On 1 June 2021, the Federal Minister for Employment, Workforce, Skills, Small and Family Business, the Hon Stuart Robert MP issued a media release to announce that the majority of changes to the Franchising Code of Conduct (Franchising Code) will commence on 1 July 2021.
The changes give effect to the Governments response to the Corporations and Financial Services inquiry into the operation and effectiveness of the Franchising Code of Conduct report: Fairness in Franchising. Last year, the Government released an exposure draft of the proposed changes and engaged in further consultation with key sector stakeholders. The final amending regulation is different from the exposure draft and some important changes have been made to these reforms.
In making the announcement the Minister stated that the significant reform package reflects extensive feedback and consultation with the franchising sector and delivers what is needed to restore confidence and address power imbalances to protect Australian small and family owned businesses.
The amending regulation giving effect to these changes, the Competition and Consumer (Industry Codes-Franchising) Amendment (Fairness in Franchising) Regulation 2021 was registered on the Federal Register of Legislative Instruments (FRLI) on 1 June 2021. Importantly this means that some changes commenced yesterday and others commence to apply on 1 July 2021.
The key aspects include:
Commencement, application and transitional
- The amending regulation amends (and does not replace or repeal) the existing Competition and Consumer (Industry Codes-Franchising) Regulation 2014 (Regulation).
- Section 2 of the amending regulation sets out the commencement dates when the amending provisions start to apply.
- Sections 1 to 4 (which are administrative), Schedule 1 and Schedule 12 – Item 1 of the amending regulation (which relate to transitional provisions for dispute resolution) commence on the day after the amending regulation is registered – that is yesterday, Wednesday 2 June 2021.
- Importantly Schedules 2 to 11 and Schedule 12 – Item 2, (which contain transitional provisions relating to other reforms) and containing most of the changes commence on 1 July 2021.
- Schedule 12 contains a new Part 6 of the Franchising Code containing clauses 59-69 which sets out the transitional provisions that apply to specific changes.
- Whilst most changes only apply to agreements entered into, renewed or extended on or after 1 July 2021 some changes do apply to existing agreements as and from 1 July 2021. In other cases the new provisions will apply to existing agreements once an event occurs such as a transfer or a notice of dispute is issued. Accordingly it is important to consider these clauses when determining if the reforms apply to existing agreements.
Changes that start on 2 June 2021
- On 2 June 2021 important changes relating to dispute resolution and the role and function of the Australian Small Business and Family Enterprise Ombudsman (Ombudsman) commenced.
- Those dispute resolution provisions are set out in Schedule 1 of the amending regulation and include a new Division 3 to Part 4 of the Franchising Code. Division 3 contains the ADR process (of conciliation or mediation) that a party to a franchise agreement must follow for a dispute arising on or after 2 June 2021.
- Importantly you must attend the ADR process and a failure to do so will contravene a civil penalty provision.
- A new clause 40B provides for multi-party dispute resolution where 2 or more franchisees have a ‘similar’ dispute.
- It also empowers the Ombudsman to appoint an arbitrator to a dispute where the parties agree to engage in voluntary arbitration. The amendments set out the procedure to follow for arbitration and the powers of the arbitrator and Ombudsman in relation to arbitration under clauses 43A, 43B, 43C and 43D.
- Clause 60 of the amending regulation makes it clear that new disputes notified on or after 2 June 2021 will need to have regard to these new provisions and they apply to agreements entered into before, on and after 1 July 2021.
Changes that start on 1 July 2021
- The majority of other changes commence on 1 July 2021. These are set out in Schedules 1 to 11 and Schedule 12 – Item 2 of the amending regulation.
- Your franchise agreement should be updated to include those changes that commence on 1 July 2021 and be used in transactions after that date.
Changes that start on 1 November 2021
- There is a transitional provision (Clause 69) that requires you to commence to use the amended disclosure document when you give it out on and after 1 November 2021. You can of course commence to use it earlier, particularly if your financial year does not end on 30 June 2021.
- It appears that they have delayed the start to coincide with the annual update window for franchisors with a financial year ending 30 June. As a consequence it would be advisable that you use the new version for any agreement to be entered into on or after 1 November 2021.
