Government releases its response to the 2019 Franchising Code Review

On 20 August 2020, the Australian Government released its long awaited response (Government Response) to the Joint Committee on Corporations and Financial Services inquiry (Inquiry) into the operation and effectiveness of the Franchising Code of Conduct report: Fairness in Franchising (Report).

The Government established an interagency taskforce on 10 April 2019 to examine the feasibility and implementation of a number of the recommendations made in the Report.

Whilst the Report identified examples of conduct in the sector that were seen as problematic, particularly in relation to breaches of the Franchising Code, false and misleading representations and unconscionable conduct, the Government did not conclude those instances were widespread.

The Government recognised the importance of the 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. Many of the recommendations made in the Report will not be adopted by Government. Some of the proposed actions that Government have indicated they will adopt will have practical and commercial implications that will need to be worked through by industry participants. Ultimately until the changes are finally drafted it is difficult to say with certainty whether all of these proposed reforms will be made and what practical impact they will have on the franchise sector.

Key amendments to be made to the Franchising Code

The Government Response indicates the amendments they intend to make to the Franchising Code including the following:

Non-financial disclosure

1. To require a disclosure document to be made available both in electronic and hardcopy form.
2. To make technical changes to clause 13 of the Franchising Code to increase transparency about retail leases but also to clarify that franchisors will not need to provide documents they do not possess.
3. To require a franchisor’s interest in a leasing arrangement to be disclosed in the Key Disclosure Information Fact Sheet.

Financial disclosure

4. Amend the Franchising Code so that any financial information (such as earnings information) must be part of the disclosure document and require disclosure documents to include a statement on the accuracy and appropriateness of that financial information provided by the franchisor.

Information Statement

5. To clarify that the Information Statement (Annexure 2 of the Franchising Code) must be provided to prospective franchisees separately and prior to providing the disclosure document and other materials.
6. To amend the wording of the Information Statement in Annexure 2 to include reference to the ACCC’s franchisee manual and emphasise key rights and information.
7. To amend the Information Statement and use educational materials to help improve franchisee’s understanding that if the franchisor becomes insolvent they may lose the benefit of shared funds such as marketing funds.
8. To amend the Information Statement to warn a prospective franchisee of the need to obtain advice about restraints of trade before entering into the agreement.
9. To amend the Information Statement to emphasise the importance of prospective franchisees understanding the Franchising Code requirements before entering into the agreement.
10. To amend the Information Statement to advise prospective franchisees of their obligations including relating to employment matters and compliance with relevant laws.

Key Disclosure Information Fact Sheet

11. To amend the Franchising Code to require a franchisor to prepare and give to a prospective franchisee a Key Disclosure Information Fact Sheet containing prescribed financial and other information.

Supply arrangements and rebates

12. To oblige franchisors to disclose information on supplier rebates, commissions and other payments and any master franchisor controls and or rebates from suppliers – this information may be included in the Key Disclosure Information Fact Sheet.
13. To clarify that the cooling off period is measured in calendar days and to clarify that the disclosure period must begin at least 14 days before signing a franchise agreement.

Cooling off periods – extended to 14 days

14. To allow a franchisee to terminate the franchise agreement at any time up to 14 days after the last of certain events have occurred. Those events include the agreement being signed, payment being made, disclosure documents being received and if applicable a copy of the terms of the lease being received.
15. To extend the statutory right to cool off to a transfer of an agreement to a new franchisee; where the transferee is required to enter into a ‘substantially new agreement’ with the franchisor. It will not be extended to renewals or extensions of agreements.

Capital expenditure

16. To extend some of the recent changes to the Franchising Code for the Automotive sector to the sector as a whole including:
    1. 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. A business justification statement will no longer be enough
    2. A new obligation to require the franchisor to discuss expenditure prior to entering into an agreement
    3. Requiring disclosure of the circumstances under which the franchisee is likely to recoup the expenditure
    4. Specifying (as far as practical) the amount, timing and nature of the expenditure to be provided.

Marketing and cooperative funds

17. To clarify requirements relating to the treatment and reporting of cooperative funds where regular payments are required to cover advertising and marketing activities.

Multi-party dispute process

18. 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.

End of term franchisee goodwill

19. Amend disclosure requirements to ensure end of term arrangements for franchisee goodwill are clearly specified.
20. Require franchisors to clarify a franchisees entitlement to goodwill in the franchise agreement and include this information in the Key Disclosure Information Fact Sheet.
21. After consultation with the sector, to 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).
22. To clarify what constitutes a breach of clause 23 of the Franchising Code (and increase prospective franchisees awareness of the effect of restraints of trade).
23. To make technical changes to clause 23 and monitor their effectiveness with respect to restraints of trade.

Special circumstances (immediate) termination to be subject to dispute resolution

24. To oblige a franchisor seeking to terminate for special circumstances under clause 29 of the Franchising Code, to give not less than 7 days’ written notice of the proposed circumstances so that a mediator or arbitrator can assist the parties to negotiate. This change will mean that the Part 4 dispute processes will commence to apply to a termination following the procedure in clause 29. It also appears to mean a termination without notice will be prohibited even in special circumstances.

Penalties and enforcement

25. Double the civil penalty provisions for breaches of the Franchising Code from 300 to 600 penalty units.
26. Make clause 31 of the Franchising Code containing provisions relating to marketing and advertising subject to civil penalties for contravention.

