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SUMMARY: Independent Review of the Franchising Code of Conduct

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The Franchising Code of Conduct (Code) is the piece of legislation that regulates the franchising sector in Australia.

The Independent Review of the Franchising Code of Conduct (Review), undertaken by former ACCC Deputy Chair Dr Michael Schaper, was released on 8 February 2024.

The focus of the Review was to:

  • assess the fitness for purpose of the Code;
  • consider the role of the Australian Competition and Consumer Commission (ACCC) and the Australian Small Business and Family Enterprise Ombudsman (ASBFEO) in the dispute resolution process;
  • consider the effectiveness of the Code in regulating the automotive sector;
  • consider the effectiveness of the 2020 and 2021 changes to the Code; and
  • provide views as to the relevance of the Franchise Disclosure Register.

The Review made 23 recommendations to the Code based on feedback received from franchisors, franchisees, the ACCC and other key stakeholders.

Dr Schaper views the Code as being fit for purpose, and should be remade prior to the sunsetting of the Code in 2025 to substantially reflect the current Code. However, the Review recommends the government to consider considers whether a licensing regime, similar to the one that regulates financial advisers, would reduce the imbalance of power between franchisors and franchisees. Given that this would be a significant departure from the Code, Dr Schaper noted that no changes will occur without prior modelling and consultation with stakeholders.

Below is a summary of some of the key recommendations:

  Recommendation
Definitions Amend definitions such as: renewal, extend, overholding, significant (capital expenditure), cooperative fund and dispute
Amendments to the Code Minimise the frequency of amendments to the Code to once every five years.
Key Facts Sheet Discontinue the Key Facts Sheet.
Pre-entry disclosure Ability for existing franchisees (those who are renewing the franchise agreement or wish to purchase additional franchises) to opt-out from receiving pre-entry disclosure documents and/or cooling off period.
Change in business model It is vital that franchisors can adapt the business model to meet changing market conditions.

Franchisors must comply with their good faith obligations and the unfair contract term regime when implementing changes to their business model.The ACCC and ASBFEO should educate franchisors in how to navigate change management.

Immediate termination Clause 29 should be revisited – franchisors should be permitted to terminate a franchise agreement in a shorter period of time, i.e. if compensation is paid to the franchisee.
End of franchise relationship It is well established that franchisees do not have a right to be compensated for goodwill at the end of the franchise relationship.

The Review recommends that clauses 46A and 46B of the Code (currently only applicable to new vehicle dealerships) are extended to franchising more broadly.

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.

Restraint of trade The unfair contract terms regime will ensure that restraint of trade clauses will not be couched too broadly.

The ACCC should provide guidance about what restraint of trade provisions would constitute as unfair contract terms in a franchising context.

Franchise Disclosure Register Despite its flaws, the general consensus is that the FDR should remain, subject to improvements.
Franchise Smart website Create a website that amalgamates resources and information about the franchising sector.
Dispute Resolution Amend the Code to allow franchisees the ability to seek a ‘no adverse costs’ order.

This will improve access to litigation for franchisees.

Penalties Substantive obligations under the Code will become civil penalty provisions, given that not all obligations currently attract a penalty.

Infringement Notices are faster at resolving potential complaints and breaches of the Code. To act as a deterrent, it is recommended that the Infringement Notice Penalties should be increased.

 

For advice as to how the Review may affect your franchise system, or if you have any questions about franchising, please contact a member of our Franchising Team on +613 8540 0200 or as follows:

Raynia Theodore: raynia.theodore@mst.com.au
Louise Wolf: louise.wolf@mst.com.au
Esther Gutnick: esther.gutnick@mst.com.au