Background

A number of changes to the Franchising Code were introduced between 2020 and 2022 in response to the 2019 "Fairness in Franchising" report. These included:

• Additional requirements for "new vehicle dealership agreements" - including compensation of franchisees in the event of early termination, ensuring a franchisee’s capacity to make a return on investment and additional protections to apply at the end of a franchise term
• Additional restrictions on a franchisor’s capacity to require a franchisee to undertake significant capital expenditure
• Introduction of multi-party dispute resolution
• Increased penalties of the greater of AUD 10 million, three times the benefit obtained, or 10% of annual turnover for some breaches of the Franchising Code
• Introduction of the public Franchise Disclosure Register

Key themes

The Consultation Paper outlines five broad themes which will be subject to review:

1. Scope of regulation

Currently, an agreement which has each of the features set out in the definition of ‘franchise agreement’ in the Franchising Code is subject to its requirements. Motor vehicle dealership agreements are deemed to be franchise agreements. There are additional protections for 'new vehicle dealership agreements' (those relating to certain new passenger motor vehicles and/ or new light goods vehicles, but not other vehicles such as motorcycles and farm machinery).

The Consultation Paper identifies the following major issues:

• There is significant diversity among franchisees which can range from sole traders to publicly listed companies; however, the regulatory approach is largely the same regardless of the experience or sophistication of the franchisee.
• Whether the additional protections relating to new vehicle dealership agreements, such as compensation for early termination, should be extended to apply to other types of motor vehicle dealerships, such as for motorcycles and farm machinery
• Whether agreements relating to automotive service and repair, but not the sale of motor vehicles, should be considered franchise agreements and subject to the Franchising Code requirements

2. Requirements prior to entering into a franchise agreement

The Franchising Code has extensive requirements relating to information that must be disclosed by franchisors to franchisees, including via the Franchise Disclosure Register, an Information Statement, and the Disclosure Document and Key Facts Sheet which must be updated annually for most franchisors. The Franchising Code also provides for a 14-day cooling off period, and prohibits the inclusion of certain terms in the franchise agreement that might be considered 'unfair'.

The Consultation Paper aims to:

• Consider the effectiveness of the current disclosure obligations.
• Examine to what extent the recent changes to Australia’s unfair contract terms regime have impacted franchise agreements and whether the current approach in the Franchising Code is still appropriate.

3. Enduring obligations in franchise relationships

The Franchising Code imposes a range of continuing obligations on the parties after a franchise agreement is entered into. These include obligations relating to continuing disclosure, use of marketing funds, the parties acting in good faith, and to have clear dispute resolution procedures; and a prohibition on franchisors requiring franchisees to undertake significant capital expenditure.

The Consultation Paper seeks to evaluate how well the Franchising Code supports franchisors and franchisees during the term of the franchise agreement, and whether these minimum standards are sufficient and/or effective. For example, unilateral variation of a franchise agreement may be required to allow franchisors to respond to business needs (but may also have serious consequences for franchisees).

It also seeks to examine the effectiveness of the additional requirements for new vehicle dealership agreements relating to compensation and return on investment.

4. The end of a franchise relationship

Amendments to the Franchising Code in 2021 expressly allow franchisees to request early termination of a franchise agreement, and prevent franchisors from refusing without providing reasons for such refusal. Franchisors must also take certain procedural steps if they seek to terminate a franchise agreement early, including providing a minimum period of notice.

The Consultation Paper seeks to evaluate the effectiveness of these amendments, particularly in respect of franchisees who seek to exit a franchise agreement due to hardship or poor conduct of a franchisor. It also raises the potential impact of franchisor insolvency, which may have serious impacts on the ability of the franchisee to conduct its business.

5. Enforcement and dispute resolution

The Consultation Paper seeks to evaluate:

• The role of the ACCC in enforcing compliance with the Franchising Code, including the frequency at which it utilises the enforcement tools available to it
• The role of the Australian Small Business and Family Enterprise Ombudsman, particularly in respect of complaints handling, disputes and mediation (the Ombudsman has been required to assist parties with resolution of disputes under the Franchising Code since 2021)  
• The impact of the 2022 penalty increases under the Franchising Code, particularly in relation to any increase in the effectiveness of deterring breaches of the Franchising Code.

Next steps

Submissions may be made by interested parties to franchisingreview@treasury.gov.au. The closing date for submissions is 29 September 2023. There will be an additional opportunity to provide feedback on the first full year of the Franchise Disclosure Register in November 2023.

A report of the findings and recommendations will be provided to the Government by the end of December 2023.

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If you would like to make a submission or discuss what these developments might mean for you, please get in touch with us.