Introduction

Following a lengthy Parliamentary Inquiry commencing in March 2018, amendments to the Franchising Code of Conduct were released 1 June 2021.

Of the 71 earlier recommendations made by the Parliamentary Joint Committee on Corporations and Financial Services some 11 substantive changes have been taken up impacting on the disclosure obligations of the franchisor, the mandatory contractual terms of a franchise agreement and resolution of disputes between franchisees and franchisors.

In summary these key changes are as follows:

• Changes to the dispute resolution provisions including provision for voluntary arbitration.
• An obligation on franchisors to provide a Key Facts Sheet in a prescribed form including important information from the disclosure document. This is a pre-entry disclosure document which must include mandatory explanation on specified terms. It is intended to make information critical to a franchisee’s understanding more accessible and a failure to provide the same or to disclose appropriately carries a pecuniary penalty.
• Changes to clauses setting out the timing for provision of disclosure, the Information Statement and leasing documents.
• Changes to the form of the disclosure document including a requirement to provide further information regarding supplier rebates.
• Changes to and extension of the cooling off provisions including new provisions regarding cooling off on a transfer. Franchisors will need to closely review the amendments relation to provision of leasing documents including how this can impact on the timing of expiry of the cooling off period.
• Introduction of a requirement for franchisors to provide a substantive response to a request for early termination.
• A requirement for notice prior to termination in special circumstances (“immediate termination” events) and an ability for the franchisee to delay such termination to permit alternative dispute resolution to be completed.
• Increased disclosure requirements regarding significant capital expenditure and an obligation on a franchisor to discuss the same with the franchisee prior to entering into the franchise agreement.
• A prohibition on franchisors recovering legal document costs other than an initial fixed fee.
• Provision of additional information regarding any lease from a franchisor or its associate.
• Increased protection for new vehicle dealership franchisees from early termination and non-renewal.

Implementation

The new dispute resolution provisions will apply immediately. Changes to the prescribed form of the disclosure document will be effective 1 November 2021. Otherwise the amendments will apply to agreements entered into, extended or renewed on or after 1 July 2021.

Generally, the changes to the disclosure document form can be made between now and 1 November 2021. This date marks the end of the annual disclosure document update period for most Australian franchisors. If a franchisor has a financial year end of 31 December, it need not update its disclosure document until the end of April 2022 unless it provides its disclosure document to a franchisee between 1 November 2021 and that time. However, if a franchisor will grant, renew or extend a franchise agreement between 1 July 2021 and 1 November 2021 it is likely to be in the franchisor’s interests to make at least the following amendments to template documents before this occurs:

• Amendments to both the franchise agreement and disclosure document to address the prohibition on passing on legal costs.
• Amendment to the disclosure document to provide further information on potential capital expenditure which may need to be incurred during the term of the franchise.
• Amendment to the transfer provisions of the franchise agreement to address cooling off.
• Amendments to the dispute resolution provisions of the franchise agreement including to permit the franchisor to require the franchisee to cease operating the franchise if an immediate termination event has occurred and a dispute resolution process relating to the same is yet to complete.

Next steps

This commentary is a high-level summary of the areas of critical change and franchisors should seek advice on their particular circumstances in advance of 1 July 2021.

We are not convinced that all areas of interpretation have been adequately dealt with and detailed consideration will be required in seeking to achieve future compliance.

The timing of updating and commencing use of updated document templates should follow the above implementation timeframes. The forms of the updated Information Statement and Key Facts Sheet will be made available on the ACCC’s website. As soon as these documents are available they should be included as part of an overall document template update.

Please contact us to discuss further.