News & Insights

Many of us have been waiting with bated breath for the Australian Government’s response to a Parliamentary Joint Committee inquiry into franchising.

The Committee report was released in March last year and contained 71 recommendations for the franchising sector. The final report was highly critical of the current regulatory framework, stating that it has not addressed power disparities between franchisors and franchisees and “has in some cases further entrenched the power imbalance” (read more about it here).

Senator Michaelia Cash, Minister for Employment, Skills, Small and Family Business; and Michael Sukkar, Minister for Housing and Assistant Treasurer have now released the Government’s response.

It has been a while but in fairness, no-one anticipated a global pandemic. So, how has the Government responded?

Firstly, it’s important to note that the Government had already taken steps in regards to the report’s recommendations, including establishing the inter-agency Franchising Taskforce in April last year. Amendments have also been made to legislation around end of term notification obligations, capital expenditure and dispute resolution in the automotive industry (learn more).

The Government’s response is outlined in a 20-page document which aims to increase fairness and accountability for both franchisees and franchisors.

A breakdown is provided as follows:

entering a franchise agreement

The Government is intending to take steps to increase transparency and the quality of information received by prospective franchisees when deciding to enter into a franchise agreement. Steps to be taken, in consultation with sector stakeholders, are:

• a public register of franchisors
• a Key Disclosure Information Fact Sheet
• a franchising specific website with sector specific information and resources.

These steps, which will involve amendments to the Franchising Code, aim to support prospective franchisees with financial and non-financial information during the due diligence period. Franchisee’s rights regarding cooling off and disclosure periods will also be clarified.

operating a franchise

Of note, recent amendments to the Franchising Code in regards to the automotive industry will be extended across the sector.

Changes have also been foreshadowed around cooperative funds for advertising and marketing. Given that this is often an area of dispute between franchisors and franchisees, any amendments that clarify the role and obligations of both parties is welcome. On that front, dispute resolution is in the spotlight, with increased functionality of dispute resolution services, including expressly allowing multi-party dispute resolution under the Franchising Code, conciliation and voluntary binding arbitration.

end of term agreements

Another area of franchising that has traditionally been ripe for disputes. Amendments to the Franchising Code will strengthen the ability of franchisees to exit the agreement before the term expires, with a focus on increasing disclosure of end-of-term arrangements for goodwill.

Both franchisors and franchisees should be aware of an amendment to clause 29 of the Franchising Code that has been flagged – this will obligate franchisors to provide franchisees with seven days’ notice of a proposed termination in special circumstances, enabling mediation or arbitration to take place if required.

The Government will take steps to improve awareness of restraint of trade clauses and balance the rights of franchisors and franchisees through an amendment to clause 23.

regulatory framework

The regulatory framework has been highlighted as a key area of concern. The Government has indicated in its response that penalties for breaches of the Franchising Code will double. The Government will also continue working with the sector to provide franchisees with more mechanisms for feedback.

Franchisees will also receive more education on the use of ‘no agent’ and ‘entire agreement’ and, here’s one for the lawyers amongst us to also note, franchisors will be banned from passing the legal costs of preparing, negotiating and executing documents to franchisees (penalties will apply!). There will be an exception for instances where the cost is already incorporated into a joining fee.

A mid-term review of the Oil Code has been flagged to ensure greater compliance, consistency and enforcement, where appropriate.

unfair contract terms

The Government will work with sector stakeholders to establish best practice, including improving awareness of existing protections and redress mechanisms for franchisees. Franchisors doing the wrong thing should take note that the Government has endorsed the ACCC’s 2020 compliance and enforcement priorities, including its focus on the Franchising Code.

Lastly, the Government will advocate that franchisees undertake training and seek professional advice ahead of entering into a franchising agreement. It does not consider this a responsibility for franchisors so consider yourself warned – it pays to undertake proper due diligence so you know exactly what you’re signing up for.

in conclusion

Many of the proposed reforms are aimed at addressing the power balance between franchisors and franchisees, putting steps in place to address system issues within the sector. Importantly, the Government intends to take these steps alongside the sector, with stakeholders that include ACCC, the Australian Small Business and Family Enterprise Ombudsman (ASBFEO), and state small business commissioners and other stakeholders.

So far, the sector’s response to the Government’s plan has been mixed. Have they got it right? Only time will tell.

For more information on the Government’s response and the impact on your franchise, please contact Macpherson Kelley’s franchising team.