As foreshadowed in its response to the 2023 Review of the Franchising Code of Conduct (the Code), the Government has proposed amendments to the current termination provisions of the Code.
On 9 October 2024, the Government released the Exposure Draft of the 2025 Franchising Code of Conduct (the Exposure Draft), inviting comment until 29 October 2024.
The full copy of the Exposure Draft, the Information Paper, and the Explanatory Statement can be read here.
The infographic below sets out the recommendations and Government findings arising from the 2023 Review of the Franchising Code of Conduct, relating to the category "Ending a Franchise Agreement".
There has been no advice about when a "decision on licensing" will occur, or how the effectiveness of clause 26B of the Franchising Code will be enhanced.
The July 2021 amendments to the Code (considered in our article Franchising Code Amendments - Termination) included substantial changes in relation to exit and termination, including:
The effectiveness of these amendments was considered in the 2023 Review of the Franchising Code of Conduct, leading to recommendations that:
The Information Paper released with the Exposure Draft indicates that the key messages from the Review on this topic were that:
Section 54 of the Exposure Draft includes a new version of the current clause 29 of the Code.
Under the proposed section 54, the franchisor is still required to provide 7 days' notice of termination (a current requirement of clause 29), however there is no ability to extend the time period to 28 days through a dispute resolution process.
The Explanatory Statement provides that section 54 "implements a more streamlined approach for termination for 'serious breaches' of the franchise agreement as represented by the grounds set out in Section 54(1)".
The list of grounds to which the new section 54 applies include:
Subsections 54(1)(d), (e), (g) and (h) are new additions to the grounds, or "special circumstances" to which the 7 day notice provisions apply.
In my view the proposed amendment does little to simplify the provisions introduced in 2021. Given that the Explanatory Statement indicates that the reason for the amendment to the provision is that "a decision has already been made under a process external to the Code (for example, a decision has been made by the Australian Securities and Investments Commission if a company is deregistered or a court if the franchisee is convicted of one of the listed offences)", it is difficult to see why the 7 day notice period is still required. That is, a more simplified approach would be to return to the pre-2021 provisions of immediate termination (in special circumstances).
Section 55 of the Exposure Draft, contains the remaining grounds of termination under the current clause 29 being:
(a) the franchisee voluntarily abandons the franchised business or the franchise relationship;
(b) the franchisee operates the franchised business in a way that endangers public health or safety;
(c) the franchisee acts fraudulently in connection with the operation of the franchised business.
In addition to the provision of 7 days' notice, section 55 contains the current provisions of clause 29 relating to alternative dispute resolution. That is, if the franchisee tells the franchisor in writing about a dispute relating to the proposed termination then, the franchisor must not terminate the agreement until the end of 28 days after the notice was given.
The Explanatory Statement goes on to note that franchisors can use section 56 (which requires a franchisee to cease operating the franchise business on termination grounds), to manage the risks associated with a franchisee continuing to operate the franchise business if the franchisee is unlicensed or where there is an endangerment of public health or safety.
In my opinion, this highlights the fact that the termination provisions in the Exposure Draft would operate more simply if section 54 enabled franchisors to immediately terminate the franchise agreement, rather than having a two step process of termination on 7 days' notice and in addition, the right to notify a franchisee of interim management in certain circumstances.
For more information about the current termination provisions under the Code see our article Understanding Franchise Agreement Termination.
In response Recommendation 15 of the 2023 Franchising Code Review relating to restraints, the Government indicated that it would direct the Competition Taskforce to consider how restraints in Franchise Agreements may be affecting franchise workers.
As part of the 2 year Competition Review which was announced in August 2023, the Government is considering the effect of non-compete clauses on the Australian economy.
The "Non-Competes and other Restraints: Understanding the impacts on Jobs, Business and Productivity Issues Paper" provides that following the 2023 Review of the Franchising Code, the Competition Review will also consider how "restraints of trade and other uncompetitive terms in franchise agreements may be affecting franchise workers".
In addition, the Exposure Draft has reframed the current clause 23 of the Code. Section 41 of the Exposure Draft prohibits a franchisor from entering into a franchise agreement which contains a restraint of trade clause of which applies in the circumstances set out in section 41.
The circumstances set out in section 41 essentially mirror the current clause 23 of the Code, except that the Exposure Draft clarifies that the section applies to the failure to renew a franchise agreement that has expired, in addition to the failure to extend a franchise agreement that has expired.
In addition to section 41 of the Exposure Draft (which is a penalty section), section 64 of the Exposure Draft provides that a franchisor must not rely on a restraint of trade clause in the circumstances set out in section 41. The proposed section 64 is also a penalty section.
For further discussion about some of the current issues surrounding restraint of trade clauses in franchising, see our article Legal Challenges to Restraint of Trade Clauses in Franchising.
The Government has sought to simplify certain provisions of the Code related to Ending a Franchise Agreement. In particular:
Feedback is sought on the proposed provisions by 29 October 2024.
While this article deals with the proposed provisions of the Exposure Draft concerning Ending A Franchise Agreement, I have considered in our two previous articles the proposed provisions of the Exposure Draft relating to the Scope of the Regulation of the Code and Before a Franchisee Enters into a Franchise Agreement.
Disclaimer
The information in this article is general in nature and is not intended to address the circumstances of any person or other entity. Although we do our best to provide timely and accurate information, we do not guarantee that the information in this article is accurate or that it will continue to be accurate in the future.