The New Code is here…

Treasury has delivered franchisors with an early Christmas present, releasing the Competition and Consumer (Industry Codes —Franchising) Regulations 2024 (New Code), the new Franchising Code of Conduct, just weeks before Christmas.

The New Code is in substantially the same form as the Exposure Draft that was circulated in October, but some changes have been made. Importantly (and sensibly) a chapter dealing with transition provisions has now been included.

In this Article, we discuss the key changes made to the Exposure Draft and set out what franchisors need to do to be ready for the commencement of the New Code in April 2025.

The Exposure Draft

In October 2024, Treasury released an Exposure Draft of the proposed new Franchising Code of Conduct. As detailed in our October 2024 article (available here), the Exposure Draft contemplated quite a number of changes to the existing Franchising Code of Conduct (Current Code). Most of those changes remain, so we recommend reviewing our article on the Exposure Draft before diving into the below.

Stakeholders were given a brief opportunity to provide comments on the Exposure Draft, following which Treasury made changes to the Exposure Draft before releasing it as the New Code.

What are the key changes between the Exposure Draft and the New Code?

There have been a few significant (and less significant) changes to the Exposure Draft. Set out below are details of some of the key changes:

Definitions

Minor changes have been made to a number of definitions. The changes are mainly aimed at clarifying definitions or removing definitions that are not used.

Numbering

As franchisors will recall, the Exposure Draft contemplated quite a significant structural change to the Current Code, such that all clauses became ‘sections’ and were re-numbered. To assist with navigating the proposed new Code, the Exposure Draft indicated ‘old’ clause numbers next to the new sections in square brackets. Unfortunately, no drafting notes (or former clause references) have been included in the New Code.

The Constitution

A new section has been introduced to make clear that any provision in the New Code will not apply to the extent it would result in the acquisition of property other than on just terms. This insertion appears to seek to ensure that the new sections that have been inserted to deal with the new compensation/buy back obligations comply with (and are permitted to be included under) the Constitution.

Restraint of trade clauses

The Exposure Draft introduced a number of changes to the way in which restraint of trade clauses would apply and the New Code includes a few additional changes.

On and from 1 April 2025, franchisors must not enter into a franchise agreement that includes a restraint of trade clause that would apply if:

1. the agreement expires;
2. the agreement contains an option for a renewal/extension;
3. before expiry of the agreement:
   1. the franchisee has given written notice to the franchisor seeking to renew or extend the agreement on the Franchisor’s current terms;
   2. the franchisee has otherwise complied with the conditions specified in the franchise agreement to be able to renew or extend the agreement;
4. immediately before the expiry, the franchisee was not in serious breach of the agreement (or any related agreement);
5. the franchisee has not infringed the intellectual property or a confidentiality agreement with the franchisor during the term of the agreement;
6. the franchisor otherwise does not renew or extend the agreement; and
7. either the franchisee claimed compensation for goodwill because the agreement was not renewed/extended, but the compensation given was a nominal amount/ did not provide genuine compensation for goodwill, or the agreement did not allow the franchisee to claim compensation for goodwill if it was not renewed or extended.

The New Code has clarified that this section will only apply in cases where the existing agreement includes an option for a further term. As such, we query if franchisors will start granting longer single terms (eg 10 years), rather than multiple shorter terms (eg 5 + 5 years) so as to avoid being caught by this section.

Compensation for early termination

One of the most controversial changes featured in the Exposure Draft was the proposal to extend the concept of compensation for early termination to apply to all franchise agreements. This concept was not new to the Current Code, but was previously limited to new vehicle dealership agreements. The Exposure Draft extended this concept to ALL franchise agreements. The New Code has retained this concept, but instead of addressing new vehicle dealership agreements and other franchise agreements in one section (as the Exposure Draft did), the New Code now has two separate (but similar) sections: one for new vehicle dealership agreements (see section 45) and one for other franchise agreements (see section 43).

In a sensible move, section 43 has been amended so that the buy back/compensation regime only applies in circumstances where the franchise agreement is terminated before it expires, due to the franchisor:

1. withdrawing from the Australian market;
2. rationalising its networks in Australia; or
3. changing its distribution models in Australia.

Despite calls for clarification on what would amount to ‘rationalising a network’ and ‘changing a distribution model’, the New Code does not define or provide drafting notes on the types of conduct which will trigger this section.

