Franchise reform: where is it all heading in 2021?

By Robert Toth | 18 Jan 2021 View comments

The long-running issue of franchise reform is still in the works as we head into 2021. So what can we expect?

Let’s recap what we know.

On 4 March 2019 the Parliamentary Joint Committee on Corporations and Financial Services (PJC) handed down its Fairness in Franchising report with 71 recommendations to improve the operation and effectiveness of the franchising sector.

The Government appointed a Franchising Taskforce to consider the feasibility and implementation of the PJC’s recommendations and seek feedback, views and consider options to the Regulation Impact Statement (RIS).

The Taskforce RIS sets out policy options that could address the issues for the Government to consider.

The Government Small Business Minister Michaelia Cash said the government was working “methodically” to deliver reform to the franchising sector while avoiding unnecessary red tape.

The Federal Government rejected many of the report’s recommendations to avoid excessive compliance costs and unintended consequences.

On 20 August 2020 the Australian Government released its response (Government Response) to the Fairness in Franchising (Report).

On 2 September 2020 the Opposition Member Senator Deborah O’Neill introduced a private members Bill into the Senate the ‘Franchising Laws Amendment (Fairness in Franchising) Bill 2020 (Bill) focusing on:

  1. Greater financial penalties for franchisors
  2. Multi class actions
  3. Mandatory Arbitration if the ASBFEO requires the parties to do so.

The Opposition seeks the penalties to be increased in line with the ACL penalties for breach as opposed to the Federal Government proposed increased penalties for breach of the Franchising Code, from $66,600 to $133,200 ($222 per penalty unit).

The Government Response proposed voluntary arbitration, similar to the dispute resolution provisions contained in the Dairy Code.

The Opposition Bill

This seeks to include arbitration provisions into the dispute resolution process and make changes to the role of the mediation adviser to cover arbitration.

  • If the Bill passes, it will increase the maximum penalty by a body corporate of a civil penalty provision of the Franchising Code (or other industry code including Oil Code) from the existing 300 penalty units to the greater of $10M;
  • However if a Court can determine the value of the benefit obtained directly or indirectly, that can reasonably attributed to the contravention – the penalty will be three times the value of that benefit;
  • If a Court cannot determine the value of that benefit – 10 per cent of the annual turnover of the body corporate during the 12-month period ending at the end of the month in which the contravention happened or began.

The Federal Government proposed reforms

These include:

  • A new Key Disclosure Information Fact Sheet (KDI))
  • Provide electronic and hard copy disclosure documentation
  • Conciliation and voluntary binding arbitration
  • Simplified and improved disclosure and more transparency provisions
  • A public register of franchisors developing a franchising website to make accessing information easier
  • Prohibit franchisors unilaterally imposing significant capital expenditure on franchisees and around capital expenditure obligations
  • Clarify that the Information Statement (Annexure 2 to the Franchising Code) must be provided to prospective franchisees separately before providing the disclosure document and other disclosure materials
  • Changes to clause 13 of the Franchising Code, to increase transparency surrounding retail leases and require a franchisor’s interest in a lease disclosed in the KDI Fact Sheet
  • Greater disclosure regarding supplier rebates, commissions, and marketing funds
  • Adding a conciliation and voluntary binding arbitration model with timelines to commence and complete the dispute resolution processes
  • Power to the ASBFEO to notify the ACCC and other regulators of breaches that come to their attention.
  • Possible provisions to allow an agreed early exit from a franchise agreement
  • A new seven days’ notice for termination in special circumstances as opposed to the current right to terminate immediately
  • Prohibit (with pecuniary penalties) franchisors passing on the legal costs of preparing, negotiating and executing documents to the franchisee
  • Possible change to the cooling off period

The Government will also:

  • amend the Information Statement (Annexure 2 to the Franchising Code) to include reference to the ACCC’s franchisee manual and emphasise key rights and information;
  • amend the Franchising Code so that any financial information must be in the disclosure document and include a statement on the accuracy of the franchisor’s financial information;
  • adopt the arbitration provisions of the Dairy Code and establish a website focussing on educating franchisees.

Franchisee whistle-blower rights

The Treasury Laws Amendment (Enhancing Whistleblower Protections) Act 2019, came into effect on 1 July 2019 and gives franchisees and employees in a franchise protection if they report a breach by their franchisor (or a franchisee by their employee) of an industry code.

Car dealership agreements

Amendments came into effect under the Franchise Code from the 1 June 2020 in relation to the car dealership and the automotive sector to:

  • Require franchisors to give franchisees 12 months’ notice of non-renewal, with reasons and expressly allow multi-franchisee dispute resolution
  • Strengthen conditions to prohibit franchisors requiring franchisees to incur significant capital expenditure without an obligation to discuss how and when that expenditure may be recouped and the amount, timing and nature of the expenditure
  • A requirement to discuss, plan and agree end of term arrangements if an agreement is not renewed including handling of capital-intensive stock
  • The proposed amendments will prohibit franchisors requiring franchisees to undertake significant capital expenditure unless disclosed before entering into a franchise agreement, it is legally required, or agreed to by the franchisee during the term with an obligation to discuss expenditure prior to entering an agreement.

Marketing and other cooperative funds

The Government is seeking advice from the Australian Accounting Standards Board for guidance on the auditing of marketing and cooperative funds is required and will work with the sector to emphasise the importance of developing best practice financial statements.

Exit arrangements

  • Amendments to the Franchising Code to enable negotiated early exit rights that balance the rights and interests of franchisors and franchisees
  • Amend the disclosure requirements to ensure end-of-term arrangements for franchisee goodwill are clearly set out
  • Require franchisors to clarify a franchisee’s entitlement to goodwill in the franchise agreement in the KDI Fact Sheet
  • Amend clause 29 of the Franchising Code to require the franchisor to provide the franchisee with seven days’ notice of a proposed termination in special circumstances, so that a mediator or arbitrator can assist the parties to negotiate. It is unclear whether this includes termination in the event of fraud or public health or safety.
  • Proposed changes to clause 23 of the Code in relation to restraints of trade
  • Franchise agreements will need to include a complaint handling procedure expanded to include the new voluntary arbitration process;
  • The dispute resolution process in clause 38 of the Code would be amended to include arbitration (even if the franchise agreement did not have a provision and a process for the parties to appoint an arbitrator from the adviser’s list and if they cannot agree the adviser to appoint one for the dispute
  • The arbitrator would decide how, when and where the arbitration is to take place, but it must be in Australia and the parties need to have someone with authority to enter into an agreement to settle the dispute.

So where does this leave franchise reform in 2021?

With the announcement of the proceedings brought by the ACCC on the 15 December against Retail Food Group playing out and further spotlight on the franchise sector and now further debate likely due to the Oppositions Private Member Bill it seems nothing concrete will be known for some months well in to 2021.

The reality for franchisors however is that change is coming, and this will require further compliance, further cost and further risk to franchisors with potentially severe financial penalties.