The Franchising Code of Conduct (the Code) is a mandatory industry code that applies across Australia to regulate the conduct of franchising participants towards each other. The Code was updated effective 1 July 2021, with changes that will affect all franchise participants.
Most of the changes to the Code will only affect franchise agreements entered into, renewed or extended on or after 1 July 2021. However, the changes to the dispute resolution provisions and disclosure requirements will apply to all agreements. Some of these changes have been introduced to bring the Code in line with modern technological practices to allow certain actions to occur electronically in response to the requirements of parties operating in a post-Covid world.
If you are a party to a franchise agreement, you should make sure you are aware of the changes and how they will affect your rights and responsibilities. Some of the key changes to be aware of are:
- Pre-entry disclosure requirements: Franchisors need to provide any prospective franchisee with an updated information statement and key facts sheet. These documents are now different to the ones that were previously required. The documents can be provided electronically or in hard copy but must be given at least 14 days before entry into a franchise agreement or paying any non-refundable money. This change applies to existing and new franchises with franchisors having until 1 November 2021 to implement the updated information statement.
- Dispute resolution: The dispute resolution process now specifically includes alternative dispute resolution (ADR) methods, namely arbitration, conciliation and mediation. When a dispute arises, there is now an obligation on all parties to attend ADR which can occur in person or virtually but must be conducted in the jurisdiction in which the franchise business is based. This change also applies to new and existing franchises.
- Cooling-off periods: The cooling-off period has been extended from 7 days to 14 days for all new and transferring franchise arrangements.
- Early Termination: under the new clause 26B of the Code, franchisees can now propose the early termination of their franchise agreement and the terms on which the early termination will occur. If this happens, the franchisor will have 28 days to provide a substantive written response to the proposal, including reasons why the franchise agreement should not be terminated if the franchisor does not accept the proposal. The response must be substantive, meaning that the franchisor cannot just say ‘no’. The good faith obligations in the Code apply to any negotiations about the early termination of the franchise agreement. The purpose of the new provisions is to provide an avenue for franchisees to start to negotiate the early termination of a franchise agreement. However, the new provisions do not give franchiees the right to exit the franchise agreement on demand.
- Franchisors now also have the right to terminate the franchise agreement without notice on particular grounds known as “special circumstances” termination rights. These rights will only apply in specific circumstances so it is important to seek advice before exercising any termination rights to make sure it is done correctly.
- Significant capital expenditure: A franchisor can no longer require a franchisee to undertake significant capital expenditure during the franchise term, unless the expenditure was disclosed to the franchisee in a disclosure document, or if agreed to by the franchisee.
- Legal costs: Franchisors can no longer require a franchisee to pay all or part of their legal costs incurred for preparing, negotiating or executing the franchise agreement. Franchisors must provide a set dollar figure contribution that the franchisee is required pay.
- Restraint of trade: A restraint of trade clause will only be effective if the franchisee was in serious breach of the franchise agreement or a related agreement immediately before the agreement expired. The term “serious” is not defined in the Code because it will be dependant on the individual circumstances of the alleged breach.
In addition to the key changes summarised above there are additional changes relating to marketing funds, co-operatives and provision of leasing information which may be relevant depending on your individual circumstances.
If you require any further information regarding the above or would like to discuss anything specific related to your franchise agreement please contact the Osborn Law Commercial team on (02) 49 272900.