Important alert for franchisors: Substantial amendments to the Australian Franchising Code strengthen protection for franchisees

The Regulations have been implemented in response to the Fairness in Franchising report published by the Parliamentary Joint Committee on Corporations and Financial Services in March 2019.  The report found that Government action was needed to improve the fairness and transparency of the franchising sector and prevent systemic exploitation of franchisees.  Understanding the new Regulations and complying with them is essential for all franchisors and master-franchisees operating systems in Australia.

Commencement dates

The majority of the changes will come into effect on 1 July 2021, with the main exception being the dispute resolution and complaints handling provisions, which came into effect on 2 June 2021.

Dispute resolution and complaints handling (took effect on 2 June 2021)

The Regulations seek to mitigate the perceived imbalances in bargaining power and resources between franchisors and franchisees in dispute resolution.  This is mainly achieved by expanding the dispute resolution avenues available to parties and conferring dispute resolution assistance functions, such as keeping lists of alternative dispute resolution (ADR) practitioners and receiving information about disputes dealt with under the Franchising Code, upon the Australian Small Business and Family Enterprise Ombudsman (Ombudsman).

The Regulations add conciliation and arbitration as dispute resolution mechanisms under the Franchising Code, expanding on the availability of mediation as a dispute resolution mechanism.  For mediation, conciliation, and arbitration, all parties must be in attendance.  A failure to attend is a civil penalty provision with a maximum penalty of A$66,600.

Notably, the new clause 40B establishes a procedural framework for the initiation and conduct of dispute resolution processes involving multiple franchisees that have similar disputes with a franchisor.  Significantly, the Regulations provide that “For the purposes of deciding whether to agree to resolve their disputes in the same way, the franchisees may discuss their disputes with each other, despite any confidentiality requirements provided in their franchise agreements”.  According to the Explanatory Statement, “This subclause ensures that clause 40B is consistent with the overarching policy of protecting franchisees’ abilities to freely associate with other franchisees for lawful purposes, such as to discuss the resolution of potential common disputes” (p 7).  This is an important provision for franchisors to be aware of, as confidential information communicated to one franchisee could be provided to another.  Further, the effect of clause 40B(6) is that the franchisor is required to attend the multi-party dispute resolution process and attempt to resolve the dispute even if the franchisor objects to the conduct of a single ADR process or the appointment of the ADR practitioner.

Disclosure before entry into franchising agreements or giving consent to transfer (take effect on 1 July 2021)

The Regulations aim to “improve the quality and scope of disclosure requirements, while […] bringing the most pertinent business information to the attention of prospective franchisees” (Explanatory Statement, p 9).

The Regulations introduce a new document, a key facts sheet, that the franchisor must provide to a prospective franchisee. The form of the key facts sheet is yet to be published.  Subject to limited exceptions, after entering into a franchise agreement, the franchisor must update the key facts sheet within 4 months after the end of each financial year.

The Regulations also introduce a disclosure obligation on franchisors upon receiving a request to consent to the transfer of a franchise.  Franchisors are now required to provide disclosure 14 days before giving consent.

Further, the Regulations expand the disclosure requirements in the Franchise Disclosure Document relating to the receipt and distribution of supplier rebates under paragraphs 10.1(j) and (k) of Annexure 1 of the Franchising Code.  The disclosure document must specify whether the franchisor, master franchisor or an associate of the franchisor will receive a rebate or other financial benefit from a supplier of goods and services to the franchisee.  If so, certain details must be disclosed, such as whether the rebate or other financial benefit is shared, directly or indirectly, with the franchisee.

Termination of franchise agreements (take effect on 1 July 2021)

The Regulations expand the rights of franchisees to terminate franchise agreements and offer franchisees greater protection in respect of termination by the franchisor for special circumstances.

The new clause 26(1) provides a cooling off period of 14 days following entry into the franchise agreement – extending the previous cooling off period of 7 days – for franchisees to terminate a franchise agreement.  Previously, the cooling off period did not apply to a transfer of an existing franchise agreement from an outgoing franchisee to an incoming one.  The new clause 26A extends cooling off rights to incoming franchisees who are transferred existing franchise agreements. 

Further, the Regulations insert clause 26B, under which “a franchisee may, at any time, give the franchisor a written proposal for termination of their franchise agreement on the terms specified in the proposal, despite the agreement”.  The franchisor must give the franchisee a substantive written response to the proposal for early termination, including reasons if they refuse the request, within 28 days. 

The Regulations also introduce a 7-day notice period where the franchisor purports to terminate the franchise agreement in special circumstances under clause 29, such as if the franchisee is convicted of a serious offence.  This period allows the franchisee the opportunity to serve a dispute notice and trigger a dispute resolution process prior to the termination.  Importantly, while the termination is halted for 28 days pending the dispute resolution process, the franchisor retains any contractual ability to require the franchisee to cease operating the business.

Capital expenditure (take effect on 1 July 2021)

The Regulations strengthen the general prohibition on significant capital expenditure being required of franchisees by extending recent changes to capital expenditure for automotive franchising to the broader franchising sector.  The Regulations remove the exception that the prohibition does not apply to expenditure that the franchisor considered necessary and justified with a written statement.

Additionally, the new clause 30A requires the franchisor to provide a prospective franchisee with “as much information as practicable” prior to entry into the franchise agreement, including the following:

1. the rationale for the expenditure;
2. the amount, timing and nature of the expenditure;
3. the anticipated outcomes and benefits of the expenditure; and
4. the expected risks associated with the expenditure.

Further, clause 30A requires the franchisor and prospective franchisee to discuss the expenditure, including the circumstances under which the prospective franchisee is likely to recoup the expenditure, before the prospective franchisee enters the agreement.

Restraint of trade (take effect on 1 July 2021)

The Regulations narrow the circumstances in which a restraint of trade clause in a franchise agreement will be enforceable.  A restraint of trade clause will have no effect after the franchise agreement expires if, immediately before the expiry, the franchisee was not in serious breach of the agreement or any related agreements.  The Franchising Code does not define the term “serious”.  What amounts to a serious breach will depend on the circumstances.

Conclusion

Franchisors in particular should familiarise themselves with the amendments to the Franchising Code and ensure that compliance processes are put in place.  The Regulations have implemented changes which strengthen protections for franchisees at all stages of the franchising process, from pre-entry disclosure to dispute resolution and post-expiry restraints of trade.  Some of the new prohibitions and restrictions are also civil penalty provisions, giving teeth to the enforcement power of the ACCC.