Highly anticipated amendments in the Franchising Code of Conduct have been published by the Australian government. Announced on June 1, the changes include key changes related to areas such as disclosure, cooling off periods, penalties for breach of payment obligations for marketing funds, and dispute resolution provisions.
The changes follow the Australian Government Response has a parliamentary inquiry into the effectiveness of the Code, Code changes for automobile dealers and the sector consultation, as well as the establishment of a franchise disclosure register, announced in mid-May by MP Stuart Robert (paragraph 17).
Many of these changes will affect agreements entered into, renewed or extended as of July 1, 2021, but some changes differ in timing. The changes to the dispute resolution provisions that came into effect on June 2, 2021, barely 24 hours after the publication of the amended Code, are significant. With many of these changes coming into effect less than a month away, here’s what you need to know:
changes to disclosure requirements
Additional disclosure requirements regarding supplier discounts, leases, capital expenditures and end-of-contract agreements will be in effect, to increase transparency for franchisees.
The Code has now made it clear that the information statement must now be provided to potential franchisees before the provision of any other document, including the information document and / or the franchise agreement.
key information sheet
A mandatory key information sheet will also be introduced for franchisors – which will essentially be a summary of the information document and must be provided to franchisees along with the information document and the relevant documentation of the franchise. Failure by a franchisor to do so now results in civil penalties. The Key fact sheet must be updated within 4 months of the end of the financial year in the same way as the annual information document.
disclosure of disputes
In addition to the contentious disputes that franchisors are still required to disclose, franchisors will now be required to disclose the percentage of franchisees in their system who participated in alternative dispute resolution proceedings in the previous fiscal year.
The much-anticipated rebate disclosure changes will also come into effect, with franchisors now required to disclose whether they receive a rebate from a supplier and, if so, the details of the benefit. Discounts should be expressed as a percentage of total purchases for the franchise system (excluding company-run stores) from a particular vendor and franchisors will need to specify whether and how the benefits will be shared with franchisees. The amended Code exempts franchisors from the obligation to disclose this information if the franchisee is authorized to source goods or services from sources and does not need the franchisor’s approval to do so, or when the surrender or the financial benefit is paid or returned directly to the franchisee or through a cooperative fund.
Franchisors will now need to indicate whether they have any interests in a particular rental agreement for the franchise, whether as the owner or the primary tenant.
In the event that profit information is provided to potential franchisees, the information must now be provided with the disclosure document and where profit information is provided, the information document must contain a statement that, at knowledge of the franchisor, the profit information is accurate. . It is important to note that the 14 day disclosure period will now begin from the date all information, including income information, is provided by a franchisor.
Changes to the provisions relating to significant investments have now been made in line with recent developments in automobile franchise systems. In order for a franchisor to now require a franchisee to make significant capital expenditures during the term of the contract, the franchisor:
- must have disclosed the expenses at the time of entering into, renewing or extending the franchise agreement;
- must obtain the approval of the majority of its franchisees;
- must demand the expenditure in order to comply with its legal obligations; or
- must obtain the agreement of the franchisee who is required to incur the expense.
Franchisors should ensure that they discuss with potential franchisees before entering into the franchise agreement the capital expenditures that may be incurred and the circumstances under which the franchisee is likely to recover these costs.
increased possibilities for dispute resolution
The Amendments increase the potential for dispute resolution for franchisors and franchisees through:
- New dispute resolution mechanisms of the voluntary conciliation and arbitration code
- Move the functions assumed by the mediation advisor from the franchise code to the Australian Small Business and Family Ownership Ombudsman. The ombudsman will also be responsible for arbitration and conciliation. Ombudsman Bruce Billson welcomed the changes, declaring that they “will help level the playing field across the franchise industry … by addressing the power imbalances that often exist between franchisees and franchisors, especially when disputes arise”
- Multi-franchise dispute resolution processes will be available. Franchisors will be obliged to attend
longer reflection periods
Cooling off periods have been extended to 14 days from the previous seven days and changes have been made to the events that trigger the start of this period. Franchisors should note that the cooling off period does not begin until all necessary information has been received by the franchisee. The ability of a franchisee to calm down after receiving the terms of the proposed lease or occupancy right is important. In the event that the final lease is not substantially identical to the proposed lease provided with the initial disclosure to the franchisee, franchisees will now have an additional 14 days to retract from receipt of the proposed new lease.
Purchases of existing franchises from selling franchisees will be subject to the withdrawal provisions which expire on the earliest of the following dates:
- 14 days from the day after becoming the franchisee, or
- Once the incoming franchisee takes ownership and control of the franchise business.
The Code details the mechanism for cooling incoming franchisees and the reimbursement of sums by an outgoing franchisee and the franchisor.
early termination requests
Changes have also been made to allow franchisees to request early termination of their franchise agreement. Franchisors must respond within 28 days with a substantive response to the proposal, including the reasons for the denial. Franchisees can make subsequent requests for early termination of their franchise agreement provided that the proposal sets out reasons that are different from the reason given above. The absence of agreement between the parties for an early termination of the franchise contract may give rise to a dispute.
A franchisor must now provide a franchisee with seven days’ notice if they terminate the contract for reasons that were previously considered special circumstances. The notice is intended to provide franchisees with an opportunity to challenge the proposed termination and in doing so prohibit the franchisor from being able to terminate the contract up to 28 days after notification of the notice. Franchisors may require franchisees not to operate all or part of the franchise business, provided that the franchise agreement grants the franchisor this right and the franchisor has served notice to that effect on the franchisee.
clauses and penalties for marketing funds
Changes were made to the marketing funds clauses to ensure consistent terminology and to remove the discrepancies that existed between what was considered advertising and marketing. The amended Code now imposes obligations on the fund administrator, whether he is a franchisor, master franchisor or partner. Civil penalties will now apply to fund administrators who do not maintain a separate bank account, do not make payments for units operated by the franchisor on the same basis as franchisees, and do not use the funds for the stated purposes. in the statement. documents and / or the Code.
legal costs for franchisors
Legal costs associated with the preparation, negotiation and execution of a franchise agreement should be clearly documented in the form of a fixed amount in the franchise agreement. Franchisors will be prohibited from passing on future legal costs associated with the agreement in cases where the costs are undetermined at the time of signing or when they relate to the preparation and execution of other documents.
retrospective modifications of franchise contracts prohibited unless the franchisee accepts them
Retrospective changes to franchise contracts are not valid unless the franchisee consents.
restrictions on trade restrictions
Restriction of trade clauses are now only enforceable in cases where a serious breach of the franchise agreement has been committed by a franchisee.
provisions relating to concession agreements for new vehicles
The provisions apply to new vehicle agents who sell on behalf of manufacturers and support fair compensation for franchised car dealers.
Franchisors should ensure that franchise agreements and processes have been reviewed and updated by July 1, 2021. Disclosure documents should be reviewed and updated by November 1, 2021. Settlement provisions disputes take effect for all disputes that arise from June 2, 2021, even the franchise agreement was concluded before that date.