LexisNexis

News from around the world – Australia

Monday 12 September 2022

Tony Garrisson

Coulter Legal, Melbourne, Victoria

tgarrisson@coulterlegal.com.au  

Franchising in Australia is regulated by the Franchising Code of Conduct (‘the Code’), a mandatory industry code implemented under the Competition and Consumer Act 2010 (Cth). Since the Code’s implementation in 2010, it has undergone several reviews, with the most recent finishing just this year.

The latest review of the Code began in 2018 with a parliamentary review to address fairness in the franchising sector. The review revealed a range of problems in the franchising sector and the Australian government released a response on 20 August 2020 with the Franchising Code of Conduct report ‘Fairness in Franchising’. 

Amendments to the Code

Regulations to amend the Code resulting from the recommendations in the report were issued on 27 May 2021, 17 March 2022 and 31 March 2022. The purpose of the amendments was to improve fairness and transparency in the franchising sector.

The regulations that amended the Code predominantly dealt with the following themes:

  • misconduct by franchisors;
  • lack of relevant information for franchisees;
  • increased penalties to deter unfair practices; and
  • further tweaking of the Code to promote transparency and increase disclosure by franchisors.

Changes already implemented

A number of significant changes to the Code have already been implemented, with the following changes commencing before 1 July 2022:

  • Increased options for dispute resolution including conciliation, mediation and multiple party dispute resolution, with alternative dispute resolution processes now able to be conducted online. In addition, voluntary arbitration provides another option to resolve the dispute where there is written agreement between the parties either in the franchise agreement or agreed later.
  • An ‘Information Statement’ must given to prospective franchisees as soon as practicable after a prospective franchisee applies or expresses an interest in a franchise.
  • A ‘Key Facts Sheet’ must be prepared and provided with the disclosure document and franchise agreement, which is intended to be a shorter form summary of the key provisions of the disclosure document.

Amendments to the Code have also been made to enable franchisees to request an early termination of their franchise agreement with franchisors required to respond within 28 days including (if applicable) their reasons for refusal.

Whilst the above changes are procedural changes, some of the changes to the Code need to be addressed in the franchise agreement. For instance, the legal costs associated with the preparation, negotiation and execution of a franchise agreement must be set out as a fixed amount. Franchisors can no longer pass on future legal costs associated with the preparation and execution of other documents associated with the franchise such as legal audits, notices of breach, renewals, transfers and extensions.

The cooling off period has also been extended from seven days to 14 days, and now applies to transfers of franchise agreements. Furthermore, the period now begins after ‘entering into the agreement’, rather than being tied to a payment being made.

Franchisors must also now give seven days’ written notice of the proposed termination and grounds for termination (for special circumstances). The franchisee can dispute the proposed termination and if the termination is disputed, the franchisor must not terminate the agreement until 28 days after such dispute notice is provided by the franchisee. The franchisor can by written notice require the franchisee to cease operation of the business during the 28-day period.

The changes to the Code that have already been implemented have also necessitated changes to the disclosure document:

  1. The disclosure document must now be provided in printed form, electronic form or both, if requested by the prospective franchisee;
  2. There have been changes to provisions of the Code concerning additional information to be included in the disclosure document including:

(i) Goodwill and franchisees’ rights: the disclosure document must now include a summary of the prospective franchisee’s rights relating to any goodwill generated by the franchisee. There must be a statement if there are none, if that is the case. The disclosure document must also include whether the franchise agreement includes a restraint of trade or similar clause.

(ii) Earnings information: if earnings information is provided, franchisors will now be required in the disclosure document (or in an attachment to it) to specify whether earnings information in the disclosure document is accurate to the best of the franchisor’s knowledge, unless otherwise stated.

(iii) Capital expenditure: the franchisor must now disclose as much information as practicable about the expenditure, including the rationale for the expenditure, amount, timing, anticipated outcomes and risks associated with the expenditure. This information must be disclosed before entering, renewing or extending the franchise agreement. Discussions now need to include whether the franchisee is likely to recoup the expenditure.

(iv) Termination rights: these determine details as to whether the franchise agreement provides for arbitration of disputes, early termination of the franchise agreement by franchisors and franchisees and the circumstances in which these rights can be exercised.

(v) Dispute resolution: franchisors will need to disclose the percentage of franchisees in the franchise system that were party to a mediation, conciliation or arbitration or were pending in the previous financial year.

(vi) Leases for the premises of the business: where a franchise premises is subject to a lease held by the franchisor or an associate, a copy of the lease or occupancy agreement and any written disclosure information about the lease provided by the landlord to the franchisor or its associate must then be provided to the franchisee. The lease must be disclosed separately to the disclosure document within the 14-day disclosure period. If the franchisor fails to make such disclosure, the franchisees will have the right to have ‘cool off’ extended by up to 14 days until it is provided.

(vii) Rebates and other financial benefits that franchisors receive: franchisors who receive a rebate or other financial benefit from one or more suppliers must now supply:

(a) the nature of the rebate/benefit, name of business providing it and amount received in the previous financial year from that supplier;

(b) whether the rebate or other financial benefit is shared directly or indirectly with the franchisee;

(c) if shared, method for working out how much is shared or retained by franchisor; and

(d) a description of each such benefit.
 

