penalty for breaching the Code from $66,000 to $133,000.[3] While this change has not been made at this time, additional civil penalties apply to several of the amendments that will be implemented by the amended Regulation and we expect the increased penalty regime will be implemented soon. In addition, in the coming months, the Government is expected to release a discussion paper on further reforms for motor vehicle dealership franchising.

Below, we outline the key reforms to be aware of, and offer some recommended actions for franchisors.

Dispute resolution reforms

The reforms to franchise dispute resolution in the amended Code commenced on 2 June 2021 and replace the requirement for mediation with a requirement for Alternative Dispute Resolution (ADR) processes, which includes conciliation and arbitration (at the election of the parties).[4]

The Small Business and Family Enterprise Ombudsman (Ombudsman) will have additional responsibilities to maintain a list of professionals that can provide arbitration, conciliation or mediation services, and appointing one of those people to a franchise dispute if requested by a party.

The Ombudsman’s role has also been extended to receiving information about disputes and providing franchise dispute statistics to the Minister.

The reforms also allow two or more franchisees with similar disputes under their franchise agreements with the same franchisor to discuss their dispute with each other, and refer the matter to a single ADR process. This could be a significant change for franchisees who may feel more comfortable to raise a dispute with a franchisor in circumstances where they have the collective weight of other franchisees dealing with similar disputes. For franchisors, this could give rise to larger and more complex dispute proceedings to be managed.

Disclosure obligation reforms

Reforms affecting disclosure obligations that apply before entering a franchise agreement will mostly commence on 1 July 2021, while amendments to the information required to be included in a disclosure document will commence on 1 November 2021.[5]

In addition to existing documents that must be disclosed, the reforms will require the franchisor to provide the new ‘key facts sheet’ and a copy of the lease (if the franchise premises will be subleased to the franchisee).

The new mandatory key facts sheet is intended to highlight crucial information contained in the disclosure document. However, it will only need to include information the franchisor must already provide in the disclosure document and does not create any new substantive disclosure requirements.

Franchisors will be required to update the key facts sheet within four months of the end of each financial year and at the franchisee’s request. The layout and contents of the key facts sheet will be published on the Australian Competition and Consumer Commission website and will be designed in a standard, accessible and useful format for franchisees. While this document should be relatively easily prepared by a franchisor from the information already included in its disclosure document, there will need to be some care to be taken in crystallising information contained in disclosure documents in a succinct form for the key facts sheet.

Where a franchise is to be transferred, the franchisor cannot give their consent to the transfer until 14 days after disclosing all of the required documents to the new franchisee. This will safeguard the new franchisee from being rushed into accepting the franchise.

The amended Code will require that the disclosure document specifies whether the franchisor received a financial benefit or rebate from a supplier, including details of the amount of rebates as a percentage of the total purchases from that supplier (unless the franchisee will directly receive the whole of the benefit or rebate), whether it will be distributed to the franchisees and how much will be shared. However, these obligations do not apply to lease incentives. This increased disclosure of rebates is intended to improve the franchisee’s ability to identify potential conflicts of interest with the franchisor.

Other key new disclosure requirements include:

• an improved Information Statement, which must be provided to the franchisee as soon as discussions commence and before it is given the disclosure documents;
  
  
• the disclosure document must include the percentage of franchisees in a franchise system that have been involved in some form of ADR process;
  
  
• disclosure of any interests the franchisor has in a particular lease arrangement for the franchised business, such as landlord or head lessee;
  
  
• additional disclosure requirements around leases, capital expenditure and earnings information; and
  
  
• increased financial disclosure, including additional information requirements for goodwill.

Termination of franchise agreement reforms

From 1 July 2021, franchisees will be able to request early termination of their franchise agreement at any time and the franchisor will be required to give a substantive response to that request within 28 days.

Where a franchisor wishes to exercise their ‘special circumstances’ termination right, they will now have to give seven days’ notice of the proposed termination to the franchisee. If the franchisee disputes the proposed termination they can refer the dispute to an ADR process and the franchisor will not be able to terminate the franchise agreement until 28 days after the notice was given. However, the franchisor can require the franchisee to stop operating the business while the ADR process is underway to protect their brand. Many franchisors will be concerned about how this new process will be managed in those limited ‘special circumstances’ where a franchisor wishes to terminate very quickly. The interim right to stop the franchisee from operating the franchise may be a useful compromise, but will require careful management by a franchisor.

The reforms will also extend the cooling off period from seven days to 14 days and the cooling-off period will only begin when the franchisee has received all the necessary documentation, including any relevant retail leases. Franchisees who purchase an existing franchise from an old franchisee will also now enjoy a cooling-off period of the earlier of 14 days from becoming the new franchisee or the day the new franchisee takes possession and control of the franchised business.

These changes may require franchisors to revisit their processes and procedures in relation to the commencement of operation of new franchises and the steps that would be taken if a franchisee exercises its cooling off rights. Ultimately, franchisors should be implementing processes and procedures which try to ensure that new franchisees enter the franchise agreement fully informed and prepared such that they are unlikely to exercise the cooling-off right.  

Changes for motor vehicle dealerships

The reforms also include changes for motor vehicle dealerships, also commencing on 1 July 2021. To ensure that an increasingly common form of dealership structure remains subject to the Code, a ‘motor vehicle dealership’ will now include a business of selling motor vehicles that is conducted by a person (for the purposes of the Code, the franchisee) who sells the motor vehicles as an agent for a principal (for the purposes of the Code, the franchisor).

No doubt as a consequence of the Holden franchise exiting the Australian market and the issues that were raised in relation to dealer compensation, the amended Code introduces an obligation for a franchisor to compensate the franchisee if the franchise agreement is terminated before it expires because the franchisor either withdraws from the market, rationalises its networks in Australia or changes its distribution models in Australia.

Accordingly, the franchise agreement must:

• specify how compensation will be determined;
  
  
• allow the franchisor to buy back or compensate the franchisee for new road vehicles, spare parts and special tools if the franchise agreement is not renewed or is terminated before it expires due to the franchisor withdrawing from the Australian market, rationalising its networks or changing its distribution models; and
  
  
• not purport to exclude any compensation the franchisee may be entitled to if the agreement is terminated before it expires other than by the franchisee breaching the agreement.

The reform also provides that the franchise agreement must give the franchisee a reasonable opportunity to make a return on any investment required to enter the agreement.

Oil Code reforms

There have been no changes to the Oil Code announced with the changes to the Franchising Code. However, it has been previously indicated by the Government that changes to the Oil Code will likely be made following the mid-term review of the Oil Code to ensure consistency between relevant parts of the Oil Code and the Franchising Code.

Recommended actions for franchisors

Franchisors should consider the following priority actions:

• amending franchise agreements and related agreements that are to be entered into, renewed or extended on or after 1 July 2021 to ensure they are consistent with the amended Code;
  
  
• considering whether current processes, procedures and timing need to be altered to reflect the amended Code (e.g. in relation to new disclosure obligations, cooling off periods and disclosures relating to leases); and
  
  
• amending the disclosure document to be given on or after 1 November 2021 to ensure it includes the additional disclosure requirements relating to rebates, leases, capital expenditure and earnings information.