Changes are coming - Start preparing!
The Government has, as at November 2020, released a paper outlining the likely changes that will be implemented to the Franchising Code of Conduct from July 2021. The status quo is definitely about to change, especially in regard to a Franchisor’s disclosure obligations. It will be important to update your documents and get the items below in check.
Disclosure is more and more becoming the way by which franchisees assess all aspects of the franchise network and business opportunity and as such, following a number of legal proceedings over 2019-2020, is becoming the document that a franchisee may rely on and consider a key document in the course of their due diligence and later any disputes relating to the initial representations made by a Franchisor. As such it is important to get your disclosure right, so to avoid any unnecessary visits by ACCC enforcement officials and/or disputes by franchisees due to inadequate disclosure under the new rules.
Some of these changes, as per the November paper, include the following—though further updates may soon follow as the July 2021 commencement date approaches.
- Franchising mediations will now be referred to and take on the process and procedure of an Alternative Dispute Resolution (ADR) process. Disputes will therefore no be limited in regard to the manner of resolution to only mediations and may also be conducted by way of conciliation meetings.
- Notification of a dispute must now provide active notice from the complainant as to what may resolve the dispute.
- Arbitration may be proposed as a means of resolving the dispute, aside from ADR but the Ombudsman will still appoint the relevant arbitrator.
- All disputes will need to go through the ADR process unless either nominated for arbitration or 30 days have elapsed without resolution and/or ADR is terminated by the appointed ADR practitioner.
- A key facts sheet on the franchise will now also be required in conjunction with the disclosure document. The details of this document are still to follow.
- Amendment and replacement of the Franchisee Information sheet.
- Details will be required to be provided as to any benefit received by either a Franchisor, master Franchisor or an associate of either in regard to the supply of goods or services to a Franchisee, including the nature of the benefit, the name of the business providing the benefit, the method by which the benefit is calculated (i.e percentage of price paid by franchisee for specific quantities to purchase and whether it is shared or not and if shared how the calculation is made as to how the share is split).
- Requirement for Franchisor to now attest to the accuracy of financial information provided or otherwise specify where inaccuracies may lie.
- The Franchisee will be capable, at any time, to provide a written proposal to the Franchisor as to the termination of the franchise, with the Franchisor being obligated to provide a reply within 28 days. Any refusal must provide reasons why.
- Franchisees will now have a 14-day post execution cooling off period during which they may seek to terminate the franchise.
- Termination may occur within 14 days if a copy of the lease subject to a licence to occupy of sublease is not provided to the Franchisee.
- A cooling off period will be applicable even where a franchise is transferred.
- Franchisor must provide 7-days notice of any termination, even if relating to bankruptcy or fraud and if a disputes arises then such matters, regardless of the initial reason seeking termination, must be address via the ADR process.
- A Franchisor will no longer be able to require a Franchisee to undertake significant capital expenditure during the term of the Franchise agreement unless either that:
- expenditure is disclosed to the franchisee either before entering or renewing the agreement
- a majority of franchisees will incur this same expenditure
- expenditure is required by legislated obligations; or
- it is agreed to by the Franchisee.
- Where disclosing any expenditure that must include a rationale for the expenditure, the amount, timing and nature of the expenditure, the anticipated outcomes and benefits and the expected risks associated.
- A fund administrator, within four months of the last financial year, prepare an annual statement detailing all fund receipts and expenses, including sources of income and the items of expenditure.
- The same statement must also be audited within the same period unless agreed otherwise as per previous requirements.
- Franchisors will no longer be able to charge franchisees for their complete legal fees unless that amount is disclosed and specified prior to commencing the franchise business. This is only applicable in regard to trying to recover later and additional costs incurred.
- Franchisors will no longer be able to make unilateral changes to franchise documents without the consent of the franchisee.
More details will be provided as received, though it’s time to start preparing as there is only just over six months to go before crunch time!
Nina Rossi is a commercial and intellectual property lawyer admitted to the Supreme Court of New South Wales. Nina has worked over the past nine years in commercial and corporate advice and contract drafting, litigation, intellectual property registrations, advice and disputes and insolvency matters. Nina is keen to work with clients to grow their franchise network, develop their business and overall achieve their goals. Nina Rossi has acted as Principal of DC Strategy Lawyers since April 2020.