Franchising Code of Conduct – exposure draft

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Our Ref: CS:CS:13301 Correspondence
Locked Bag 22
Fortitude Valley BC QLD 4006
29 October 2024

Small and Family Business Division
Treasury
Langton Cres
Parkes ACT 2600
By email: smallbusinessfranchising@treasury.gov.au By Email Only

Dear Treasury
Franchising Code of Conduct – Exposure Draft
1. We appreciate the opportunity to provide our feedback on the exposure draft prepared by the
Australian Government and its recommendations to remake the Competition and Consumer
(Industry Codes-Franchising) Regulations 2014 (the Code) (Exposure Draft) and ensure the
Code remains fit for purpose.

2. Franchising is a flagship practice at Rouse Lawyers, with a combined 50 years’ experience
between its team members. We have established over 50 franchised systems within a variety
of different sectors and industries across Australia and New Zealand. Many of our clients are
household names with established national and international networks. In preparing our
feedback, we have consulted with our franchisor clients to ensure that the voices of Australian
franchisors are heard.

3. Most of the changes reflected in the Exposure Draft were expected and are accepted. After
reviewing the proposed changes, we would like to address the following key points and
recommendations:

Clarifying the Code’s purpose
4. The purpose of the updated Code is intended to:

i. address the power imbalance between franchisors and (prospective) franchisees;
ii. improve the standards of conduct and best practices by increasing transparency and
reducing disputes; and
iii. provide fair dispute resolution procedures.

5. While providing clarity of expression to match the policy intent of the Code is welcome, we
caution the Government that the expansion of the ‘purpose’ definition under the new Code
could have significant consequences for franchise litigation in the future where a Court may be
required to interpret the conduct of a franchisor, as against the Code.

Simplification of the Code and Pre-Entry Information
6. The current Code remains highly complex, with multiple layers of information that can
overwhelm prospective franchisees. We believe there is a significant opportunity to reflect and

Liability limited by participation in a Scheme approved under Professional Standards Legislation
streamline the pre-entry process by simplifying and consolidating the key documents.
Specifically, merging the key facts sheet into the disclosure document would reduce
redundancy and confusion, offering prospective franchisees a more efficient and user-friendly
experience without compromising transparency.

7. The preparation and maintenance of a key facts sheet is an unnecessary administrative burden
for franchisors and does not offer any additional information to franchisees that could otherwise
be found in the franchisor’s disclosure document or in the franchisor’s profile on the Franchise
Disclosure Register.

8. Merging the franchisor’s key facts sheet into the disclosure document is a practical
recommendation and aligns with the broader goal of reducing administrative burden and
improving clarity for all parties involved.

Opt-Out Options for Existing Franchisees
9. The proposed amendments to the Code should include provisions allowing existing franchisees
to opt out of receiving disclosure documents and waive the 14-day cooling-off period. These
franchisees, having already engaged with the franchise system, possess sufficient knowledge
of their business operations and associated risks. Enabling them to forego these requirements
would allow for greater flexibility, providing them with the autonomy to make informed decisions
and facilitating immediate commencement of operations when appropriate.

Termination Provisions for Serious Breaches
10. The termination provisions in the Code, particularly those relating to serious breaches by
franchisees, are currently cumbersome and often lead to lengthy disputes. We support an
amendment to the Code that simplifies and expedites the termination process in the case of
serious breaches where there has been a finding against a franchisee by a competent authority
in respect of serious misconduct. Clear and efficient procedures will improve transparency and
fairness, ensuring that all parties are aware of their rights and responsibilities in these
circumstances.

11. Nevertheless, in attempting to broaden the cases in which a franchisor may terminate on only
seven days' notice, the drafting in the Exposure Draft has the effect of removing a franchisor's
ability to terminate on reasonable notice (which need not be more than 30 days) if the conduct
complained of falls under one of the 7-day termination heads. The proposed changes go
beyond the Review recommendations and may create new problems for franchisors.

Promoting Good Behaviour and Powers of ASBFEO
12. We support initiatives that encourage meaningful participation by franchisors and franchisees
in alternative dispute resolution (ADR) and propose granting the Australian Small Business and
Family Enterprise Ombudsman (ASBFEO) the power to publicly name franchisors who fail to
participate in ADR. However, we question the efficacy of increasing penalties further, from 300
to 600 penalty units, for breaches of substantive obligations.

13. While we agree that penalties should reflect the seriousness of the breach, we query whether
such a significant increase is necessary to achieve the intended deterrent effect. It may be more
productive to ensure robust enforcement of existing penalties rather than raising them again.

Reasonable Opportunity for Franchisees to Achieve a Return on Investment
14. The new provisions relating to compensation or buy-back are stated to be an extension to all
franchisors of those which currently apply only to certain motor vehicle dealers. However, they
go beyond this. The current motor vehicle buy-back provisions relate to only vehicles, spare

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parts and special tools, but the Exposure Draft provisions that apply to all franchisors extend to
specialty equipment, branded product or merchandise that could not be repurposed for a similar
business, all the outstanding stock of the franchised business that had been specified by the
franchisor and any other "thing" the franchisor required the franchisee to purchase or maintain.

15. While it is crucial for franchisees to be provided a reasonable opportunity to make a return on
their investment during the term of the agreement, any changes to the Code must recognise
the inherent risks involved in running a business. We implore the Government to ensure that
franchisors are not obligated to provide a contractual guarantee of profit or success. The
entrepreneurial nature of franchising involves a degree of risk for all parties, and the Code
should maintain this balance without placing undue expectations on franchisors.

16. We further implore the Government to provide clarity regarding the meaning of “reasonable
opportunity” and not necessarily apply a one-size fits all approach. This proposed amendment
to the Code is particularly problematic, as these provisions are untested, and it is unclear to
what extent external factors will impact what is considered a ‘reasonable’ return. They may also
impact a franchisor's ability to consent to the sale of a franchise, as they would need to be clear
that the buyer did not over-invest.

17. Even when a franchisee fails to take the necessary steps to develop and grow their businesses,
they will often blame the franchisor rather than accept responsibility for their actions (or lack of
action as may be the case). This could lead to significant disruptions and disputes when these
provisions are enacted. Smaller franchisors may need special consideration, as early
terminations frequently stem from franchisee behaviour or lack of effort.

18. This issue is especially concerning for franchisors and franchise systems because productive
franchisees can suffer due to the distractions caused by unproductive franchisees instigating
disputes. Many franchise systems operate as small businesses with limited teams, and conflicts
can significantly detract from their productivity. When small franchisors are consumed by these
disputes, they struggle to innovate and improve their networks, which can have far-reaching
effects on both the network and its successful franchisees.

19. There is a consensus among some franchisors that they need to adapt their internal policies
and procedures to ensure they are well-protected from these unproductive franchisees, which
means directing more funds towards compliance issues rather than business growth strategies.

20. One of our franchisor clients that operates a machinery and equipment franchise systems
believes that franchisors ought to be categorised and treated differently based on their revenue
generation, similar to how workplace legislation varies for small businesses. Smaller franchises,
which represent the majority, often cannot bear the same obligations as larger ones, and this
distinction is crucial for their viability.

Concluding Remarks
21. We appreciate the Government’s effort in this reform and remain supportive of an approach
that both simplifies compliance and enhances fairness across the franchising sector. Should
further discussion be required, we would be happy to provide additional insights.

22. Thank you for your consideration.

Yours faithfully
Rouse Lawyers Pty Ltd

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