Major changes to Australia’s Franchising Code of Conduct

A mandatory Franchising Code of Conduct (‘the Code’) has been in operation in Australia since 1 October 1998. It was revised on 1 January 2015 and the Australian Government is rolling out significant changes from 1 July this year (2021).

What is the franchising code of conduct?

In simple terms it regulates the conduct of franchisors and franchisees. Anyone who wants to franchise their business must comply with the Code and it includes such things as:

• disclosure requirements
• a good faith obligation
• a dispute resolution mechanism
• a cooling-off period
• procedures for ending a franchise agreement

The Australian Competition & Consumer Commission (ACCC) is tasked with regulating the code.

As of 1 July 2021, significant changes to the Code will be implemented which include:

Alternative Dispute Resolution (ADR) Process

Mediation will be removed and replaced with other ADR options such as arbitration, conciliation and mediation.

Capital Expenditure

The franchisor cannot require a franchisee to undertake significant capital expenditure during the franchise agreement term unless it is:

• disclosed in the disclosure document before entering, renewing or extending the term of the franchise agreement;
• approved by a majority of the franchisees;
• incurred to comply with legislative obligations; or
• agreed to by the franchisee

Cooling-Off and Transfer

The proposed changes to the cooling-off period include:

• extending it from seven days to 14 days;
• starting it on the later of (no longer the earlier of):
  • entry into an agreement (including ancillary documents); or
  • paying money under an agreement;
• applying the cooling off to transfers as well as new agreements; and
• if the franchisee provides leasing documentation.

Disclosure Obligations

These include:

• the introduction of a Key Facts Sheet, to be provided with the disclosure document the structure of which is yet to be finalised
• disclosure of additional information concerning capital expenditure, marketing funds, rebates and earnings information
• the ability of a franchisor to provide the disclosure document in an electronic or printed form
• franchisors who sublease or sub-licence a lease to franchisees must provide the lease and relevant lease disclosure statements when providing the disclosure document. Franchisors must provide these at least 14 days before executing the franchise agreement
• franchise transfers will require the disclosure document, even where a new franchise agreement is not required

Early Exit by a Franchisee

Franchisees can terminate their franchise agreement via a written notification at any time.

A Franchisor will have 28 days to provide a substantive written response to the proposal, to which mandatory good faith obligations will apply. If the franchisor does not agree to the termination, they must give reasons and the franchisee can go through the usual dispute resolution processes provided by the Code.

If a franchisor refuses a termination request without complying it could be seen to have breached the Code’s good faith obligations or to have engaged in unconscionable conduct.

Legal Costs

Franchisors will not be able to make the franchisee pay all or part of the legal costs to prepare, negotiate, or execute the franchise agreement. However, there are some exemptions to this if the franchise agreement provides a precise dollar figure.

Marketing Funds

The Code will replace the term ‘franchisors’ with the term ‘fund administrators’, capturing franchisors, individuals and master franchisors who operate a fund.

The fund administrator will no longer need to maintain a separate account with a ‘bank’ but can maintain a separate account with a ‘financial institution’ instead.

Penalties

Penalties imposed on non-compliant franchisors will increase from 300 penalty units to 600 penalty units which means a fine of up to $133,200.

Retrospective Variation

A Franchisor will not be able to vary the franchise agreement with retrospective effect unless the franchisee agrees unless the majority of the franchisees to be affected by the change agree to the variation.

Franchisors will still be able to terminate an agreement under the Code’s ‘special circumstances’ termination rights if they provide the franchisee with 7 days’ notice and reasons.

It is open to the franchisee if it disputes the termination, the parties can refer the matter to an ADR process if mutually agreed.

How can we help?

At FC Lawyers our team has decades of experience in assisting both franchisors and franchisees with their business needs and understanding their obligations under the Code. 

Contact our team today for an obligation free quote.