On 20 August 2020, the Australian Government released its long awaited response (Government Response) to the Joint Committee on Corporations and Financial Services inquiry (Inquiry) into the operation and effectiveness of the Franchising Code of Conduct report: Fairness in Franchising (Report).
The Government established an interagency taskforce on 10 April 2019 to examine the feasibility and implementation of a number of the recommendations made in the Report.
Whilst the Report identified examples of conduct in the sector that were seen as problematic, particularly in relation to breaches of the Franchising Code, false and misleading representations and unconscionable conduct, the Government did not conclude those instances were widespread.
The Government recognised that it has already made changes to the Franchising Code specifically for the automotive sector which commenced operation on 1 June 2020. These changes were to:
- Require franchisors to give franchisees 12 months’ notice of a decision not to renew an agreement, if the agreement is for 12 months or longer, including a requirement for the franchisor to provide a statement outlining why an agreement is not renewed;
- Strengthen conditions that prohibit franchisors requiring significant capital expenditure from franchisees, including the introduction of an obligation to discuss expenditure prior to entering an agreement, disclosure of the circumstances under which the franchisee is likely to recoup the expenditure and specifying, as far as practical, the amount, timing and nature of the expenditure to be provided;
- Include a requirement to discuss, plan and agree end of term arrangements if an agreement is not renewed including for the handling of capital intensive stock; and
- Expressly allow multi-franchisee dispute resolution.
The Government further recognised that the automotive sector will further benefit from broader reforms to the Franchising Code, including the introduction of voluntary binding arbitration and increased civil pecuniary penalties for a breach of the Code. The Government also stated that it will continue to work with the automotive franchising sector on the development of an industry-led, principles based voluntary guide to improve the transparency and fairness of agreements.
Key amendments to be made to the Franchising Code
- To require a disclosure document to be made available both in electronic and hardcopy form.
- To make technical changes to clause 13 of the Franchising Code to increase transparency about retail leases but also to clarify that franchisors will not need to provide documents they do not possess.
- To require a franchisor’s interest in a leasing arrangement to be disclosed in the Key Disclosure Information Fact Sheet.
- Amend the Franchising Code so that any financial information (such as earnings information) must be part of the disclosure document and require disclosure documents to include a statement on the accuracy and appropriateness of that financial information provided by the franchisor.
- To clarify that the Information Statement (Annexure 2 of the Franchising Code) must be provided to prospective franchisees separately and prior to providing the disclosure document and other materials.
- To amend the wording of the Information Statement in Annexure 2 to include reference to the ACCC’s franchisee manual and emphasise key rights and information.
- To amend the Information Statement and use educational materials to help improve franchisee’s understanding that if the franchisor becomes insolvent they may lose the benefit of shared funds such as marketing funds.
- To amend the Information Statement to warn a prospective franchisee of the need to obtain advice about restraints of trade before entering into the agreement.
- To amend the Information Statement to emphasise the importance of prospective franchisees understanding the Franchising Code requirements before entering into the agreement.
- To amend the Information Statement to advise prospective franchisees of their obligations including relating to employment matters and compliance with relevant laws.
Key Disclosure Information Fact Sheet
- To amend the Franchising Code to require a franchisor to prepare and give to a prospective franchisee a Key Disclosure Information Fact Sheet containing prescribed financial and other information. This may have important implications for Dealers as it may require distributor to provide specific information concerning the dealership business model.
Supply arrangements and rebates
- To oblige franchisors to disclose information on supplier rebates, commissions and other payments and any master franchisor controls and or rebates from suppliers – this information may be included in the Key Disclosure Information Fact Sheet.
- To clarify that the cooling off period is measured in calendar days and to clarify that the disclosure period must begin at least 14 days before signing a franchise agreement.
Cooling off periods – extended to 14 day
- To allow a franchisee to terminate the franchise agreement at any time up to 14 days after the last of certain events have occurred. Those events include the agreement being signed, payment being made, disclosure documents being received and if applicable a copy of the terms of the lease being received. Determining when it commences and ends will need to be carefully determined.
- To extend the statutory right to cool off to a transfer of an agreement to a new franchisee; where the transferee is required to enter into a ‘substantially new agreement’ with the franchisor. It will not be extended to renewals or extensions of agreements.
- Documentation for the sale of a dealership will need to deal with this new cooling off right, which is intended to benefit a purchaser. It may also delay completion of a sale by a further 7 days as distributors will want to ensure the cooling off period has ended before the sale is completed and the original dealership agreement will not be affected if the right to cool off is exercised.
- To extend some of the recent changes to the Franchising Code for the Automotive sector.
Marketing and cooperative funds
- To clarify requirements relating to the treatment and reporting of cooperative funds where regular payments are required to cover advertising and marketing activities.
Multi-party dispute process
- To clarify that if the person conducting the dispute resolution process determines it is appropriate to conduct a multi-party process the franchisor cannot refuse to take part in that process.
End of term franchisee goodwill
- Amend disclosure requirements to ensure end of term arrangements for franchisee goodwill are clearly specified.
- Require franchisors to clarify a franchisees entitlement to goodwill in the franchise agreement and include this information in the Key Disclosure Information Fact Sheet.
- After consultation with the sector, to amend the Franchising Code to include provisions to facilitate a negotiated early exit of the franchise agreement (that balances the rights and interests of the franchisor and the franchisee).
- To clarify what constitutes a breach of clause 23 of the Franchising Code (and increase prospective franchisees awareness of the effect of restraints of trade).
- To make technical changes to clause 23 and monitor their effectiveness with respect to restraints of trade.
Special circumstances (immediate) termination to be subject to dispute resolution
- To oblige a franchisor seeking to terminate for special circumstances under clause 29 of the Franchising Code, to give not less than 7 days’ written notice of the proposed circumstances so that a mediator or arbitrator can assist the parties to negotiate. This change will mean that the Part 4 dispute processes will commence to apply to a termination following the procedure in clause 29. It also appears to mean a termination without notice will be prohibited even in special circumstances.
Penalties and enforcement
- Double the civil penalty provisions for breaches of the Franchising Code from 300 to 600 penalty units.
- Make clause 31 of the Franchising Code containing provisions relating to marketing and advertising subject to civil penalties for contravention.
Prohibit legal costs being passed on for issuing documents
- Amend the Franchising Code to prohibit a franchisor passing on its legal costs of preparing, negotiating and executing documents to the franchisee (unless it is already incorporated into a joining fee). It will make that prohibition subject to a civil penalty provision.
- To consider making amendments relating to retrospective variations to an agreement by a franchisor.
Changes to dispute resolution provisions
- Amend the Franchising Code to include dispute resolution provisions similar to the Dairy Code that relate to voluntary Arbitration. The Dairy Code was introduced in December 2019 and has a dispute resolution provision that includes improvements to the mediation provisions that are not currently in the Franchising Code. It is likely that the Franchising Code will be amended to incorporate those provisions for consistency.
Many of the recommendations made in the Report will not be adopted by Government. Some of the proposed actions that Government have indicated they will adopt will have practical and commercial implications that will need to be worked through by industry participants. Ultimately until the changes are finally drafted it is difficult to say with certainty whether all of these proposed reforms will be made and what practical impact they will have on the franchise sector.
There is likely to be only a short time for further consultation with Government before draft legislation is prepared. The timing of this release is interesting as it now means there is the potential for changes to the Franchising Code to be made prior to the end of the calendar year.
This article was written by Evan Stents, Lead Partner, Automotive Industry Group, HWL Ebsworth Lawyers.