In brief

Our 16 February 2024 Client Alert reported on the recommendations of the Federal Government’s Independent Review of the Franchising Code of Conduct (“Code”). 

We noted that the recommendations were largely sensible and light touch and that the Review considered that the Code was generally fit-for-purpose.

The Government has now released its formal response, adopting the Review recommendations in full.

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Contents

1. Timing and next steps
2. Likely changes to Disclosure and Franchise Disclosure Register
3. Likely changes to Franchise Agreements
4. Likely changes to process
5. Scope and consequences of breaching Code

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Timing and next steps

The current Code automatically sunsets on 1 April 2025, so will be remade before then. It is unlikely to contain many substantive changes.

The Government is expected to release an Exposure Draft of its intended changes for public comment, as has been its practice, most likely in mid-2024. This will not include issues that both the Review and the Government concluded needed further consideration, such as:

• The feasibility and the costs and benefits of a licensing regime;
• If licensing is not introduced, whether additional information or documents should be included on the Franchise Disclosure Register to enhance its usage;
• Whether the Code needs to regulate how restraints of trade may affect franchisee employees or franchisees post-termination;
• Whether the Code provisions regarding new motor vehicle dealerships should also apply to other sub-sectors of the automotive industry, including motorcycle, farm machinery and truck dealerships.

It is to be hoped that these (and other) Code changes will not occur for 5 years after the Code is remade in 2025. The Review noted that changes to the Code have been too frequent, and need to be given time to settle in.

The Government has also committed to introducing other legislative changes, including to increase the number of breaches of the Code that attract penalties and to enable public naming of franchisors that fail to participate meaningfully in alternative dispute resolution.

Likely changes to Disclosure and Franchise Disclosure Register

The Government has heard the concerns of the franchisor community that pre-contract disclosure to franchisees has become too detailed, duplicative, and in some cases, unnecessary. Changes will include:

• Merging the key facts sheet into the Disclosure Document;
• Simplifying (if not removing) disclosure obligations to existing franchisees when they are renewing an existing agreement or entering into a new agreement;
• Consistency of language throughout, some clarifications of intent and possibly plain language style changes.

However, it may expand the information required to be included on the Franchise Disclosure Register to cover whether the franchisor has been engaged in regulatory action or litigation and whether it would be prepared to arbitrate disputes.

Likely changes to Franchise Agreements

Termination Provisions: Franchisors had raised concerns that the requirement to give a franchisee a minimum of 7 days’ notice of termination in the case of a serious breach has unintended consequences. This requirement will be relaxed to give franchisors more flexibility in these cases.

Specify compensation: The current requirement to include compensation for early termination applying only to new motor vehicle dealers should be extended to all franchisors. This means that all franchise agreements entered into or renewed after the Code changes will need to provide for the franchisee to be compensated if the franchise agreement is terminated before it expires because the franchisor withdraws from the Australian market, rationalizes its networks or changes its distribution models, and specify how the compensation is to be determined, with specific reference to:

• lost profit from direct and indirect revenue;
• unamortized capital expenditure requested by the franchisor;
• loss of opportunity in selling established goodwill; and
• costs of winding up the franchised business. 

Likely changes to process

Importantly, a new provision which also currently only applies to new motor vehicle dealers will require all franchisors to demonstrate that they have actively assessed the viability of a franchisee before they enter into a franchise agreement and to record what, if any, investments the franchisor has or has not required. A franchisor will be prohibited from “entering into” a franchise agreement unless the agreement provides the franchisee with a reasonable opportunity to make a return during the term of the agreement on any investment the franchisor requires as part of entering into or under the agreement.

This will have the effect that a franchisor will need to review whether the term of each franchise agreement it enters into will suffice for these purposes in the light of any required investments, including on a transfer in the case of a franchisee sale.

Scope and consequences of breaching Code

The scope of the Code will be increased to deem dealers who do not sell motor vehicles of a particular brand, but who are licensed to service or repair such vehicles, to be franchisees covered by the Code.