- Nothing prevents you moving to the new form of disclosure document for transactions where franchise agreements are to be entered into on or after 1 July 2021.
New compiled version of the Franchising Code
- A compiled version of the Regulation will be released in the next few days incorporating a complete copy of the Franchising Code.
- All franchisors will need to download and commence to use the new compiled version of the Code to attach to their disclosure document.
Penalties and disclosure register
- A number of existing and new provisions will become civil penalty provisions.
- The Minister has signalled that other enabling legislation will be introduced at some time in the near future to increase penalties for contravention and has already signalled that the maximum number of penalty units for a contravention will double to 600.
- Similarly in a recent budget announcement, the Minister signalled that changes will be made to provide a legislative framework for the creation and operation of a franchise disclosure registry.
Key facts sheet
- A franchisor will now be required to create and give a prospective franchisee a “key facts sheet” containing key information from the disclosure document. The intent being that they have to give it to a prospective franchisee with the disclosure document.
- Clause 9 of the Franchising Code has been amended to expand the list of documents that must be given with the disclosure document to include the key facts sheet, and if the franchisor leases, subleases or licences premises to the franchisee, a copy of the lease terms and written information concerning the lease (such as a retail shop leases act disclosure statement and agreement to lease) provided by the landlord to the franchisor (or associate).
- The contents of the key facts sheet will be determined by the Department and this form will be published on the ACCC website rather than in the Franchising Code itself.
- A franchisor will need to update the key facts sheet annually, within 4 months after the end of its financial year, unless the franchisor is eligible to delay updating it in line with their eligibility to delay updating their disclosure document. This mirrors current updating requirements for a franchisor’s disclosure document.
- A franchisor must give the key facts sheet with the disclosure document as part of the transaction process and also give it if the franchisee makes a written request for a disclosure document.
- A failure to create it, update it or give it will contravene a civil penalty provision.
- The form of Information Statement contained in Schedule 2 of the Regulation is repealed as and from 1 July 2021.
- The contents of the Information Statement will be determined by the Department and this form will be published on the ACCC website rather than in the Franchising Code itself.
- Importantly the Government has made it clear that they want franchisors to give the Information Statement to a prospective franchisee much earlier in the transaction process and not simply annex it to the Disclosure Document.
- Clause 6 of the Franchising Code has been amended to add another factor that the Courts can have regard to determine whether the party has acted in good faith. The factor relates to whether the terms of the agreement are ‘fair and reasonable” applies to new vehicle dealerships.
- In addition the words “and if it does, the clause is of no effect” have been removed from clause 6(3) of the Franchising Code. The Code now simply says that a franchise agreement must not contain a clause which seeks to limit or exclude the obligation to act in good faith.
- A franchisor is prohibited from entering into an agreement that has the effect of requiring (or allowing the franchisor or its associate to require) the franchisee to pay all or part of the legal costs of the franchisor in relation to preparing, negotiating or executing the agreement or other documents relating to it.
- Importantly you can require reimbursement “of a fixed amount of dollars” if it is specified in the franchise agreement and is stated for preparing, negotiating and executing the agreement and it is stated that it does not include any amount for future services that will or may be provided in the future relating to other documents.
- The words “or documents relating to the agreement” appear to capture other documents such as notices of breach or termination. Accordingly it appears those costs cannot be passed onto a franchisee. It is not clear if the prohibition (or exception) covers seeking to recoup legal costs for a renewal or transfer where a new agreement is to be signed, however it is likely they could be considered to be “documents relating to the agreement”. We are attempting to obtain further clarification on this point.
Variation of franchise agreement
- A franchisor is express prohibited from varying a franchise agreement with retrospective effect without the written consent of the franchisee (clause 31(A)).
Leasing of premises
- Clause 13 of the Franchising Code has been amended to repeal some existing provisions and add new clause to set out what information a franchisor must give where the franchisor (or its associate) holds the head lease and leases, subleases or licences occupation rights to the franchisee.
- This includes an obligation to pass on written information concerning the lease (including retail shop leasing disclosure statements) passed on to the franchisor from the landlord in circumstances where the franchisee makes a written request for that information. The franchisor will have to pass on that information as soon as reasonably practicable but within 7 days after the franchisee has requested that information.
