AUTOMOTIVE AND GENERAL FRANCHISING REFORMS – COMMENCING 1 JULY 2021

Jun 22, 2021

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On 1 June 2021, the Federal Government released the Competition and Consumer (Industry Codes—Franchising) Amendment (Fairness in Franchising) Regulations 2021 (the Amendments).

The Amendments amend the Franchising Code of Conduct (the Code), addressing the franchising sector generally as well as new vehicle dealership agreements, specifically.

We summarise the key Amendments below.

Changes related to new vehicle dealership agreements

  1. The definition of “motor vehicle dealership” in the Code has been expanded to capture agency models of vehicle sales.
  2. A franchise agreement must provide for compensation for early termination where it is terminated before it expires because the Franchisor:
    1. withdraws from the Australian market; or
    2. rationalises its networks in Australia; or
    3. changes its distribution models in Australia.
  1. A franchise agreement not exclude any compensation to which the Franchisee may be entitled, other than under the agreement, if the agreement is terminated before it expires other than because the Franchisee’s breach.
  2. A Franchisor must not enter into a franchise agreement unless the agreement provides the Franchisee with a reasonable opportunity to make a return on investment. 
  3. A Franchisor must not enter into a franchise agreement unless the agreement contains provision for the Franchisor to buy back or compensate the Franchisee for new road vehicles, spare parts and special tools where the agreement has been terminated early under certain circumstances or not renewed.
  4. Without limiting the factors to which a Court may have regard in determining whether a party has acted in good faith, Courts must now have regard to whether the terms of the agreement are fair and reasonable.

General franchising changes

Numerous general franchising changes have been made, including the following, which is not an exhaustive list:

  1. Dispute resolution

The dispute resolution provisions of the Code have been amended, including as follows: as follows:

  • the introduction of conciliation and voluntary arbitration dispute resolution mechanisms;
  • the express recognition of the availability of multi-franchisee dispute resolution processes, and an obligation for a Franchisor to attend such a process conducted by the dispute resolution provider.
  1. Pre-entry disclosure

These key changes include:

  • an updated Information Statement must be given to Franchisees before disclosure. A copy of the Information Statement may be downloaded here.
  • the introduction of a Key Facts Sheet, to be provided with the disclosure document. The template for this is expected to be released shortly.

An updated version of the Code and template disclosure document is anticipated to be released shortly.

  1. An existing Franchisee now has the right to give a written proposal to the Franchisor for early termination of the agreement. The Code sets out the mechanism governing how a Franchisee and Franchisor must deal with one another in this regard.
  2. As a result of the Amendments, if a franchise agreement gives the Franchisor power to terminate the agreement for certain special grounds as set out in the Code, the Franchisor must not terminate the agreement because of such a ground unless the Franchisor has given the Franchisee 7 days’ written notice of the proposed termination and the ground for it. The Code sets out Franchisee’s right to challenge this and the related process.
  3. 14-day cooling off

The changes to the cooling-off period include:

  • extending it from seven (7) days to fourteen (14) days;
  • starting on the later of (no longer the earlier of):
    • entry into an agreement (including ancillary documents); or
    • paying money under an agreement; and
  • applying the cooling off to transfers of business as well as to new agreements.
  1. Significant capital expenditure

The prohibition on requiring undisclosed significant capital expenditure is strengthened by extending recent changes to capital expenditure made in 2020 for automotive franchises to the broader franchising sector.

  1. A Franchisor is prohibited from unilaterally varying an agreement with retrospective effect unless the written consent of the Franchisee is obtained.
  2. The Amendments prevent a Franchisor from contractually passing on future legal costs associated with the agreement where those costs are indeterminate at the time the agreement is signed.
  3. The Code has been updated to ensure that only a serious breach of an agreement by a Franchisee is relevant to the enforceability of a restraint of trade provision.

When do the changes take effect?

The Amendments that relate to dispute resolution apply to any dispute that is notified on or after 2 June 2021, even if the franchise agreement was entered into before 2 June 2021.

The remaining provisions only affect agreements entered into, renewed, or extended on or after 1 July 2021, noting however that, broadly speaking, any amendments which require a Franchisor to change its disclosure document will apply from 1 November 2021.

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