The Federal Government’s proposed reforms to the Franchising Code of Conduct seek to “methodically” deliver reform to the Australian franchise sector, while avoiding unnecessary red tape. The headline reforms mentioned in Minister Cash’ announcement head in that direction, but there is a degree of devil in the detail that has the potential to cause consternation and additional compliance cost for franchise systems. The expressed intention for Government to consult with industry concerning the detail of some of the reforms is therefore important to avoid excessive compliance costs and unintended consequences.
The proposed legislation will double the penalties for breach of the Franchising Code, from $66,600 to $133,200. The Government proposes to consult on other specific reforms, which will include:
- A public register of franchisors;
- A new Key Disclosure Information Document;
- A requirement for both electronic and hard copy disclosure documentation;
- Additional disclosure in relation to retail leasing arrangements, supplier rebates and commissions and marketing funds;
- Changes to cooling off arrangements;
- Additional requirements in relation to capital expenditure;
- Supplementing the dispute resolution processes by conciliation and a voluntary binding arbitration model and providing best practice guidance on timeframes for the commencement and completion of dispute resolution processes;
- Introducing mandatory multi-party dispute resolution processes, at the discretion of the appointed mediator;
- Enhancing enforcement by supporting ASBFEO’s power to write to the ACCC and other regulators notifying them of systemic or serious matters that have come to its attention;
- New provisions to allow negotiated early exit from a franchise agreement;
- A new requirement to give 7 days’ notice for termination in special circumstances, which amends the current ability to terminate immediately in such circumstances; and
- A new prohibition (with pecuniary penalties) on franchisors passing on the legal costs of preparing, negotiating and executing documents to the franchisee except where it is already incorporated into a joining fee.
There are various other initiatives aimed at improving information and franchise awareness, including a franchising specific website.
The Government noted that it had already introduced a number of initiatives in response to issues raised during the 2018 Franchising Inquiry, notably extra ACCC information gathering and enforcement powers in relation to unfair contract terms and the Treasury Laws Amendment (Enhancing Whistleblower Protections) Act 2019, which came into effect on 1 July 2019 and provides protections for franchisees and employees of franchisors reporting a breach of an industry code by a franchisor, and for employees of franchisees reporting a breach by a franchisee.
The Government also noted it had amended the Franchising Code effective 1 June 2020 specifically for the automotive sector to:
- require franchisors to give franchisees 12 months’ notice of non-renewal, and reasons;
- strengthen conditions that prohibit franchisors requiring significant capital expenditure from franchisees, including an obligation to discuss expenditure, recoupment of expenditure and the amount, timing and nature of the expenditure;
- include a requirement to discuss, plan and agree end of term arrangements if an agreement is not renewed including for the handling of capital intensive stock; and
- expressly allow multi-franchisee dispute resolution.
The Government noted it will continue to work with the automotive franchising sector on the development of an industry-led, principles based voluntary guide to improve the transparency and fairness of agreements.
Information and awareness
The Government aims to increase the information available to prospective franchisees before they enter the franchise agreement, with consultation with the sector to assist it to develop:
- a public register of franchisors;
- a new Key Disclosure Information Fact Sheet, summarising key information from the disclosure documents; and
- a franchising specific website to make it easier to access information and support.
The Government proposes to improve franchisees’ access to non-financial information, supporting their ability to conduct due diligence, by amending the Franchising Code:
- so that the disclosure document and franchise agreement must be made available in both electronic and hardcopy form;
- to clarify that the Information Statement (Annexure 2 to the Franchising Code) must be provided to prospective franchisees separately and prior to providing the disclosure document and other disclosure materials;
- to implement technical changes to clause 13 of the Franchising Code, to increase transparency surrounding retail leases (subject to consultation with the sector to ensure there are no unintended consequences), with the exception that franchisors will not need to provide documents they do not possess; and
- to require a franchisor’s interests in a leasing arrangement to be disclosed in the Key Disclosure Information Fact Sheet.
The Government will also amend the Information Statement (Annexure 2 to the Franchising Code) to include reference to the ACCC’s franchisee manual and emphasise key rights and information.
The Government will amend the Franchising Code so that any financial information must be part of the disclosure document and require disclosure documents to include a statement on the accuracy and appropriateness of the franchisor’s financial information.
Supply Arrangements and Rebates
The Government will improve disclosure to franchisees on supply arrangements and rebates received by franchisors. The Government will amend the Franchising Code to require franchisors to disclose information on supplier rebates, commissions and other payments and to disclose any master franchisor controls and/or rebates from suppliers. Disclosure of financial information will be improved through the introduction of a Key Disclosure Information Fact Sheet.