Restraint of trade
- A minor change to clause 23 has been made to one of the elements that has to be satisfied for that clause to apply. In particular that the franchisee was not in serious breach. Serious breach is not defined.
Cooperatives and test of a franchise agreement
- The Franchising Code has been amended so it will not apply to a franchise agreement if the franchisor and franchisee are both members of the same cooperative that is entered on a register maintained by the Co-operatives National Law or the Co-operatives Act (2009) (WA).
- There have been some minor changes to clause 5(3) which sets out those relationships that do not in themselves constitute a franchise agreement.
Termination – special circumstances
- For agreements entered into on or after 1 July 2021, the procedure set out in clause 29 Termination – special circumstances is replaced by a new clause 29 Notice of termination by franchisor on particular grounds. If the new provision applies to the franchise agreement it will require a franchisor to give 7 days’ prior written notice of the termination and clearly set out the grounds for termination.
- If the franchisee disputes that termination in writing then the franchisor cannot terminate for 28 days after the termination notice was originally given. This gives the franchisee the right to apply the ADR process to seek to resolve the dispute.
- When giving the notice a franchisor may want to stop a franchisee operating the franchised business during this period. It can do so if it included a clause in the franchise agreement that gave the franchisor the right to notify the franchisee that it cannot operate the franchised business during this period. Many agreements contain management clauses which should be reviewed to ensure they comply with the clause and that you can take steps to prevent them operating.
- Whilst the 7 listed special circumstance grounds have not changed, the process and procedure to terminate relying on this clause will need to be included in all franchise agreements entered into, renewed or extended on or after 1 July 2021.
- There is an express transitional provision (clause 65(4) and (5)) that preserves the existing process of immediate special circumstance grounds for termination in a pre-1 July 2021 agreement without the need for 7 days’ notice. However it only applies to existing agreements entered into before 1 July 2021 until they are renewed or extended.
Termination – Cooling off
- Clause 26 of the Franchising Code has been significantly amended.
- The cooling off period has been extended from 7 to 14 calendar days. This change was anticipated.
- The commencement of the cooling off period and what triggers a right for a prospective franchisee to cool off has also been substantially expanded.
Cooling off – new agreement
- A new Clause 26(1) will give the franchisee a right to cool off and terminate a franchise agreement within 14 days after entering into the franchise agreement. The right to cool off and terminate does not apply to the renewal or extension of the scope or term of a franchise agreement. The right to cool off and terminate under 26(1) will also apply to a transfer where the prospective transferee is required to sign a new agreement with the franchisor.
Cooling off – transfer (assignment)
- A new Clause 26A will deal with transfers that involve an assignment of an existing franchise agreement and sets out that the cooling off period ends at the earlier of 14 days starting on the day after the new franchisee becomes the franchisee for the purposes of the franchise agreement or the period ending on the day that the new franchisee takes possession and control of the franchised business.
Cooling off – where lease terms are not disclosed before entering agreement
- New Clauses 26(1B) and 26(1C) will apply if the franchisor proposes to control the lease of the premises and intends to lease, sublease or licence the occupancy right to a franchisee but the lease, sublease or licence has not been entered into before they enter into the franchise agreement. The right for the franchisee to cool off and terminate arises from the failure to give and disclose the actual terms (or summary) of the lease, licence or occupancy right terms that the franchisee will be bound by before they sign the franchise agreement. It is therefore imperative that when disclosure is given there is a copy of the lease terms (or detailed summary) provided to the franchisee.
Clause 26(1B): where proposed terms not acceptable or substantially identical
- The franchise has the right to cool off and terminate a franchise agreement within 14 days of: (a) receiving the first document setting out the terms of the proposed lease, sublease or licence ;OR (b) any later document setting out the terms of the proposed lease, sublease or licence if they are not substantially identical to the terms set out in the first document (other than due to changes requested by the franchisee).
- A franchisee will therefore be able to exercise the right to cool off far later in the process of on-boarding and it may expose a franchisor to the risk of the site if it has not properly disclosed the lease terms.
Cooling off – Clause 26(1C) – not get terms before entering into agreement
- The franchisee will have a right to cool off within 14 days of entering into the lease, sublease or licence being granted IF they did not, before entering into the lease, sublease or licence, receive a document that set out the terms of the proposed lease, sublease or licence that are substantially identical to the actual terms (excluding changes requested by the franchisee).
