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Franchisors take care! Further penalties and obligations under the Franchising Code for 2021 (part 1)

09 December 2020

5 min read

#Corporate & Commercial Law, #Competition & Consumer Law

Published by:

Friedrich Kuepper, Amy Hancell

Franchisors take care! Further penalties and obligations under the Franchising Code for 2021 (part 1)

The federal government recently released an exposure draft proposing numerous changes to the Franchising Code of Conduct (Code). The proposed changes are in response to the Parliamentary Joint Committee’s Fairness in Franchising Report and seek to improve protections for, and information available to, franchisees.

If enacted, the Code will rebalance franchise arrangements in favour of the franchisee and franchisors will face increased obligations and restrictions. Further, for breaches of the Code that carry a civil penalty, franchisors may be exposed to penalties at double the current rate (from 300 to 600 penalty units, currently at $133,200).

In this two-part series, we will summarise the proposed changes to the Code and consider the impact of these changes on the franchised business system, end of term arrangements and franchise agreements.

We kick off this series by examining certain proposed changes to the Code.

Proposed changes to the Code

The exposure draft proposes a number of changes to the Code, including:

  • expanded disclosure obligations
  • doubled penalties
  • a new key facts sheet
  • restrictions on operating a franchise
  • expanded franchisee rights in ending the relationship
  • new dispute resolution processes.

Expanded disclosure obligations

Under the exposure draft, disclosure obligations of franchisors are proposed to be expanded as follows:

  • terms of the franchise agreement – franchisors will be required to provide further information about certain key commercial terms of the franchise agreement. This includes:
    • arbitration of disputes – the exposure draft contains new provisions relating to the dispute resolution between franchisor and franchisee by way of arbitration. The introduction of arbitration to the Code may change expectations around how disputes are managed and resolved. Given the costs and timeframes associated with arbitration, close attention will need to be paid to dispute resolution clauses. Further, franchisors will be required to disclose whether the franchise agreement provides for arbitration of disputes in a manner consistent with the Code
    • early termination – franchisors will be required to disclose the rights each party has to terminate the franchise agreement early. Importantly, franchisees will have the right to propose termination under the Code, at any time, and the franchisor must respond within 28 days (with reasons, if refusing)
    • rights to the goodwill generated by the franchisee – franchise agreements commonly attribute goodwill arising from the operation of the business subject of the agreement to the franchisor. These kinds of arrangements would need to be disclosed under the exposure draft Code. 
  • significant capital expenditure – where the franchisor requires significant capital expenditure, information such as the amount, timing and nature of the expenditure must be disclosed and must be discussed with the franchisee before entering the franchise agreement. Franchisors will only be permitted to require franchisees undertake significant capital expenditure during the term in certain circumstances, including where it is disclosed
  • earnings information – if earnings information is provided to franchisees, the franchisor must include a statement in the disclosure document as to whether earnings information is accurate to the franchisor’s knowledge, and specify any parts that it is aware are not accurate
  • leases – where a lease over the franchise premises is held by the franchisor or its associate, the lease and any other information required under applicable law must be provided to the franchisee at least 14 days before entry into the franchise agreement. In addition, a franchisee will have an additional cooling-off period to terminate the franchise agreement where the franchisor or associate holds the lease, being 14 days after receiving the terms of the lease or the right to occupy. Further, if the franchisor does not provide adequate lease disclosure, the franchisee will have a further 14 days from entry into the lease or the right to occupy to terminate
  • supplier rebates – further information on any benefits a franchisor receives from supplying goods or services to the franchisee must be provided, including the nature of the benefit, who the supplier is, how the benefit is calculated and whether the benefit will be shared with the franchisee (whether directly or indirectly – and how)
  • new key facts sheet – under the proposed changes, franchisors will be required to provide prospective franchisees with a standard form ‘key facts sheet’ which highlights the most critical information from the disclosure document. The guide to the changes provides three mock-ups, with the final version to be added to the Code
  • documentary requirements – the exposure draft also proposes changes to form requirements. Information statements will need to be provided before other disclosure documents and be updated with further warnings, guidance materials and information on specific clauses and franchisor practices. Franchisors will also be required to provide disclosure documents in print, electronic or both, upon request by the franchisee.

Doubled penalties

Significantly, in an attempt by the government to deter poor conduct by franchisors, the maximum penalty for a breach of the Code is proposed to increase from $66,600 to $133,200.

When will the proposed changes take effect?

Aside from the increased penalties (which are dependent on amendments to the Competition and Consumer Act 2010 (Cth) passing parliament), these changes are proposed to come into effect from 1 July 2021.

What does this mean for you?

Should the updates to the Code proceed, franchisors will need to prepare a key information statement and consider the changes they will need to make to the disclosure document to ensure compliance with the proposed changes. The exposure draft may be viewed in full here.

Key takeaways

Franchisors should make themselves aware of the proposed amendments and be prepared to update their systems, documents and policies to ensure compliance before 1 July 2021. In particular, franchisors will need to disclose further information on certain terms in the franchise agreement and for any significant capital expenditure, earnings information, leasing and supplier rebates.

Franchisors will also need to provide a key facts sheet outlining the critical information in the disclosure document and be vigilant of whether their practices comply with other Code requirements given that breaches of the Code may expose franchisors to doubled penalties.

If you require assistance with updating your systems, documents and policies to comply with these proposed changes, please contact our team.

Other changes

To learn about the impact of the proposed changes on the operation of the franchised business system, end of term arrangements and franchise agreements, stay tuned for our second part next week.

Authors: Trent Taylor, Friedrich Kuepper & Amy Hancell

The information in this publication is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, we do not guarantee that the information in this newsletter is accurate at the date it is received or that it will continue to be accurate in the future.

Published by:

Friedrich Kuepper, Amy Hancell

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