On 10 October 2024, the Australian Government released a draft version of the new Franchising Code of Conduct which will take effect from 1 April 2025 (New Code).
The New Code, which continues to regulate the conduct of franchisors and franchisees towards each other, will replace the existing Franchising Code of Conduct (Old Code). It incorporates many of the 23 proposed changes arising from the Government’s 2023 review of the Old Code.
The less than 3 week public consultation window on the draft New Code has now closed, so the franchising industry will now be eagerly awaiting the Government’s review of submissions by industry members as to whether any further changes will be made before the final version is released. Whilst structured differently with numerous definitions altered, the New Code retains much of the same content as the Old Code.
Intended to improve conduct and standards in the Australian franchise sector, some of the notable changes within the New Code include the following:
- As a welcome change, in order to simplify a franchisor’s disclosure requirements to prospective franchisees, the requirement for a franchisor to maintain and provide a Key Facts Sheet has been removed.
- In certain circumstances (including when a franchisee renews their existing Franchise Agreement, or an existing franchisee acquires an additional franchise), franchisees are permitted to opt-out of receiving a Disclosure Document from the franchisor before signing their new Franchise Agreement.
- A franchisee acquiring an additional franchise can also opt-out of the mandatory 14-day cooling off-period which ordinarily applies after signing a Franchise Agreement.
- A franchisor’s Disclosure Document must now disclose proceedings or judgments by a public agency against the franchisor, such as investigations or determinations by the Australian Competition and Consumer Commission (ACCC).
- There is an expansion of certain ongoing disclosure obligations of franchisors outside of the Disclosure Document. One new “materially relevant fact”, which a franchisor must disclose to its franchise network within 14 of days of its occurrence, is proceedings against the franchisor by a public agency for a contravention of sections 558B(1) or (2) of the Fair Work Act 2009 (Cth) (FWA). This being, proceedings intended to hold a franchisor liable for a franchisee breaching the FWA, for example, underpaying its employees.
- The grounds for (and processes surrounding) termination of a Franchise Agreement by a franchisor on giving a franchisee 7 days written notice have been varied. Grounds for termination now extend to a franchisee having been found by a Court to have committed a serious breach of the FWA, including (amongst others) being convicted of wage theft.
- The term/length of a Franchise Agreement must now be consistent with the level of capital investment required in order for a franchisee to have a reasonable opportunity to receive a return on their investment. Whilst a franchisor won’t be required to guarantee that a franchisee will make a profit from their business, franchisors will however be required to carefully weigh up the length of the Franchise Agreements they grant against the costs a franchisee must spend on setting up the franchised business.
- A Franchise Agreement must now specify compensation to be payable to a franchisee in certain circumstances, including for:
- lost profit and goodwill if a franchisor decides to withdraw from the Australian market, rationalise its networks or change its distribution models; and
- outstanding stock, essential specialty equipment and branded products if a Franchise Agreement is not renewed.
- The Australian Small Business and Family Enterprise Ombudsman (ASBFEO) now has the power to “name and shame” franchisors who do not participate in, or withdraw from, the alternative dispute resolution process (being mediation or arbitration) with a franchisee.
- More provisions in the New Code now attract penalties for breaches, together with an increase to the penalty amount for breaches of particular provisions. These penalties continue to apply to both franchisors and franchisees.
- There will now be 5-yearly reviews of the New Code moving forward.
Whilst the New Code remains silent on the controversial licencing regime for franchisors which was proposed within the 2023 Government review, the Government has indicated that this is still being actively considered.
Franchisors must now begin to take steps, in consultation with their legal advisors, to undertake a comprehensive review and update of their template Franchise Agreements and Disclosure Documents to align with the provisions of the New Code by 1 April 2025.
The team at Marino Law are experienced in acting for both franchisors and franchisees in all aspects of franchising law. Get in contact if you need our assistance.
By Luke McKavanagh – 7 November 2024
Luke is part of Marino Law’s franchise and commercial law team. His days involve providing advice on a wide variety of commercial issues that arise in operating businesses of all sizes. Luke has specialised in franchising law for over 10 years and has acted for a diverse range of franchisors and franchisees of a variety of franchise systems. He is also an active member of the Queensland Law Society Franchising Law Committee where he keeps on the forefront of the latest developments in laws affecting franchising and contributes towards submissions to the Australian Government on topical issues facing the franchising industry.
DISCLAIMER: This article is only meant to give you general information and should not be relied on as legal advice. Speak to one of our lawyers for more information.
