Release of Exposure Draft of Franchising Code

On 9 October 2024, the Government released an Exposure Draft of a new Franchising Code of Conduct ("Code") set to begin on 1 April 2025, when the current Code expires.

The draft follows Dr. Schaper's review of the Code but does not mention the proposed licensing system. Below is a summary of the main changes, all in reference to the current Code.

Please see the full article on the MST Lawyers website.

Civil Penalties

All major obligations under the Code will have a maximum penalty of 600 units (currently $198,000), including the requirements for franchisors to:

• Get a written statement that franchisees have received and understood the disclosure document and the Code (Clause 10(1)).
• Get a written statement that franchisees have had the chance to seek legal, business, and accounting advice (Clause 10(2)).
• Keep written records for at least 6 years (Clause 19).
• Discuss significant capital expenditures (Clause 30A).
• Give 7 days’ written notice for specified grounds of termination (Clause 29).
• Not make retrospective changes without franchisee consent (Clause 31A).
• Remove confidential information from the franchise disclosure register (Clause 53).

A related bill proposes to increase fines for infringement notices issued by the ACCC for breaking the Code. Franchisors should be aware of the increased risk of fines for non-compliance.

See the Exposure Draft of the Treasury Laws Amendment (Fairer for Families and Farmers) Bill 2024: Industry Codes (Penalties and Other Amendments) which proposes to increase the penalty to be specified in infringement notices issued by the ACCC for an alleged contravention of the Code.? Refer to our recent article in relation to this Bill.

Termination

A significant change affects the franchisor's right to terminate a franchise agreement.

Termination with 7 days’ notice This section allows termination on 7 days’ notice if specific serious issues arise, like:

• Violating Fair Work laws.
• Exploiting non-citizen workers.
• Being convicted of wage theft.

In these cases, franchisees cannot use dispute resolution processes since an external decision has already been made about their misconduct.

Termination with dispute rights Franchisees can use dispute resolution if the franchisor terminates for reasons like:

• Abandoning the business.
• Endangering public health or safety.
• Fraud.

These changes are positive as they give franchisors certainty in handling serious misconduct.

Reducing Red Tape for Existing Franchisees

Following Dr. Schaper’s recommendations, the draft proposes to reduce disclosure requirements for existing franchisees seeking to extend or buy another franchise from the same franchisor.

Key points:

• Existing franchisees can waive the 14-day cooling-off period.
• They can opt out of receiving the franchisor's disclosure document or a copy of the Code but can request it once every 12 months.

These changes aim to cut unnecessary steps, making it easier for multi-unit operators and encouraging industry growth.

Discontinuance of Key Facts Sheet

Franchisors no longer need to maintain a Key Facts Sheet, as the relevant information will now be part of the disclosure document. This reduces compliance costs and avoids duplication.

Expansion of Early Termination Compensation and Return on Investment

The government plans to extend rules on early termination compensation and ensuring franchisees can make a return on investment to all franchise agreements.

Penalties for breaking these rules are severe:

• For corporations: up to $10 million or 10% of annual turnover.
• For individuals: up to $500,000.

These changes discourage franchisors from offering unfair terms and help franchisees recover their investments.

Post-Termination Restraints

The rules on post-termination restraint clauses are expanded to include cases where franchisees seek to renew agreements. Franchisors are prohibited from enforcing or relying on these clauses.

Specific Purpose Fund

The term "specific purpose fund" will replace "marketing fund" or "co-operative fund," ensuring franchisors follow obligations related to pooled funds.

What You Should Do

The draft is not yet law, and the Government is seeking industry feedback until 29 October 2024. Submissions can be made here.

For more information on the draft of the new Code, contact our experienced franchising team.

• Raynia Theodore: [email protected]
• Louise Wolf: [email protected]
• Esther Gutnick: [email protected]

or call Ph: +613 8540 0200.

Please see the full article on the MST Lawyers website.