Prohibit legal costs being passed on for issuing documents

27. Amend the Franchising Code to prohibit a franchisor passing on its legal costs of preparing, negotiating and executing documents to the franchisee (unless it is already incorporated into a joining fee). It will make that prohibition subject to a civil penalty provision.
28. To consider making amendments relating to retrospective variations to an agreement by a franchisor.

Changes to dispute resolution provisions

29. Amend the Franchising Code to include dispute resolution provisions similar to the Dairy Code that relate to voluntary Arbitration. The Dairy Code was introduced in December 2019 and has a dispute resolution provision that includes improvements to the mediation provisions that are not currently in the Franchising Code. It is likely that the Franchising Code will be amended to incorporate those provisions for consistency.

Future actions to be taken by Government

The Government Response also identified a number of actions that Government intends to take which includes:

1. Establishing a public register of franchisors;
2. Developing in consultation with the sector a Key Disclosure Information Fact Sheet containing information taken from the disclosure document (which will be given to the prospective franchisee like a key summary sheet);
3. Establishing a franchising specific website to make it easier to access information support for the sector;
4. Amending the CCA to make it clear that should a supplier rebate to a franchisor result in a substantial lessening of competition it will trigger a breach of the CCA;
5. Instructing the Department of Industry, Science, Energy and Resources (Dept) to write to the Australian Accounting Standards Board to ask it to consider whether guidance for auditing of marketing and cooperative funds is required;
6. Working with the sector to emphasise the importance of developing best practice financial statements;
7. Merging the role of the OFMA into the ASBFEO to improve the efficiency of dispute resolution assistance and make it clearer that the ASBFEO can assist with franchise disputes;
8. Ensuring all franchisees can access the ASBFEO’s dispute resolution service;
9. Implementing a voluntary binding arbitration model by appointing a Franchising Arbitration Advisor (using a model similar to the Dairy Industry Code);
10. Introducing conciliation to complement existing dispute resolution provisions;
11. Supporting ASBFEO’s power to write to the ACCC and other regulators notifying them of systemic or serious matters that have come to their attention;
12. Providing best practice guidance on timeframes for commencement and completion of the dispute resolution process;
13. Consulting with the sector to develop amendments to the Franchising Code to facilitate negotiated early exit that balance the rights and interests of franchisors and franchisees;
14. Supporting and providing franchisees with opportunities to provide their views on franchising policy, regulation and legislation through the ACCC, ASBFEO, Dept and State and Territory Small Business Commissioners;
15. Educating franchisees on use of ‘no agent’ and ‘ entire agreement’ clauses through the information statement and get the ACCC to refer to these terms in its educational material;
16. The Government will ban and prohibit a franchisor passing on its legal costs of preparing, negotiating and executing documents to the franchisee (unless it is already incorporated into a joining fee). A contravention may lead to a financial penalty;
17. The Government will educate the sector on wastage and shrinkage payments by franchisees and existing protections of the Franchising Code and ACL to deal with these including using existing protections such as good faith and ACL protections relating to false and misleading representations;
18. The Government supports consistency between the Oil Code and Franchising Code and will conduct a mid-term review of the Oil Code;
19. The Government will work with stakeholders to develop best practice models in relation to the process by which a franchisor makes unilateral variations to contracts and subsidiary documents; and
20. The Government is taking action in relation to unfair contract terms (UCTs) undertaking a separate reform process to strengthen the protections for small businesses from UCTs. Submissions closed on 27 March 2020 and they received nearly 80 submissions.

Actions already taken by Government

Government has already taken some actions to implement the recommendations of the Report which have been informed by the consultation and guidance of the Taskforce. These actions have included:

1. Establishing the interagency taskforce;
2. Amending the Competition and Consumer Act 2010 (CCA) on 18 October 2018 to allow the ACCC to issue and use a Notice under S155 of the CCA to obtain evidence about whether a standard form contract contains an unfair contract term;
3. On 1 July 2019, the Treasury Laws Amendment (Enhancing Whistleblower Protections) Act 2019 came into effect and includes protections for franchisees and employees reporting a breach of an industry code by a franchisor and for employees of franchisees reporting a breach by the franchisee. A new franchising website will provide information about whistleblower protections, including how to lodge a complaint; and
4. On 1 June 2020 amendments to the Franchising Code commenced that are specific to the Automotive sector including the introduction of a new Part 5 of the Franchising Code to give greater protections for dealers.

Key implications

Importantly the Government will not adopt a number of recommendations made in the Report which is not surprising given the existing economic climate and effects of COVID-19 on small business generally. Despite that there are a number of flagged changes to the Franchising Code which will have a profound effect on the obligations of a franchisor under the Franchising Code, particularly the fines associated with contravention and early exit arrangements.

Some of the proposed reforms are complex and need to strike a balance between the interests of franchisors and franchisees. The final drafting of the amendments will need to be considered to see how in practice this will affect franchisors. There is likely to be only a short time for further consultation with Government before draft legislation is prepared. The timing of this release is interesting as it now means there is the potential for changes to the Franchising Code to be made prior to the end of the calendar year.

A copy of the Government Response is available here.

If you require any advice on these proposed reforms please contact a member of our national franchising team. Once we know more about the likely drafting changes to the Franchising Code we will provide a further update.

This article was written by Sean O’Donnell, Partner and Derek Sutherland, Special Counsel.