Termination – franchisee may propose termination at any time
- A new Clause 26B will give an existing franchisee a right to give a written proposal to the franchisor for early termination of the agreement. The proposal must be in writing and set out the reasons for the proposed termination.
- If a franchisor receives such a proposal it has 28 day to give a substantive written response.
- If the response is that the franchisor refuses to terminate or agree to terminate, then the franchisor must include reasons for the refusal. A dispute may arise and be dealt with under the ADR process in Part 4. The good faith obligation applies.
- If a franchisor has given a substantive written response to a termination proposal then it is not required to give another response to that proposal, unless that proposal is for a different reason than the earlier proposal.
- Clause 26B is not intended to limit the rights or obligations under a law of any other state or territory or rights and obligations under a franchise agreement.
- Clause 15 of the Franchising Code has been amended. If a marketing fund is controlled or administered by or for the franchisor or master franchisor by a person (fund administrator) then the fund administrator has the responsibility to prepare the financial statements and obtain the audit report (if applicable) or conduct the vote to reach agreement to non-audit and give the financial report and audit report to franchisees.
- The fund administrator will need to open and operate a separate bank account and it is a civil penalty provision if you fail to do so.
Significant capital expenditure
- The definition of significant capital expenditure has been changed.
- Clause 30 is repealed and replaced with a new clause similar to the clause that applied to new motor vehicle dealership agreements. There is no longer a provision that allows for a business justification statement before imposing an obligation to incur a significant capital expense unless it is included in a disclosure document.
- Similar to the existing clause a franchisor is prohibited from requiring a franchisee to undertake significant capital expenditure during the term of the franchise unless the expenditure is of the kind set out in new Clause 30(2). These follow the existing grounds (other than business justification statement).
- There is an obligation to set out the business justification in a disclosure document and discuss the expenditure with the franchisee prior to entering into, renewing or extending the franchise agreement. The discussion must include a discussion of the circumstances under which they are likely to recoup the expenditure having regard to certain factors.
- Clause 9(2) has been amended to change the process of consent to a transfer of a franchise agreement by assignment. A franchisor must in that event at least 14 days BEFORE giving its consent, give a copy of the existing franchise agreement and document the prospective transferee must sign to give effect to the transfer.
- This is in addition to the disclosure document they are required to give under clause 9(1). You can give it electronically or in hard form or both. If a prospective transferee asks for it in a particular form before you give disclosure then you must give it in the form they request.
- A right to cool off and terminate where the transfer involves an assignment of an existing franchise agreement has also been included.
- There are a number of important changes to make to the disclosure document as many items have been amended.
- Some key warning statements have been changed to allow for the key facts sheet and changes in cooling off.
- Earnings information: Importantly, any earnings information must be given with the disclosure document. If a franchisor gives disclosure then gives out earnings information the Franchising Code will deem them not to have given the information required in accordance with clauses 9(1)(2) or (2A).
- As a consequence before entering into an agreement the franchisor would be required to re-disclose and commence the 14 day disclosure period (Clause 9(4)).
- Disclosure of ADR process: Item 4 litigation disclosure will now require you to disclose the percentage of the franchisees in the system who were a party to the conciliation, mediation or arbitration process conducted or was pending during the last financial year.
- Rebates and financial benefits: Item 10.1(j) and (k) have been repealed and replaced with comprehensive provisions relating to the disclosure of rebates and financial benefits including items 10.1(j) – (m) and new Items 10.2 and 10.3.
- A franchisor who receives a rebate or financial benefit from a supplier will have to disclose in Item 10.1(k)(iii) (on a supplier by supplier basis) as a percentage the total amount of the rebate or financial benefit received last financial year from that supplier against the total purchases by all franchisees from that supplier. The amount of purchases by the franchisor or its associates from the supplier is not included in that calculation.
- A franchisor will also have to include details of the method used to work out how much of the rebate or financial benefit is retained by the franchisor, master franchisor or associate and how much directly and indirectly is shared with the franchisees. This can be described as a percentage of the rebate or benefit or you can use another method.
