Response to the fairness in franchising report

The Federal Government released its response to the Fairness in Franchising Report on 20 August 2020.

In its response, the Federal Government proposed a number of amendments to the Franchising Code of Conduct (the Code).

The Government also announced the introduction of a Key Disclosure Information Fact Sheet to the disclosure process and proposed amendments to the Information Statement set out in Annexure 2 of the Code. 

Contents

Non Financial Disclosure
Financial Disclosure
Supply Arrangements and Rebates
Cooling Off
Capital Expenditure
Marketing and Cooperative Funds
Dispute Resolution
Exit Arrangements
Termination
Restraint of Trade Clauses
Penalties
Legal Costs

Non Financial Disclosure

In response to the principle that prospective franchisees should be able to make reasonable, informed assessments of the value (including costs, obligations, benefits and risks) of a franchise before entering into a contract with a franchisor, the Government proposed in its response to the Fairness in Franchising Report, the following amendments to the Code in relation to non-financial disclosure:

1. a requirement that the disclosure document and the franchise agreement be made available in electronic and hard copy form.
2. a requirement that the Information Statement (Annexure 2 to the Code) be provided to prospective franchisees separately and prior to providing the disclosure document and other disclosure materials. As set out above, the Government has also proposed numerous amendments to the Information Statement.
3. clause 13 of the Code (which requires a franchisor to provide a franchisee with a copy of the lease)  be amended to increase transparency surrounding retail leases. In addition franchisors will be required to set out any interests (such as incentives received) in the Key Disclosure Information Fact Sheet.
   
   

Financial Disclosure

The Parliamentary Joint Committee on Corporations and Financial Services (the Parliamentary Joint Committee) noted our submission in relation to earnings information in the Fairness in Franchising Report. 

The Government in its response to the Fairness in Franchising Report indicated that it proposed to amend the Code to require that:

1. any financial information must be part of the disclosure document.
2. the franchisor’s disclosure document include a statement on the accuracy and appropriateness of the franchisor’s financial information.
   
   
   

Supply Arrangements and Rebates

The Parliamentary Joint Committee noted in the Fairness in Franchising Report that “It is fundamentally important for prospective franchisees to be able to make an informed appraisal of the true cost of goods in order to assess the profitability of a business, especially when both royalties and rebates are applied simultaneously”.

In response, the Government indicated that it proposed to amend the Code to require further disclosure of supplier rebates and commissions, and in particular to require that:

1. franchisors disclose information on supplier rebates, commissions and other payments.
2. franchisors disclose any master franchisor controls and/or any rebates from suppliers.

Cooling Off

To allow a franchisee reasonable time to complete all due diligence the Government in its response to the Fairness in Franchising Report indicated that it proposed to amend the Code to extend the cooling off period to 14 days and broaden the type of transaction subject to cooling off provisions. In particular it proposed that:

1. a franchisee be allowed to terminate a franchise agreement at any time up to 14 days after the last of certain events has occurred such as, the franchise agreement being signed, payment to the franchisor being made, all disclosure documents being received by the franchisee and if applicable a copy of the lease being received.
2. Cooling Off rights be extended to the transfer of an agreement to a new franchisee and where the franchisee enters into a substantially new agreement with the franchisor. Cooling Off rights were not proposed to be extended to renewals or extensions of the franchise agreement.

Capital Expenditure

The Government proposed to strengthen franchisees’ rights when a demand for significant capital expenditure is made by extending the recent amendments to the Code applying to the automotive sector to all sectors. In particular:

1. prohibiting franchisors from requiring franchisees to undertake significant capital expenditure, except where
   1. it has been disclosed before entering into a franchise agreement,
   2. it is legally required, or
   3. it is agreed by the franchisee during the term.
2. introducing an obligation to discuss expenditure prior to entering into the franchise agreement.
3. introducing an obligation to disclose the circumstances under which the franchisee is likely to recoup the expenditure.
4. requiring the franchisor to specify as far as practicable, the amount, timing and nature of any expenditure.
   
   

Marketing and Cooperative Funds

In response to the principle set out in the Fairness in Franchising Report that each party to a franchise agreement should be able to verify that the other party is meeting its obligations under the franchise agreement, the Government proposed to amend the Code to:

1. clarify the requirements relating to the treatment and reporting of cooperative funds where regular payments are required to cover advertising and marketing activities.
2. apply penalties for breaches of clauses that relate to the use of marketing funds, such as clause 31(3) of the Code which provides that marketing fees or advertising fees can only be used to meet certain expenses.
   
   

Dispute Resolution

In response to the principle set out in the Fairness in Franchising Report that where there is a dispute, the dispute resolution process should be fair, timely and cost effective for both parties the Government proposed to amend the Code to:

1. introduce conciliation to complement existing dispute resolution provisions.
2. 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.
3. include a voluntary arbitration model similar to the Dairy Industry Code of Conduct.
   
   

Exit Arrangements

In response to the principle that franchisors and franchisees should be able to exit the franchise agreement in a way that is reasonable and fair for both parties, the Government indicated that it would:

1. consult with the franchising sector to develop an amendment to the Code to facilitate a negotiated early exit of a franchise agreement that balances the rights and interests of franchisors and franchisees.
2. amend disclosure requirements to ensure that end of term arrangements for franchisee goodwill are clearly specified.
   
   

Termination

The Government announced that it would require a franchisor to provide seven days’ notice for termination in special circumstances. Currently a franchisor is able to terminate a franchisee immediately in the special circumstances set out in the Code. In particular the Government indicated that it proposed to amend clause 29 of the Code to require a franchisor to provide a franchisee with seven days’ notice of any proposed termination in special circumstances, so that a mediator or arbitrator can assist the parties to negotiate.

The Government however indicated that it considered it appropriate that franchisors be able to move quickly to address concerns around fraud or public health and safety.

Restraint of Trade Clauses

As set out in our previous article, the Government proposes to amend the Information Statement to warn franchisees of the need to obtain advice about restraints of trade before entering into a franchise agreement. In addition to providing information to franchisees about restraint of trade clauses, the Government proposed to amend the Code to:

1. clarify what constitutes a breach of clause 23 of the Code.
2. make technical changes to clause 23 of the Code. 
   
   

Penalties

As announced as one of its key actions, the Government proposed to encourage greater compliance with the Code by doubling pecuniary penalties for a breach. In particular the Government stated that it would:

1. double the civil pecuniary penalty for breaches to the Code from 300 penalty units ($66,600.00) to 600 penalty units ($133,200.00).
2. amend the Code to apply penalties for breaches of clauses that relate to the use of marketing funds.
   
   

Legal Costs

The Government in its response to the Fairness in Franchising Report also indicated that it would:

1. prohibit franchisors passing on legal costs of preparing, negotiating and executing documents to the franchisee (except where it is already included in the joining fee).
2. introduce pecuniary penalties for any breach of the provisions relating to Legal Costs.