Reforms to the Franchising Code of Conduct unveiled: Here's what you need to know

By Adrian Kuti, Meg Waller
10 Jun 2021
While existing franchise agreements entered into prior to 1 July 2021 are generally not affected by the changes, any new agreements or any variations, extensions or renewals of existing franchise agreements, and all disclosure documents, will need to be updated to deal with these reforms.


On 1 June 2021, the Federal Government released the Competition and Consumer (Industry Codes - Franchising) Amendment (Fairness in Franchising) Regulations 2021. The significant reform package amends the current Competition and Consumer (Industry Codes—Franchising) Regulation 2014 to improve the fairness and transparency of the franchising sector and to provide protection for parties wishing to enter into franchise agreements.

The amendments are a response to the Parliamentary Fairness in Franchising report and an extensive period of consultation on the Exposure Draft legislation proposing amendments to the Code.

Key changes to the Franchising Regulations at a glance

  • On 1 July 2021 the majority of the reforms to the Code will come into effect.
  • Amendments regarding dispute resolution apply to any dispute which arise after the clause commences, even if the franchise agreement was entered into before the Franchising Regulations. Existing agreements will need to be reviewed to reflect these reforms (if applicable).
  • A number of new provisions will become civil penalty provisions.
  • Improvements to the scope and quality of disclosure requirements have been made.
  • More dispute resolution avenues other than mediation are now available, including conciliation and voluntary arbitration.
  • A franchisor is expressly prohibited from varying a franchise agreement with retrospective effect without the written consent of franchisee.
  • There are a number of important changes to the provisions relating to new vehicle dealership agreements.
  • A franchisor is prohibited from entering into an agreement which requires the franchisee to pay for legal costs associated with the agreements or documents related to the agreement.
  • A restraint of trade clause will only apply in circumstances where the franchisee commits a "serious" breach of the agreement.
  • The amended capital expenditure provisions as amended by the Franchising Regulations will apply uniformly across all franchise systems, including automotive franchises.
  • Significant changes have been made to clause 26 of the Code relating to the cooling-off period.
  • While existing franchise agreements entered into prior to 1 July 2021 are generally not affected by the changes, any new agreements or any variations, extensions or renewals of existing franchise agreements, and all disclosure documents, will need to be updated to deal with these reforms.

Start dates for the changes to the Franchising Regulations

  • Amendments relating to dispute resolution apply from 2 June 2021.
  • The majority of other changes commence on 1 July 2021. These relate to Schedules 2 to 11 and Schedule 12, item 2 of the Franchising Regulations.
  • Amendments which require a franchisor to change the disclosure document apply to disclosure documents to be given, or copies which are given, on or after 1 November 2021. Franchisors must update the disclosure document within 4 months of the end of the financial year.

Dispute resolution

Key issues underlying franchising dispute resolution have been addressed by:

  • expanding existing dispute resolution avenues to introduce conciliation and voluntary arbitration;
  • conferring on the Australian Small Business and Family Enterprise Ombudsman the functions previously undertaken by the Franchising Code Mediation Adviser;
  • formalising the availability of multi-franchisee dispute resolution processes which must be attended by a franchisor where conducted by the dispute resolution provider;
  • failure to attend ADR process will contravene a civil penalty provision; and
  • requiring parties to a dispute to observe confidentiality requirements relating to resolving the dispute. 

Disclosure obligations – pre-entry disclosure

Improvements to the quality and scope of disclosure requirements have been made, including:

  • the requirement that franchisers meet additional disclosure requirements prior to entering into an agreement with a prospective franchisee. For example, franchisors must provide to the prospective franchisee:
    • a copy of the new key facts sheet containing key information from the disclosure document; and
    • and relevant lease documents (if applicable)

    to the prospective franchisee at least 14 days before the parties enter a franchise agreement (or pays non-refundable money); and

  • an improved Information Statement which franchisors must provide to the prospective franchisees prior to giving them other disclosure documents; and
  • the requirement that the franchisor cannot give their consent to the transfer of the agreement until at least 14 days after giving the prospective new franchisee the required documents.

Marketing funds and other cooperative funds

  • References to marketing funds will apply to all forms of cooperative funds where payments are collected to cover marketing activities for the franchise system or a segment of it.
  • Master franchisors may collect and manage marketing and cooperative funds.
  • Fund administrators are required to prepare an audited annual financial statement for the last financial year, within four months of the end of the financial year to which it relates. This statement and the auditor's reports must be provided to franchisees within 30 days of their preparation.
  • Where 75% of Australian franchisees who contribute to the fund agree by vote, the fund administrator does not need to have the statement audited for the financial year.

Civil penalties will be imposed upon franchisors who maintain a marketing fund but fail to comply with reporting obligations. 

Significant capital expenditure

Under the new reforms, a franchisor is prohibited from requiring a franchisee to undertake significant capital expenditure in relation to a franchised business during the term of the franchise agreement term. Some exceptions apply.

Early termination arrangements

  • Significant changes to give franchisees an explicit avenue to propose the early termination of the franchise agreement.
  • The franchisor must respond to the proposal within 28 days, and if they do not agree to the termination, they must include reasons for refusal. Franchisors who refuse a termination request may be seen to be in breach of the Code's good faith obligations or unconscionable conduct clauses.
  • Franchisors who wish to terminate an agreement under the Code's "special circumstances" termination rights will be required to provide 7 days' notice to the franchisee that they purport to terminate the franchise agreement.

Passing on of a franchisor's legal costs

  • With the introduction of new Clause 19A, franchisors are prevented from contractually passing on future legal costs associated with the agreement.
  • This clause allows for franchisors to pass on the legal costs of preparing the franchise agreement to franchisees, but only where those costs are specifically quantified as a dollar amount in the agreement.

Cooling-off and transfer

  • The reforms extend the cooling-off period from 7 to 14 calendar days for new agreements and transfers of existing agreements. For transfers, the cooling off period will expire earlier if the incoming franchisee takes possession and control of the franchised business (new clause 26A).
  • The commencement of the cooling-off period has also been expanded.

Unilateral variation – retrospective

  • Under the new reforms, franchisors are prevented from varying an agreement with retrospective effect unless the affected franchisee consents (in writing) to the variation. 

Leasing of premises

  • The reforms enhance the existing disclosure requirements of lease information to a franchisee (or prospective franchisee).
  • Non-compliance with the new provisions may result in a civil penalty. 

Restraints of trade

  • Under the existing Code, the restraint of trade clause only applies after the existing agreement expires if (among other factors) the franchisee was in breach of the agreement (or any related agreements). Following the reforms, this clause will now apply only when the franchisee has committed a "serious" breach.
  • What amounts to a "serious" breach may differ between franchise systems and will often depend on the circumstances.

Good faith

  • In addition to the existing considerations pertaining to good faith, courts must now have regard to whether the terms of the agreement are fair and reasonable. 

New vehicle dealership agreements

  • The definition of motor vehicle dealership has been expanded to incorporate agency models of vehicle sales.
  • Compensation provisions:
    • New vehicle dealership agreements are to include terms setting out the compensation of the dealer in the event the manufacturer withdraws or rationalises its Australian market presence, or changes its distribution models in Australia. The compensation term must specifically address how the compensation is to be determined.
    • The manufacturer must specify how the franchisor will buy back or provide compensation in relation to new vehicle inventory, party and special tools in the event early termination or non-renewal.
    • Manufacturers are precluded from including a contractual provision which attempts to deny the dealer compensation if the agreement is terminated early for reasons other than breach by the dealer.
    • The new compensation provisions are civil penalty provisions. 

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.