A welcome clarification to section 43 is that the list of things franchisors must buy back or compensate a franchisee for is more limited than what was originally captured in the Exposure Draft.

Reasonable opportunity for return on investment

Like with the above compensation concept, the requirement for franchise agreements to provide franchisees with a reasonable opportunity to make a return, during the term of the agreement, on any investment required by the franchisor as part of the agreement, is a concept that is in the Current Code, but under the Current Code is limited to new vehicle dealership agreements. The Exposure Draft extended this concept to ALL franchise agreements.

Again, the New Code provides for the separate treatment of new vehicle dealership agreements and all other franchise agreements by including separate (but nearly identical) sections for each of new vehicle dealership agreements (see section 46) and other franchise agreements (see section 44).

Termination

One of the ‘sleeper’ issues we flagged in our article regarding the Exposure Draft were the proposed changes to the termination sections. Many will recall that in the changes made to the Franchising Code of Conduct in 2021, the ‘immediate’ termination clause was amended, such that the circumstances contemplated by that clause (now known as ‘special circumstances’) could no longer be grounds for immediate termination, and instead required a minimum of 7 days written notice.

The grounds for termination were again re-visited in the Exposure Draft, in which the special circumstances were separated into two distinct categories, namely:

1. circumstances relating to prior determinations of relevant authorities. In this instance, a franchisee’s right to “appeal” the termination has been removed on the basis that they would have been entitled to appeal this finding as part of a process external to the Code. To rely upon this section, a franchisor must simply give 7 days written notice; and
2. circumstances that rely on franchisors making a judgement call (i.e. acting fraudulently or operating the franchised business in a way that endangers public health and safety). Termination under this section is still subject to a franchisee’s right to “dispute” and if disputed by the franchisee, a franchisor must not terminate the agreement before the end of 28 days after the day the dispute notice is given.

Within the first category, the Exposure Draft introduced a number of new ‘special circumstances’ that are not in the Current Code. One such ‘circumstance’ was where a franchisee has been convicted of an offence under subsection 327A(1) of the Fair Work Act or a Fair Work-related office provision that relates to an offence under that subsection. The Government have since walked back from including a conviction of this nature as a ‘special circumstance’ (and therefore allowing for termination on 7 days notice), with this ground of termination being absent in the New Code. That said, the exclusion of this termination ground means that such circumstances can be addressed in a more timely manner in accordance with the breach procedure (if applicable) specified in the franchise agreement.

Overall, it is disappointing that the changes to the termination sections do not go further. In his 2023 review, Independent Review of the Franchising Code of Conduct, Dr Michael Schaper recommended that “provisions relating to termination for serious breaches should be simplified’ and that “changes made in 2021 relating to termination under clause 29 of the Code should be revisited“. (See Recommendation 13). The changes initially introduced in the Exposure Draft and now ratified in the New Code do not look to simplify the termination process and could very well further complicate it.

Disclosure of personal information

An unexpected amendment has been made to (now) section 63 (section 60 in the Exposure Draft). This change provides that a franchisor MUST not disclose a former franchisee’s personal information unless:

1. at least 14 days before doing so, the franchisor informs the former franchisee in writing that the former franchisee may request the franchisee’s personal information not be disclosed to a prospective franchisee; and
2. the relevant former franchisee has not given such a written request.

Curiously, this obligation exists in tandem with franchisors’ existing obligations not to engage in conduct with the intention of influencing a former franchisee to make, or not make, a request to omit their personal details. In light of these amendments, franchisors will need to consider the ideal time to write to former franchisees (at the time of departing the system or prior to the update of the Disclosure Document) and consider the language adopted when informing franchisees of their rights regarding disclosure of personal information (so as to not influence a franchisee’s decision in this regard). Further, the inclusion of this positive notification obligation on franchisors creates yet more records which franchisors need to keep copies of for at least 6 years (noting that this section is now a penalty provision!).

Contents of the FDR

One minor change that has been incorporated into the New Code (but which may allay some franchisor fears) is a small amendment to the types of documents that may be included on the Franchise Disclosure Register (FDR). Namely, the disclosure document is no longer a document that may be included on the FDR (although a franchisor’s template franchise agreement and logo are still listed as documents that may be included on the FDR). Be mindful that this change currently has little day to day impact – as there is currently no requirement to include such documents.

Transition provisions

A very welcomed inclusion in the New Code is the introduction of various transitional provisions.

