Discover key changes in the newly released Exposure Draft of the Franchising Code of Conduct, including new termination rules, increased penalties, and reduced red tape for franchisees. Learn how these updates impact franchisors ahead of the April 2025 implementation.
On 9 October 2024 the Government issued an Exposure Draft of a proposed new Franchising Code of Conduct (“Code”), that is due to commence on 1 April 2025, when the existing Code sunsets.
The Exposure Draft appears to be consistent with Dr Schaper’s review of the Code, though there is no mention of the proposed licensing regime.
Below is a summary of the key changes to the Code, as contemplated in the Exposure Draft.
All clauses referred to in this article are in relation to the current Code.
Civil Penalties
All substantive obligations under the Code will attract a maximum of 600 penalty units (currently $198,000), including the requirements for a franchisor:
- to receive a written statement that the franchisee or prospective franchisee has received, read and had a reasonable opportunity to understand the disclosure document and the Code (clause 10(1));
- to receive a written statement that the franchisee or prospective franchisee has obtained or has had the opportunity to obtain independent legal, business and accounting advice (clause 10(2));
- to keep written records for at least 6 years (clause 19);
- to conduct the significant capital expenditure discussion (clause 30A)
- to provide 7 days’ written notice in relation to specified grounds for termination (clause 29)
- to make unilateral retrospective changes without franchisee’s consent (clause 31A)
- to redact confidential information from the franchise disclosure register (clause 53).
Furthermore, the government has introduced an Exposure Draft of the Treasury Laws Amendment (Fairer for Families and Farmers) Bill 2024: Industry Codes (Penalties and Other Amendments) which proposes to increase the penalty to be specified in infringement notices issued by the ACCC for an alleged contravention of the Code. Refer to our recent article in relation to this Bill.
Given that more of the provisions of the Code will become penalty provisions, in respect of which the ACCC may issue infringement notices, franchisors should be aware of increased exposure to increased fines and penalties for non-compliance.
Termination
Perhaps one of the most significant changes to the Code relates to the franchisor’s rights to terminate a franchise agreement.
Under the proposed changes, clause 29 will be separated into two provisions:
- termination with 7 days’ notice on grounds for which franchisee may not notify dispute
- This proposed section 54 mostly retains the wording in clause 29 of the current Code, whereby the franchisor may terminate on 7 days’ written notice if any of the specified grounds occur.
- Additional grounds include where the franchisee:
- has committed a serious contravention of a Fair Work civil remedy provision;
- has committed or has been convicted of an offence in relation to section 245AAA, 245AAB or 245AAC of the Migration Act 1958 (Cth) (coercing or exerting undue influence on a lawful non-citizen to breach a work-related condition of their visa, and to otherwise exploit non-citizen workers in the Australian workplace;
- has been convicted of an offence relating to engaging in intentional conduct that results in wage theft.
- This new provision prevents franchisees from accessing dispute resolution processes, because an external decision maker has already made a decision that the franchisee has engaged in serious misconduct.
- termination on grounds for which franchisee may notify dispute
- Franchisees may access dispute resolution processes (including the rapid appointment of an ADR practitioner) in relation to the franchisor’s termination of the franchise agreement where the franchisee:
- voluntarily abandons the business or franchise relationship;
- operates the franchised business in a way that endangers public health or safety;
- acts fraudulently in connection with the operation of the franchised business.
- These grounds involve a subjective view as to whether the franchisee was in breach of the franchise agreement.
- Franchisees may access dispute resolution processes (including the rapid appointment of an ADR practitioner) in relation to the franchisor’s termination of the franchise agreement where the franchisee:
We view these changes to be positive as franchisors will have certainty in issuing termination notices for serious non-contentious misconduct.
Reducing red tape for existing franchisees
Consistent with Dr Schaper’s recommendation, the Exposure Draft proposes to minimise disclosure requirements for existing franchisees who wish to be granted a further franchise or wish to purchase an existing franchise (“Existing Franchisee”).
Note that these provisions only apply to Existing Franchisees that are subject to the same business and same franchisor – so an existing John’s Gym franchisee cannot waive their cooling off rights in relation to the purchase of a John’s remedial massage franchise.
- Cooling off: Existing Franchisees may waive the 14 day cooling off period by providing written notice to the franchisor.
- Pre-entry disclosure: Existing Franchisees may opt out of receiving a copy of the franchisor’s disclosure document or a copy of the Code by providing written notice. Existing Franchisees may nonetheless request a copy of the updated disclosure document once every 12 months.
These changes are positive and will significantly minimise red tape associated with transactions such as the relocation of premises, renewals and variations to existing agreements. These changes will also encourage the granting of franchises to multi-unit operators, thus enabling the further expansion and growth of the franchising industry.
Discontinuance of Key Facts Sheet
Franchisors will not be required to create and maintain a Key Facts Sheet. Information previously contained only in the Key Facts Sheet will be incorporated into the disclosure document.
This change is intended to reduce the maintenance and compliance costs of franchisors and duplication of information given to franchisees.
Expansion of early termination compensation and return on investment
The government proposes to expand clauses 46A and 46B of the Code to all franchise arrangements.
These clauses require:
- the franchisor to compensate the franchisee for an early termination of the franchise agreement; and
- that the parties must not enter into a franchise agreement unless the franchisee is provided with a reasonable opportunity to make a return on any investment during the term of the agreement.
We note that the ‘super’ civil penalties apply in relation to the contravention of these provisions, being:
- for a body corporate:
- the greater of $10 million;
- 3 times the value of the benefit attributable to the breach; or
- 10% of the annual turnover during the 12 month period relating to the contravention);
- for an individual: $500,000.
These changes are intended to dissuade franchisors from granting franchises containing uncompetitive terms, and to otherwise enable a franchisee to recoup their initial level of investment. Franchisors are not providing a contractual guarantee as to the level of profit or success of the franchised business.
Post termination restraints
The post termination restraint exemption under clause 23 has been broadened to include circumstances where a franchisee seeks the renewal of the franchise agreement.
Furthermore, the new section 64 is a civil penalty provision which prohibits a franchisor from relying or purporting to rely upon such a restraint of trade clause.
Specific Purpose fund
The phrase “specific purpose fund” replaces the references to marketing fund and co-operative funds in the Code and in the disclosure document.
This change will ensure that franchisors comply with obligations in respect of any pooled funds.
What should you do?
The Exposure Draft is not yet law and the Government is seeking industry feedback on the proposed legislation.
Stakeholders are invited to provide submissions on the Exposure Draft, with submissions open until 29 October 2024. Submissions can be made here.
For further information regarding the Exposure Draft of the proposed new Franchising Code of Conduct, contact our experienced Franchising team on Ph: +61 3 8540 0200 or as follows:
Raynia Theodore: raynia.theodore@mst.com.au
