Reforms to the Franchising Code of Conduct unveiled: Here's what you need to know

Dispute resolution

Key issues underlying franchising dispute resolution have been addressed by:

• expanding existing dispute resolution avenues to introduce conciliation and voluntary arbitration;
• conferring on the Australian Small Business and Family Enterprise Ombudsman the functions previously undertaken by the Franchising Code Mediation Adviser;
• formalising the availability of multi-franchisee dispute resolution processes which must be attended by a franchisor where conducted by the dispute resolution provider;
• failure to attend ADR process will contravene a civil penalty provision; and
• requiring parties to a dispute to observe confidentiality requirements relating to resolving the dispute. 

Disclosure obligations – pre-entry disclosure

Improvements to the quality and scope of disclosure requirements have been made, including:

• the requirement that franchisers meet additional disclosure requirements prior to entering into an agreement with a prospective franchisee. For example, franchisors must provide to the prospective franchisee:
  • a copy of the new key facts sheet containing key information from the disclosure document; and
  • and relevant lease documents (if applicable)

  to the prospective franchisee at least 14 days before the parties enter a franchise agreement (or pays non-refundable money); and

• an improved Information Statement which franchisors must provide to the prospective franchisees prior to giving them other disclosure documents; and
• the requirement that the franchisor cannot give their consent to the transfer of the agreement until at least 14 days after giving the prospective new franchisee the required documents.

Marketing funds and other cooperative funds

• References to marketing funds will apply to all forms of cooperative funds where payments are collected to cover marketing activities for the franchise system or a segment of it.
• Master franchisors may collect and manage marketing and cooperative funds.
• Fund administrators are required to prepare an audited annual financial statement for the last financial year, within four months of the end of the financial year to which it relates. This statement and the auditor's reports must be provided to franchisees within 30 days of their preparation.
• Where 75% of Australian franchisees who contribute to the fund agree by vote, the fund administrator does not need to have the statement audited for the financial year.

Civil penalties will be imposed upon franchisors who maintain a marketing fund but fail to comply with reporting obligations. 

Significant capital expenditure

Under the new reforms, a franchisor is prohibited from requiring a franchisee to undertake significant capital expenditure in relation to a franchised business during the term of the franchise agreement term. Some exceptions apply.

Early termination arrangements

• Significant changes to give franchisees an explicit avenue to propose the early termination of the franchise agreement.
• The franchisor must respond to the proposal within 28 days, and if they do not agree to the termination, they must include reasons for refusal. Franchisors who refuse a termination request may be seen to be in breach of the Code's good faith obligations or unconscionable conduct clauses.
• Franchisors who wish to terminate an agreement under the Code's "special circumstances" termination rights will be required to provide 7 days' notice to the franchisee that they purport to terminate the franchise agreement.

Passing on of a franchisor's legal costs

• With the introduction of new Clause 19A, franchisors are prevented from contractually passing on future legal costs associated with the agreement.
• This clause allows for franchisors to pass on the legal costs of preparing the franchise agreement to franchisees, but only where those costs are specifically quantified as a dollar amount in the agreement.

Cooling-off and transfer

• The reforms extend the cooling-off period from 7 to 14 calendar days for new agreements and transfers of existing agreements. For transfers, the cooling off period will expire earlier if the incoming franchisee takes possession and control of the franchised business (new clause 26A).
• The commencement of the cooling-off period has also been expanded.

Unilateral variation – retrospective

• Under the new reforms, franchisors are prevented from varying an agreement with retrospective effect unless the affected franchisee consents (in writing) to the variation. 

Leasing of premises

• The reforms enhance the existing disclosure requirements of lease information to a franchisee (or prospective franchisee).
• Non-compliance with the new provisions may result in a civil penalty. 

Restraints of trade

• Under the existing Code, the restraint of trade clause only applies after the existing agreement expires if (among other factors) the franchisee was in breach of the agreement (or any related agreements). Following the reforms, this clause will now apply only when the franchisee has committed a "serious" breach.
• What amounts to a "serious" breach may differ between franchise systems and will often depend on the circumstances.

Good faith

• In addition to the existing considerations pertaining to good faith, courts must now have regard to whether the terms of the agreement are fair and reasonable. 

New vehicle dealership agreements

• The definition of motor vehicle dealership has been expanded to incorporate agency models of vehicle sales.
• Compensation provisions:
  • New vehicle dealership agreements are to include terms setting out the compensation of the dealer in the event the manufacturer withdraws or rationalises its Australian market presence, or changes its distribution models in Australia. The compensation term must specifically address how the compensation is to be determined.
  • The manufacturer must specify how the franchisor will buy back or provide compensation in relation to new vehicle inventory, party and special tools in the event early termination or non-renewal.
  • Manufacturers are precluded from including a contractual provision which attempts to deny the dealer compensation if the agreement is terminated early for reasons other than breach by the dealer.
  • The new compensation provisions are civil penalty provisions.