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Franchising Law Reforms in Australia

Franchising Law Reforms in Australia
Recently, some of our clients who are franchisees have consulted us about what do they have to beware of when running a franchise. In fact, the laws and regulations on franchising in Australia have been maturely developed, and the relevant affairs are mainly governed by the Franchising Code of Conduct. In recent years, the growth of franchising issues has attracted the government’s attention. Meanwhile, relevant laws and policies are also facing reform. In this article, we will introduce the legal issues that franchisees need to pay attention to and interpret the new changes according to the recently published amendments.

01

How to start up a franchise
The franchising model can help your business grow quickly. From the master franchisor’s perspective, if the operation goes smoothly, it will be a win-win relationship as franchising can rapidly expand its business. For the franchisee itself, franchising can avoid the trouble of implementing early promotion and enter the market straight away. It is important to note that the franchisee is not buying the business, but the license to carry out business belonging to the master franchise (i.e. the franchisor).To franchise your business, the franchisor must prepare the necessary legal documents such as the franchise agreement and disclosure statement in accordance with the franchising laws. Subject to the legal documents, the franchisor may authorize the franchisee to use its trademarks, business systems, methods of operation, suppliers, training courses, etc. And that the franchisor will continue to provide the franchisee with support. In return, the franchisee will provide ongoing revenue to the franchisor, including franchise fees, loyalty fees, brand development fees, and other supply-chain related income.

02

Franchisor’s disclosure statement
The franchisor must provide the franchisee with disclosure information at least 14 days prior to entering into an agreement with the franchisee or accepting any payment from franchisee. This means that the master franchise needs to list out specific details about the franchise in the disclosure document, including the franchise system, fees related to the franchise, names and contact information of all relevant personnel, existing and former franchisees, etc. For franchisees, it is necessary to carefully review the disclosure document and conduct the corresponding research to ensure that the given information is understood so as to avoid future disputes.

03

Things to be cautious of when signing the franchise agreement
Similarly, the franchisor must also provide the franchisee with a franchise agreement at least 14 days in advance, meaning franchisee has at least 14 days to review the agreement before signing it. Not only that, according to the law, there is a 7-day cooling-off period after the franchisee signs, meaning that the franchisee can unconditionally withdraw from the contract within 7 days after signing. In addition, prior to signing an agreement, the franchisee is required to provide a written statement to the franchisor to ensure that the franchisee has consulted with relevant professionals such as lawyers and accountants and is fully aware of the legal implications of the franchise agreement and other relevant documents.

04

Franchising penalties and new reforms

According to the Franchising Code of Conduct, if any of the following duties are breached by a party, it may be subject to notices of infringement and fines from the Australian Competition and Consumer Commission:

  • Duty to act in good faith
  • Duty to provide a disclosure document
  • Duty to attend mediation
  • Duty to provide reasonable written notice of proposed termination for breach.
On 1 June 2021, the Australian Government made amendments to the Franchising Code following the Government’s response to the Fairness in Franchising report. Many of the changes have already taken effect since 1 July 2021. These changes include the following:
  • In certain circumstances, franchisor must provide a ‘key facts sheet’ to the prospective franchisee, in addition to the disclosure document, at least 14 days before they:
    • enter into a franchise agreement or make a non-refundable payment;
    • give consent to a transfer of existing franchise agreement to themselves; or
    • renew or extend a franchise agreement.
  • Additional information required in disclosure documents:
    • the percentage of franchises that participated in an alternative dispute resolution process or arbitration in the previous financial year
    • more detail around rebates and other financial benefits that franchisors receive from suppliers
    • whether the franchisor or an associate has an interest in a lease that will be used for the operation of the franchised business
    • whether the franchise agreement provides for the arbitration of disputes using the Code’s arbitration provisions
    • the ways in which the franchisee and the franchisor can terminate the agreement early
    • franchisees’ rights to any goodwill they generated
    • any restraint of trade obligations.
  • There are now more alternative dispute resolution (ADR) options available, including conciliation, voluntary arbitration, and mediation.
  • The cooling-off period has been changed from being 7 days to 14 days.
  • The franchisor can require the franchisee to pay a fixed amount for legal costs which must be specified in the franchise agreement. However, the franchisor cannot require the franchisee to pay legal costs in relation to preparing, negotiating, or executing other documents after the agreement is entered into.

 

For further information please visit https://www.accc.gov.au/business/industry-codes/franchising-code-of-conduct/changes-to-the-franchising-code-of-conduct-july-2021.

Conclusion

The process of starting a franchise business is complex, and the new law reforms this year could mean further legal compliance and increased costs and risks for franchisors and franchisees. We suggest that you consult with one of our experienced lawyers who can provide professional assistance throughout this process.

Disclaimer

The process of starting a franchise business is complex, and the new law reforms this year could mean further legal compliance and increased costs and risks for franchisors and franchisees. We suggest that you consult with one of our experienced lawyers who can provide professional assistance throughout this process.

Fumens Team

Wendy Wang

Principal

Casey Chow

Associate

Hao Qian

Associate