Disclosure and Cooling Off time periods will be clarified, although the proposal for franchisee termination at any time up to 14 days after the last of certain events have occurred, such as, the agreement being signed, payment being made, disclosure documents being received and, if applicable, a copy of the terms of the lease being received, seems problematic and an unnecessary complication. Similarly, the extension of cooling off rights to the transfer of an agreement will create compliance complexities.
The Government will strengthen franchisees’ rights when a demand for significant capital expenditure is made by:
- prohibiting franchisors from requiring franchisees to undertake significant capital expenditure, except where it has been disclosed before entering into a franchise agreement, is legally required, or is agreed to by the franchisee during the term;
- introducing an obligation to discuss expenditure prior to entering an agreement;
- requiring disclosure of the circumstances under which the franchisee is likely to recoup the expenditure; and
- specifying, as far as practical, the amount, timing and nature of the expenditure to be provided.
Marketing and Other Cooperative Funds
The Government will amend the Franchising Code to clarify requirements relating to the treatment and reporting of cooperative funds, and will:
- instruct the Department of Industry, Science, Energy and Resources to write to the Australian Accounting Standards Board, asking it to consider whether guidance for auditing of marketing and cooperative funds is required;
- work with the sector to emphasise the importance of developing best practice financial statements.
The Government will strengthen the management of the dispute resolution services and organisations, including expressly allowing multi-party dispute resolution under the Franchising Code, conciliation and voluntary binding arbitration, and will:
- incorporate the functions of the Franchising Mediation Adviser into ASBFEO, to improve the efficiency of dispute resolution assistance and make it clearer that ASBFEO can assist with franchise disputes;
- ensure all franchisees can access ASBFEO’s dispute resolution services;
- implement a voluntary binding arbitration model by appointing a Franchising Arbitration Adviser, utilising a model similar to that in the Dairy Industry Code;
- introduce conciliation to complement existing dispute resolution provisions;
- support ASBFEO’s power to write to the ACCC and other regulators notifying them of systemic or serious matters that have come to its attention;
- provide best practice guidance on timeframes for the commencement and completion of dispute resolution processes; and
- amend the Franchising Code 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.
The Government will strengthen the ability of franchisees to exit the agreement before the end of the term and increase disclosure of end-of-term arrangements for goodwill:
- consult with the franchising sector to develop amendments to the Franchising Code to facilitate negotiated early exit that balance the rights and interests of franchisors and franchisees;
- amend disclosure requirements to ensure end-of-term arrangements for franchisee goodwill are clearly specified; and
- require franchisors to clarify a franchisee’s entitlement to goodwill in the franchise agreement and include this information in the Key Disclosure Information Fact Sheet; and
- amend clause 29 of the Franchising Code to require the franchisor to provide the franchisee with seven days’ notice of a proposed termination in special circumstances, so that a mediator or arbitrator can assist the parties to negotiate. It is unclear whether this includes termination in the event of fraud or public health or safety.
Some technical changes are proposed to clause 23 of the Code in relation to restraint of trade clauses, as well as initiatives designed to increase awareness.
Compliance and Enforcement
The Government will enhance enforcement, and will:
- amend the CCA to increase the maximum civil pecuniary penalty available for a breach of an industry code from 300 penalty units to 600 penalty units;
- double the civil pecuniary penalty for breaches of the Franchising Code from 300 penalty units to 600 penalty units; and
- amend the Franchising Code to apply penalties for breaches of clauses that relate to the use of marketing funds.
Other Code Amendments
- The Government will improve franchisees’ awareness about 'no agent' and 'entire agreement' clauses.
- The Government will prohibit (and have pecuniary penalties for) franchisors passing on the legal costs of preparing, negotiating and executing documents to the franchisee (except where it is already incorporated into a joining fee).
- The Government will improve awareness of the issue of wastage and shrinkage payments by franchisees.
- Upon finalisation of amendments of the Franchising Code the Government will consider amending the Oil Code of Conduct to ensure consistency where appropriate, as part of the Oil Code of Conduct med-term review.
Unfair Contract Terms
The Government declined to single out franchise agreements in the context of the review of legislation to prohibit unfair contract terms in standard form small business contracts. It noted that issues relating to unilateral variations of franchise agreements and subsidiary documents are best dealt with through the Australian Consumer Law and the good faith provisions of the Franchising Code.
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 will:
- improve awareness of existing unfair contract term protections and mechanisms with which franchisees can seek redress;
- consider appropriate amendments to the Franchising Code relating to retrospective variation; and
- amend the Information Statement to emphasise the importance of prospective franchisees understanding Code requirements before entering a franchise agreement.