The Australian government has released an Exposure Draft of the Competition and Consumer (Industry Code – Franchising) Regulations 2024 (Cth) (the Exposure Draft), which would repeal and replace the current Franchising Code of Conduct (the Current Code). The Exposure Draft has adopted many of the proposed changes to the Current Code which were contemplated in the Independent Review of the Current Code undertaken by Dr. Michael Schaper that was released earlier this year. The Australian government is proposing that these new regulations would commence on 1 April 2025.

COMPENSATION FOR EARLY TERMINATION

One of the most significant changes proposed in the Exposure Draft is the proposed inclusion of a new obligation requiring all franchisors to provide some compensation to a franchisee in certain circumstances on early termination of a franchise. Under the Current Code, an obligation along these lines was only applicable to new vehicle dealership agreements.

The Exposure Draft contemplates that a franchisor would not be permitted to enter a franchise agreement:

• Unless the agreement provides for the franchisee to be compensated if the agreement is terminated before it expires because the franchisor either:
  • withdraws from the Australian market;
  • rationalises its networks in Australia; or 
  • changes its distribution models in Australia,

    and the agreement specifies how the compensation is to be determined, with specific reference to:

  • lost profit from direct and indirect revenue;
  • unamortised capital expenditure requested by the franchisor;
  • loss of opportunity in selling established goodwill; and 
  • costs of winding up the franchised business.
• Unless the agreement provides for the franchisor to buy back or compensate the franchisee for certain things if the agreement is not renewed or if the franchisor does not enter into a new franchise agreement with the franchisee or the agreement is terminated before it expires because the franchisor withdraws from the Australian market, rationalises its networks in Australia, or changes its distribution models in Australia.
• That purports to exclude any compensation to which the franchisee may be entitled, other than under the agreement, if the agreement is terminated before it expires other than because the franchisee has breached the agreement.

The Explanatory Statement to the Exposure Draft (the Explanatory Statement) indicates that the franchisor would be required to buy back or compensate the franchisee for all outstanding stock of the franchise purchased by the franchisee, where those things were specified by the franchisor and required in order to operate that franchise in line with the franchise agreement or any operations manual (or similar document). This would also include essential specialty equipment, branded product, or merchandise purchased or maintained by the franchisee that could not be repurposed for a similar business and any other thing that the franchisee was required to purchase or maintain for the purposes of the franchise. 

An example has been given that if a franchisee is intending to purchase a coffee franchise and the franchisor will require the franchisee to sell coffee only in branded coffee cups and using a specific brand of coffee beans, the agreement must provide for how the franchisor will buy back or compensate for the outstanding stock of branded coffee cups. However, the franchisor would not be required to compensate or buy back the coffee beans, as they are not specific to the franchise and could be repurposed for another business.

REASONABLE OPPORTUNITY FOR RETURN ON FRANCHISEE’S INVESTMENT

Another major change proposed in the Exposure Draft is the proposed new obligation for franchisors not to enter 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 required by the franchisor as part of entering into, or under, the agreement. Under the Current Code, an obligation of this kind was only applicable to new vehicle dealership agreements.

The Explanatory Statement indicates that what is considered a reasonable opportunity will be specific to the terms of each agreement, the costs paid by the franchisee, and the length of the agreement. It also provides that franchisors are not expected to provide a contractual guarantee of a profit or the success of the franchisee’s business (and that the new provision is not intended to remove the inherent risks of running a business but to ensure that the term of a franchise agreement is consistent with the level of capital investment required). However, it remains to be seen how an opportunity to make a return on any investment required would be interpreted and how franchisors might best approach substantiating this.

OTHER KEY UPDATES

Some of the other key updates that are proposed to be made to the Current Code include the following:

• Franchisors would no longer be required to create, maintain, or provide a key facts sheet to franchisees or prospective franchises.
• There would now be scope for existing franchisees (renewing or extending an existing franchise agreement) to potentially opt out of disclosure and cooling-off requirements in writing if the franchise agreement and the business is the same or substantially the same as under the existing agreement. This ability to opt out would also apply where there is a transfer of a franchise agreement to a person that is an existing franchisee of the same franchisor.
• When a franchisor is giving notice of its intention to extend an agreement, a franchisee would now also need to be advised of its right to request a disclosure document. A franchisor has two months (instead of 14 days) to provide a disclosure document when it is requested (which request may be made once every 12 months). 
• Where there is to be a fixed sum payable in respect of the franchisor’s legal costs relating to the franchise agreement, it has been proposed that this fixed sum must not exceed reasonable and genuine legal costs.
• Changes would be made to the provisions relating to termination of a franchise agreement. In particular:
  • If a franchisor is terminating where there is no breach of the agreement by the franchisee, reasonable written notice of the decision to terminate would need to be given and the reasons for the termination.
  • For certain kinds of serious breaches, the franchisor would not be able to terminate unless it has provided the franchisee seven days’ written notice of the proposed termination and grounds. 
  • For termination in cases where the franchisee voluntarily abandons the franchised business, operates the franchised business in a way that endangers public health or safety, or acts fraudulently in connection with the operation of the franchised business, a franchisor must not terminate the agreement before a notice period of seven days passes without a dispute notice being given. If a dispute notice is given, the agreement cannot be terminated until the end of 28 days after the day the dispute notice is given.
  • A franchisor would also have certain rights to require a franchisee not to operate the business or part of a business if the franchisor is proposing to take action to terminate for these special termination grounds and specified serious breaches.
• A franchisor would now be prohibited from entering a franchise agreement that includes a restraint of trade clause that is inconsistent with the applicable requirements (as well as restricted from relying on a restraint of trade clause in certain circumstances where a franchise agreement is not extended).
• The definition of “motor vehicle dealership” would be amended to expand this to sales, service, and repair work.
• The Exposure Draft contemplates that some changes would need to be made by franchisors to their disclosure documents. For example, additional disclosure would need to be made regarding:
  • Proceedings against a responsible franchisor entity or holding company under subsection 558(1) and (2) of the Fair Work Act 2009 (Cth);
  • “Specific purpose funds” (instead of only marketing funds); and
  • The rationale, amount, timing, nature, outcomes, benefits, and risks of any significant capital expenditure that may be required of the franchisee.
• The Exposure Draft also provides that civil penalties would now apply to essentially any substantive obligations placed on franchisors.

The Exposure Draft has now closed for public consultation, and we await confirmation of the proposed final form of the new regulations.