  • The rebate/financial benefit does not need to be disclosed if:
    1. the franchisee is permitted to acquire the goods or services from sources without the franchisor’s approval;
    2. the whole of the rebate or benefit from that supplier is to be returned to the franchisee directly as a payment into a co-operative fund controlled or administered by or for the franchisor; and/or
    3. the benefit is an incentive received by franchisors in connection to premises.
  • There are now increased penalties for non-compliance with the Code, with the introduction of ‘mega penalties’ for seven specified breaches of the Code:
    1. Clauses 17(1) and (2) - failure to disclose materially relevant facts in relation to financial details and other matters such as change of ownership, criminal or civil proceedings or judgment recorded against the franchisor, and failure to disclose changes to the materially relevant facts;
    2. Clause 33 - restricting franchisees’ freedom to associate for a lawful purpose; and
    3. Clauses 46A(1), (2) and (3) and 46B which apply to new vehicle dealership agreements in the automotive industry only – failing to compensate franchisees for early termination of their agreements where the franchisor exits from the Australian market, rationalises its network or changes its distribution model, and failing to buy back vehicles, spare parts and tools under these circumstances, or if the agreement is not renewed. Failing to provide reasonable opportunity for a franchisee to make a return on their investment is a further breach of the Code.

      If any of the above clauses are breached by a body corporate, the ‘mega’ penalty is the greatest of the following:
    4.  $10m;
    5. if the court can determine the value of the benefit that the body corporate, and anybody corporate related to the body corporate, has obtained directly or indirectly and that is reasonably attributable to the contravention, the penalty is three times the value of that benefit; and
    6. if the court cannot determine the value of that benefit, the penalty is ten per cent of the annual turnover of the body corporate during the period of 12 months ending at the end of the month in which the contravention occurred.

If the franchisor is not a body corporate, the ‘mega’ penalty for a contravention is $500,000.

All other existing civil penalty provisions will now attract 600 penalty units, instead of the current 300 penalty units. Some existing provisions of the Code that were not previously penalty provisions also became civil penalty provisions on 15 April 2022 along with new provisions.

The current value of a penalty unit is $222, with 600 penalty units equating to a fine of $133,200.

Changes to be implemented

The Competition and Consumer (Industry Codes-Franchising) Amendment (Franchise Disclosure Register) Regulations 2022 were issued on 31 March 2022. The Franchise Disclosure Register became available in July 2022 and will be mandatory from 14 November 2022. From this date, franchisors will also be required to provide certain information to the Australian government for inclusion on the Franchise Disclosure Register. The Register will be available to the public and will need to be updated annually.

The information to be provided by franchisors includes:

  • the name of the franchisor;
  • the name under which the franchisor carries on business in Australia relevant to the franchise;
  • if the franchisor has an Australian Business Number (ABN) and, if so, the franchisor’s ABN;
  • the address, or addresses, of the franchisor’s registered office and principal place of business in Australia;
  • the business telephone number and email address of the franchisor;
  • the Australian and New Zealand Standard Industrial Classification (ANZSIC) division and subdivision codes for the industry in which the business operated under the franchise operates; and
  • any other information that the Secretary of the Department that is administered by the Minister of the Australian Small Business and Family Enterprise Ombudsman Act 2015 may require to be provided to it.

The franchisor may redact information from the documents that is of a commercial nature and is commercially sensitive. Franchisors that give a disclosure document on or before 31 October 2022 must provide information for inclusion in the Register on or before 14 November 2022. Other franchisors that are proposing to enter into a franchise agreement, but have not given a disclosure document by 31 October 2022, must provide the information for inclusion in the Franchise Disclosure Register at least 14 days before the franchisor enters into the franchise agreement with the prospective franchisee.

If a franchisor is a master franchisor in a master franchise system, and has two or more sub-franchisors, the same obligations apply. This means that some overseas franchisors may need to register their franchise system with the Australian Government on the Franchise Disclosure Register.

If the franchisor is operating on a non-Australian financial year, the franchisor must provide disclosure information for their most recent financial year by 14 November 2022. The disclosure information must then be updated and published within 14 days following the franchisor’s annual obligation to update their disclosure document.

International franchisors can nominate representatives (such as lawyers) to access the Franchise Disclosure Register on their behalf. Representatives will need to be authorised to act on behalf of the franchisor's ABN for interactions with the Department of the Treasury.

The Franchise Disclosure Register may also contain the following documents that are provided by the franchisor:

  • disclosure statement;
  • Key Facts Sheet; and
  • standard form franchise agreement used by the franchisor.

The information provided by franchisor must be updated at least once year, by the 14th day of the fifth month following the end of the financial year (ie within two weeks after the franchisor updates their disclosure document each year). For franchisors operating on a July-to-June financial year, this will be by 14 November each year. Failure to provide this information will be a breach of the Code and incur a civil penalty.

The future of franchising in Australia

These changes to the Code are not designed to be prohibitive or detract franchisors from franchising in Australia.

Rather, the changes are designed to ensure fairness and to ensure franchisees are properly informed and can make informed decisions prior to committing to a franchise. Whether those objectives will be achieved, will only be known in the future. [1]


 

 

[1] Article prepared with the grateful assistance of Lauren O’Loughlin, Lawyer, Coulter Legal.

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