- Importantly for the purposes of disclosure a rebate or financial benefit will not include payment of amounts by the franchisee to the franchisor, master franchisor or associate for a supply (such as a wholesale supply) or lease incentives.
- Disclosure of the % rebate in Item 10.1(k)(iii) is not required if the franchisee can acquire goods or services from other sources without approval of the franchisor or the full amount of the rebate or financial benefit is paid to a cooperative fund controlled by or for the franchisor.
- History of site or territory: Item 13.3 has been replaced with an item requiring disclosure of whether the franchisor or its associate has an interest in the lease of the premises the franchisee will occupy whether as a landlord, head lessee or another interest. The former wording of Item 13.3 becomes Item 13.4 and details must be contained in a separate document attached to the disclosure document.
- Arbitration of disputes: Item 17A has been added to require disclosure of whether the franchise agreement provides for arbitration of disputes in a manner consistent with the new changes.
- Ways to end the agreement earlier: Item 17B has been added to require a summary of the rights that the franchisor and the franchisee have to terminate the franchise agreement earlier and the circumstances in which those rights can be exercised.
- Term of agreement and arrangements to apply at end of franchise agreement: Item 18 has been amended to require disclosure of the term of the franchise agreement, the franchisees rights relating to goodwill generated by the franchisee (including a statement to the effect if the franchisee does not have any right to goodwill, whether the franchise agreement contains a restraint of trade or similar clause.
- Earnings information: Item 20 has been amended to require the franchisor to attach earnings information to the disclosure document. If earnings information is given before disclosure is given, the franchisor must also ensure the earnings information is contained in the disclosure document or an attachment to it. If earnings information is given a franchisor will have to include a statement that to the best of its knowledge the information is accurate. If it knows information is not accurate it should include a statement to that effect.
New vehicle dealership agreements
- There have been a number of important changes to the provisions relating to new vehicle dealership agreements. This includes replacing the definition of a motor vehicle dealership to include a business of selling motor vehicles where the dealer (franchisee) sells them as agent for a principal (franchisor).
- Importantly the Franchising Code now includes a provision Clause 46A requiring a franchisor to pay compensation for early termination of an agreement where it is terminated before it expires because the franchisor withdraws from the Australian Market, rationalises its networks in Australia or changes distribution models in Australia.
- The agreement must specify how compensation is determined with specific reference to loss profit from direct and indirect revenue, unamortised capital expenditure requested by the franchisor, loss of opportunity in selling established goodwill and costs of winding up the business.
- There is also a prohibition on entering into an agreement unless it also includes a provision to compensate a dealer for new road vehicles, spare parts and special tools if the agreement is not renewed or new agreement entered into or it is terminated before it expires because the franchisor withdraws from the Australian Market, rationalises its networks in Australia or changes distribution models in Australia.
- There is also a prohibition on entering into an agreement that contains a clause seeking to exclude compensation for those reasons.
- A franchisor is also prohibited from entering into an agreement unless the agreement allows the franchisee a reasonable opportunity to make a return on the investment it is required by the franchisor to make.
- A new Clause 6(3A) amends the good faith provision and introduces an additional factor that courts must consider in determining whether a party to a new vehicle dealership agreement has acted in good faith.
- In addition to the existing considerations that apply to all franchise agreements, courts are to have regard to whether the terms of the agreement are fair and reasonable. This means that manufacturers should act in good faith in negotiating and offering the substantive terms of an agreement, including terms relating to the duration of the agreement and the proposed calculation of compensation for dealers in the event of early termination.
What to do
A compiled version of the Regulation will be available shortly. You should obtain and use the new compiled version as soon as it is available and discard older copies of the Franchising Code.
You will need to update your franchise agreement and disclosure document and other transaction documents to deal with these reforms. Members of our franchising team are ready to assist you in that process.
Our Franchising Team will be hosting a client webinar on 15 June 2021 to discuss these changes in detail.
If you would like to attend please click the following link and register.
A copy of the following is available in the links below.
Amending regulation: https://www.legislation.gov.au/Details/F2021L00670
Explanatory statement: https://www.legislation.gov.au/Details/F2021L00670/Explanatory%20Statement/Text#
If you require any advice on these proposed reforms contact a member of our National Franchising team.
This article was written by Derek Sutherland, Partner and Sean O’Donnell, Partner.