Franchising Updates

2021 Changes to Franchising Code of Conduct

Changes to theFranchising Code of Conducthave now been legislated. Some of the changes - relating to dispute resolution - took effect on 2 June 2021, and the others take effect from 1 July 2021. These amendments to theCodeare the result of work that commenced in 2018 with the Senate Enquiry into franchising.

The changes mean greater complexity in navigating the field of franchising. The amendments are far-reaching and will affect both the process for entering into a franchise agreement and the documents required, as well as other aspects of franchising.

Here is a brief summary of some of the major changes to theCode.

Documents Provided to Franchisees

For franchise agreements entered into from 1 July 2021, there are new documents that must be given to franchisees: 

• There is a new form of Information Statement. 

• There is now a 'Key Facts Sheet'. Like the disclosure document, this must be updated within 4 months after the end of each financial year. 

• Documents relating to the lease or occupation of premises must be provided, if the franchisee is to obtain a right of occupation from the franchisor or its associate. Differently to the previous regime, these documents must now also be provided at least 14 days before the franchise agreement is entered into. 

Franchisors will be able to continue using their existing disclosure documents until 31 October 2021, but from 1 November 2021, there are changes to the form of the disclosure document. The revised form requires additional information, including significantly greater detail in relation to rebates from suppliers. 

Cooling off Period

The cooling off period, which was previously 7 days, has been lengthened to 14 days and there are additional rights for a franchisee to terminate the franchise agreement if proper disclosure in relation to any lease has not occurred (where the franchisor or its associate grants occupancy rights).

The longer cooling off period also applies to sales of franchises by existing franchisees. Furthermore, franchisors cannot give consent to a transfer unless disclosure has been provided to the incoming franchisee at least 14 days beforehand.

Significant Capital Expenditure

Further restrictions have been added to any requirement for a franchisee to make significant capital outlays during the term of the franchise agreement. If the franchisor discloses, in its disclosure document, that significant capital expenditure will be required, it must provide as much information as practicable about the expenditure including the justification for it, the amount, the timing and nature of it and other information. The franchisor and franchisee must also discuss the expenditure.

Termination of Franchise Agreements 

Franchisors no longer have the right to terminate a franchise agreement immediately in special circumstances, for example where a franchisee acts fraudulently. Seven days' notice must be given. It is possible for the franchisor to suspend the operation of the franchised business in those circumstances but whether it can actually do so will depend on whether this right is contained in the franchise agreement. 

Franchisees can also request the early termination of a franchise agreement and if the franchisor refuses, the dispute may become the subject of a dispute resolution process. 

Dispute Resolution 

Groups of franchisees can now compel a franchisor to participate in joint dispute resolution where the issues in dispute are similar. This will inevitably give greater negotiating power to franchisees. 

The types of dispute resolution available have been extended to conciliation and arbitration, whereas previously only mediation could be insisted upon. 

Arbitration will not be available unless the parties agree to it or the franchise agreement provides for it, however it seems that any party to a franchising dispute now has the option of asking for the appointment of a conciliator instead of a mediator. Conciliation is similar to mediation but unlike a mediator, a conciliator can express opinions and give guidance about the parties' rights and obligations. 

These changes to dispute resolution have already taken effect, so franchisees or franchisors who are in dispute can immediately avail themselves of the new rights and procedures. 

Future Changes 

Other changes to laws affecting franchising had been foreshadowed by the government, including the introduction of a franchising register and an increase in the penalties that apply for breach of theCode. These changes have not been implemented as at 12 June 2021, but it is expected that they will be introduced in the near future.