After much anticipation, the Federal Government has now released both the final version of the new Franchising Code of Conduct together with an Explanatory Statement summarising the changes to the Code to take effect from April 1 next year.
The new Code of Conduct will replace the existing one and has been introduced in response to the findings of the 2023 Independent Review of the Franchising Code of Conduct, by Dr Michael Schaper.
Although much of the content of the current Code has been retained in the new Code, it has now been structured completely differently, which means that franchise agreements and related documents will require review and amendments with respect to Code referencing (at the very least).
Importantly, and what is highly likely to be a relief for franchisors, is that the proposal to introduce a franchisor licensing system has not been included in the new Code. Although this and other recommendations remain under consideration, at this stage it would appear that any licensing system will not be introduced in time for the commencement of the new Code in April 2025. Whether in fact a licensing system is introduced at all remains to be seen.
To follow we summarise some of the key changes that have been incorporated into the new Code:
- Key Facts Sheet Removal:
The requirement for a Key Facts Sheet has been eliminated as it was seen to be an unnecessary duplication of the information set out in the Disclosure Document. - Opting Out of Disclosure:
Franchisees may opt out of disclosure if the new agreement is identical or substantially similar to their current one (e.g., in the case of acquiring additional franchises). - Introduction of “Specific Purpose Fund” Definition:
The term “specific purpose fund” will replace “Marketing” or “Advertising” fund and will now include other funds such as IT and conference funds. Disclosures will also need to specify whether these funds will be used for the franchisee’s specific business. - Timely Disclosure of Relevant Facts:
Disclosure will now need to include materially significant facts that arise between the preparation of the Disclosure Document and the actual time the document is provided to potential franchisees, ensuring up-to-date information. - Public Agency Proceedings or Judgments:
Franchisors must disclose any legal proceedings or judgments against them by public agencies (e.g., investigations or findings by the ACCC). - Record Keeping:
Franchisors are required to retain documents received from franchisees under the Code, or documents supporting statements in the Disclosure Document, for a minimum of six years. - Penalties:
- Increased Penalty (600 penalty units) for:
- Prohibiting liability release;
- Resolving disputes or litigation outside a franchisee’s jurisdiction;
- Enforcing restraints of trade upon an exiting franchisee who would have otherwise renewed.
- Civil Penalties may apply if franchisors:
- Do not discuss significant capital expenditure and the opportunity to recoup that expenditure with franchisees;
- Refuse to terminate an agreement when requested by a franchisee, or not providing reasons for the refusal;
- Fail to issue breach notices with directions on how to remedy a breach, together with a reasonable timeframe in which to remedy breaches.
- Increased Penalty (600 penalty units) for:
- Franchise Term and Investment Alignment:
Franchise agreements must contain a Term that is consistent with the level of capital investment required, in turn giving franchisees a reasonable opportunity to gain a return on investment. This provision currently only applies to motor vehicle dealerships in the current Code but will be extended to all franchise agreement in the New Code. - Cooling-Off Period for Subsequent Franchises:
Franchisees acquiring second or additional franchises can waive the mandatory 14-day cooling-off period following the execution of the relevant Franchise Agreement by providing written notice. - Disclosure Document Updates:
- Item 9 which relates to Franchise Site or Territory, will now need to include information previously covered in the Key Facts Sheet, for example, whether franchisees will encounter competition from businesses affiliated with the franchisor.
- Item 14 which relates to Other Payments, will require more detailed information with respect to significant capital expenditure.
- Accelerated Termination Provisions:
Franchise agreements will be able to be terminated with seven days’ notice for serious breaches by franchisees, including four new instances:- Deregistration by ASIC;
- Serious Fair Work breach;
- Penalty or breach under the Migration Act;
- Conviction of wage theft.
Franchisees will, however, retain the right to dispute resolution for terminations related to voluntary abandonment, public health risks, or fraud allegations.
- Dispute Resolution Options:
Dispute resolution may follow processes outlined in either the franchise agreement or the Code itself. - ASBFEO’s Role in ADR Compliance:
The Australian Small Business and Family Enterprise Ombudsman (ASBFEO) will have the ability to publicly “name and shame” franchisors that refuse to participate or withdraw from Alternative Dispute Resolution (ADR) processes.
So what’s next?
Given the number of changes that will be introduced in the new Code, it is important for franchisors to get on the front foot in the new year with a review of their Disclosure Document and Franchise Agreement to ensure compliance in time for the Code’s introduction on 1 April 2025.
We will be in contact with our existing clients in the new year to assist in getting the process underway. For those clients considering franchising in 2025, please feel free to contact us so we can discuss how CCR Legal can support you in your franchising journey.