Application of Old Regulations and New Code

Section 97 confirms that the New Code applies (other than for a couple of limited exceptions) to:

1. all franchise agreements entered into, transferred, renewed or extended; and
2. conduct engaged in,

on or after 1 April 2025.

However, sections 43 and 44 (the sections that specify that franchise agreements must provide for compensation for early termination and for a reasonable opportunity for return on investment, for franchise agreements that are not motor vehicle dealership agreements) do not apply to an agreement entered into, transferred, renewed or extended before 1 November 2025.

For agreements that exist immediately before 1 April 2025 until that agreement is terminated, otherwise ceases to exist, is transferred, renewed or extended, section 98 of the New Code expressly provides that the old regulations remain in force in relation to such agreements. The old regulations also remain in force in relation to conduct relating to such agreements engaged in on or after 1 April 2025 (other than conduct relating to the transfer, renewal or extension of such an Agreement).

Disclosure Documents

Disclosure Documents created in accordance with the old regulations and given to prospective franchisees prior to 1 April 2025 for the purposes of complying with a Franchisor’s disclosure obligations are taken to be satisfactory under the New Code.

However, the drafting of new section 99 (and the drafting of the accompanying Explanatory Memorandum to the New Code) seems to suggest that disclosure documents given after 1 April 2025 and before 1 November 2025, need to be updated to reflect the details specified in the New Code (save for certain exemptions). To this end, and in the absence of any further clarifying material, it appears that franchisors seeking to issue disclosure documents after 1 April 2025, will need to re-update their disclosure documents prior to issuing such documents after 1 April 2025.

Franchisors with calendar financial years would ordinarily need to update their disclosure documentation by 30 April 2025. However, franchisors falling into this category may wish to consider bringing forward the update of their disclosure documentation to align with the mandatory franchise agreement update which must occur on or before 1 April 2025, so as to ensure that material within the Disclosure Document is not misleading or deceptive.

Marketing and Specific Purpose Funds

The Exposure Draft saw marketing fund obligations being extended to ‘specified common purpose funds’ (such as conference fees). As all franchisors are well into their financial year, concerns regarding how to treat ‘specified common purpose fund’ obligations and report on the same were raised. To alleviate this concern, sections 97(5) and (6) and 100 have been inserted into the New Code, clarifying that obligations regarding marketing funds (preparation and circulation of annual financial statements and payments to and from the marketing fund) will not extend to ‘specific common purpose funds’ before 1 November 2025. Further, financial statements prepared in accordance with the old regulations will be deemed to comply with section 31(2) of the New Code.

While franchisors will need to keep a track of any ‘specified common purpose funds’ from the first day of their new financial year, inclusion of details of such funds in annual financial statements and item 15 of the Disclosure Document, need not occur until 1 November 2025. Therefore, for a franchisor operating on a 30 June financial year, it is not expected that disclosure documents created before 1 November 2025 need to include all such details of these funds. However, if circumstances necessitate for a franchisor to update its disclosure document on and from 1 November 2025, then its disclosure document will need to meet the new ‘specified common purpose fund’ obligations.

Ombudsman’s power to publish franchisor’s refusal to engage in ADR process

Under section 78 of the New Code, the Ombudsman may publicise, in any way that the Ombudsman thinks appropriate, either or both of the following:

1. that a franchisor who is a party to a dispute has refused to engage in an ADR process for the dispute; and
2. that a franchisor who is a party to a dispute has withdrawn from an ADR process for the dispute.

Section 97(2) has been inserted to clarify that only a franchisor’s conduct occurring on or after 1 April 2025 (in relation to a franchise agreement entered into, transferred, renewed or extended on or after 1 January 2015) may be publicised by the Ombudsman.

Remind me – when does the New Code take effect?

As mentioned above, the New Code commences on 1 April 2025. While the New Code does include some transition provisions, franchisors need to diarise this date and should have their franchise agreements reviewed, updated and ready for use from this date.

What should I do now?

As noted above, the New Code commences on 1 April 2025, so franchisors do have some time to prepare.

HWL Ebsworth’s specialist Franchising Team will be hosting a number of seminars across the country in 2025, sharing more information about the New Code together with practical insights. Be sure you don’t miss out on an invitation to these events by subscribing here.

This article was written by Allison McLeod, Partner, and Emily Lucas, Senior Associate.