Key Points:

The Government has released for public consultation draft amendments to the Franchising Code of Conduct, seeking to strengthen the effectiveness of the Code and its enforcement by the ACCC.

On 2 April 2014, the Government published its "Future of Franchising" statement in response to the recommendations of the independent review of franchising laws led by Alan Wein in July last year. As part of that response, the Government also announced a suite of exposure draft legislation to give effect to its proposed reforms.

The draft legislation proposes some significant changes to the framework for franchising laws in Australia, including the introduction of pecuniary penalties for breaches of the Franchising Code, amended information disclosure requirements and a new express obligation on franchisors to act in good faith.

The Government has sought comments on technical aspects of the draft legislation by 30 April 2014. However, it has expressly indicated that it has no intention to reconsider the underlying policy on which the legislation is based.

Why is the Government introducing reforms?

The Small Business Minister, The Hon. Bruce Billson MP, championed change to the Code prior to the election and argued that enhanced protections for small business franchisees were warranted. The amendments have been positioned at promoting growth in the sector, and giving greater power and protection in the Code to franchisees, who are often small business owners.

The reforms are also aimed at reducing red tape and ensuring that all participants in the franchising industry follow best practice principles.

What changes have been made to the penalty regime?

For many years, there has been criticism of the fact that a franchisor that does not comply with the requirements of the Code does not face any pecuniary penalties as a result. The key reform in the Government's proposed legislation is the introduction of civil pecuniary penalties, empowering the ACCC to take proceedings and seek penalties of up to $51,000 for serious breaches of the Code.

The reforms also empower the ACCC to issue infringement notices of up to $8,500 without having to formally bring proceedings in court. The ACCC may do so where it has reasonable grounds to believe that an entity has breached the Code. It is open to the relevant entity to choose not to pay an infringement notice, in which case the ACCC may commence court-based action in respect of the alleged contravention. Alternatively, the entity may choose to pay the infringement notice, in which case the ACCC may not commence court proceedings in relation to the alleged breach.

This means stronger consequences for breaching the Code and will further deter parties from breaching the Code.

What new disclosures will franchisors need to make?

In addition to existing disclosures required under the Code, franchisors will now need to provide prospective franchisees with an information statement in a prescribed form.

Compared with existing disclosure requirements which relate to specific information about the franchise, the information statement is intended to give franchisees a general overview of the risks and rewards of entering into a franchising agreement. This may include information on unforeseen capital expenditure, the importance of education and conducting due diligence, and the prospect of franchisor failure. The Government hopes that this will encourage franchisees to conduct more thorough investigations to ensure the agreement is right for them.

What are some other reforms to be aware of?

The Code will also have an express requirement for franchisors and franchisees to act in "good faith" in their dealings with one another. Importantly, franchisors and franchisees will not be able to contract out of this obligation.

Acting in "good faith" includes an obligation to act honestly and not arbitrarily and to co-operate to achieve the purposes of the franchise agreement.

The obligation will apply in all dealings that the franchisee and franchisor have with one another, including during negotiations, the term of the agreement, in dispute resolution and as part of renewal discussions.

Other changes will include:

  • improving disclosure and transparency of marketing funds and online sales agreements;
  • removing unnecessary provisions to reduce red tape and compliance costs; and
  • introducing general provisions to clarify the operation of the Code.

What's next?

Subject to any submissions received in respect of the technical drafting of the legislation, the Government expects to introduce the Bill formally to Parliament later this year, with the changes to take effect from 1 January 2015.

Businesses in the franchising industry have less than a year to familiarise themselves with the proposed changes. At a minimum, franchisors will need to update their disclosure documents and prepare new information statements to ensure that they comply with the new information requirements and put in place best practice protocols to comply with the new "good faith" obligations.

As we reported in October, the ACCC is already undertaking an audit of franchisors' compliance with the Code in its current form, paying particular attention to franchisors in the take-away food and health and fitness industries.

With the introduction of pecuniary penalties and infringement notices, the stakes have undoubtedly gotten higher.

Adrian Kuti, Aman Saxena and Lauren Grbich.