Franchising Update: Government Response to the Fairness in Franchising Report

Sep 17, 2020

By Business Law Team

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On 20 August 2020, the Australian Government released its response to the “Fairness in Franchising Report” (the Report) which was published last year by the Joint Committee on Corporations and Financial Services following its inquiry into the operation and effectiveness of the Franchising Code of Conduct (the Code).

The Government recognised the importance of the franchising sector to the economy, however in line with the recommendations of the Report, decided that action was required to improve fairness and transparency for franchisees.

Further, on 2 September 2020, the Federal Opposition released its own response to the Report by way of a private members bill to the Senate. This may alter the Government’s proposed timing of the proposed reforms and their implementation.

Importantly, until many of the changes are finally drafted and agreed between the Government and Opposition, the final changes to the Code and their impact on the franchising industry in general, remain to be seen.  The Government has not yet announced a timetable for introducing its proposed amendments to the Code. However it is widely expected to occur later this year or early next year.

We have summarised the salient points of the Government’s response:

Increased Penalties
  • Increasing the maximum civil pecuniary penalty (being a monetary fine) under the Code from 300 to 600 penalty units (or $133,200 based on the current $222 per penalty unit)
  • Pecuniary penalties for breaches regarding the use of marketing funds
Increased disclosure requirements Improvement to the information that must be disclosed to the prospective franchisees, including:

  • financial information must be part of the disclosure documents, and franchisors are required to make a statement as to the accuracy and appropriateness of the financial information provided
  • improved information must be contained in marketing fund financial statements
  • more information around restraints of trade must be provided
  • more information in relation to supply arrangements and supplier rebates, commissions, and other payments must be provided
  • Key Disclosure Fact Sheet: franchisors will be required to prepare and issue to prospective franchisees a Key Disclosure Information Fact Sheet to simplify and improve upfront information available to them, which includes franchisor’s interest in a leasing arrangement.
Disclosure and Cooling Off time periods These will be clarified, although the proposal is for franchisee termination at any time up to 14 days after the last of certain events have occurred, such as:

  • the agreement being signed;
  • payment being made;
  • disclosure documents being received; and
  • a copy of the terms of the lease being received, if applicable.
Dispute Resolution
  • introducing conciliation and voluntary binding arbitration as a means of improving dispute resolution options in a similar manner to the Dairy Code
  • amend the Code to clarify that, if the person conducting the dispute resolution process determines it is appropriate to conduct a multi-party process, the franchisor cannot refuse to take part in that process.
Significant capital expenditure
  • strengthening franchisees’ rights when a demand for significant capital expenditure is made, including by prohibiting franchisors from requiring franchisees to undertake significant capital expenditure unless it is disclosed prior to entering into a franchise agreement, it is legally required, or the franchisee agrees.
Exit Arrangements
  • develop amendments to the Code to facilitate negotiated early exit that balance the rights and interests of franchisors and franchisees
  • amend disclosure requirements to ensure end-of-term arrangements for franchisee goodwill are clearly specified
  • require franchisors to clarify a franchisee’s entitlement to goodwill in the franchise agreement and include this information in the Key Disclosure Information Fact Sheet
  • amend clause 29 of the Code to require the franchisor to provide the franchisee with seven days’ notice of a proposed termination in special circumstances, so that a mediator or arbitrator can assist the parties to negotiate. Such special circumstances may include where the franchisee no longer holds a licence that the franchisee must hold to carry on the franchised business, the insolvency of the franchisee, or where the franchisee is convicted of a serious offence, acts fraudulently, or is operating the business in a way that endangers public health or safety.
Public Register
  • a public register of franchisors is to be maintained, to help prospective franchisees make an informed decision before entering a franchise agreement.
Access to information
  • disclosure document and franchise agreement must be made available in both electronic and hardcopy form
  • Information Statement must be provided to prospective franchisees separately and prior to providing the disclosure document and other disclosure materials
  • increase transparency surrounding retail leases (subject to further negotiation with the sector), with the exception the franchisor is not required to provide documents it does not have available.

We note for completeness that the above proposed reforms are additional to those already implemented to the Code on 1 June 2020, which are specific to the Automotive sector and include the introduction of a new Part 5 of the Code to give greater protections for automotive dealers.

Clinch Long Woodbridge have for over 20 years advised franchisors and franchisees on their compliance with the Code and will continue to monitor developments and provide updates.

Important Disclaimer: The content of this publication is general in nature and for reference purposes only. It is current at the date of publication. It does not constitute legal advice and should not be relied upon as such. Legal advice about your specific circumstances should always be obtained before taking any action based on this publication.

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