Expect changes to both disclosure documents and franchise agreements 3 min read
A range of Australian franchising amendments is expected to be implemented next year.
The Australian Government has announced its response to the 2019 Fairness in Franchising Report and, while timing and content are uncertain, changes are expected to take effect in mid-2021.
Meanwhile, franchisor, Back In Motion Physiotherapy has made an undertaking to the Australian Competition and Consumer Commission (ACCC) regarding potentially unfair contract terms, reinforcing the regulator's commitment to investigate such activity in the small business space.
Key takeaways
- We envisage that a number of changes will be required to disclosure documents. Some changes may be required also to franchise agreements. In addition, Key Information Fact Sheets will need to be developed.
- Once these amendments take effect it will be important to ensure compliance therewith, given that increased penalties for certain breaches of the Franchising Code are expected to apply.
- The Back In Motion undertaking provides a timely reminder that while unfair contract terms are not prohibited, they may be declared void and unenforceable if challenged.
Who in your organisation needs to know about this?
Franchising and legal compliance teams.
Timing
Proposed amendments are subject to industry consultation and still need to be approved by Parliament. The Franchising Council of Australia has indicated it will be making a submission to the Government on the proposals. A draft Bill may be introduced in late 2020, but it is expected that the legislation will not come into effect until 1 July 2021 (to be confirmed).
Proposed amendments include:
- Double maximum penalty for breach of Franchising Code
- New penalties for:
- charging franchisees costs of preparing agreements; and
- agreement breaches involving use of marketing funds
- Increased disclosure requirements
- mandatory Key Disclosure Information Fact Sheet;
- significant capital expenditure changes (recent automotive changes requiring upfront disclosure of significant capital expenditure to apply to all franchise agreements – this will require franchisors to think longer term to predict expenditure); and
- must disclose supplier rebates, financial information and end-of-term arrangements for franchisee goodwill
- Extended cooling off period (14 day period to apply to substantially new agreements with existing franchisees or transfers of current agreements in addition to completely new agreements)
- Additional dispute resolution options
- Clarifications and technical changes regarding:
- cooperative funds;
- restraint of trade clauses; and
- retail leases.
The Government also proposes a new government franchising website to provide all parties with easier access to information and support, along with a public register of franchisors.
The full Government response to the Fairness in Franchising Report can be found here.
Restraint of trade undertaking
Back In Motion Physiotherapy has made an enforceable undertaking to the ACCC to remove potentially unfair terms from future franchise agreements and not to enforce such terms contained in current agreements. The terms prohibited any franchisee that left the group from being involved in a competing practice within 10km of a Back In Motion franchise for up to 12 months. Given there are over 500 franchisees, the ACCC was concerned the restriction had the effect of preventing ex-franchisees from operating in many metropolitan areas because they would be within range of a Back In Motion franchise.
While Back In Motion can no longer prevent ex-franchisees setting up competing businesses, it retains some protection, with the ACCC allowing the continued application of a clause that restricts active solicitation of known clients.
The ACCC plans to continue to investigate unfair contract terms in franchise agreements involving small businesses, indicating it will take action against franchisors where it believes contracts contain unfair terms that breach the Australian Consumer Law.