Important changes to Australian franchise laws, introduced in July, will impact both franchisors and franchisees, regardless of expansion plans.
The new laws will apply to new franchisee agreements, as well as renewals, meaning old contracts will eventually be superseded, despite how long they’ve been in place.
O*NO Legal Founder and Legal Strategist, Kristen Porter, said the new laws were franchisee friendly, and designed to balance the power relationship between the two parties.
“Essentially, the laws are almost classifying franchisees as consumers, with consumer protections put in place,” she said.
“The changes will increase the cost of administering franchisee agreements, putting more red tape in place, and increasing the civil penalties for non-compliance, so it’s critical that all franchisors are across the amendments.”
At a high level, the updated Franchise Code of Conduct includes increased protection for franchisees, enhanced disclosure requirements, and changes to the dispute resolution process.
The changes also cover:
- Cooling off
- Marketing fund
- Capital expenditure
- Variation of Franchise Agreement
Some of the more significant amendments relate to dispute resolution, termination, and restraints of trade following agreement terminations.
The new laws aim to allow for alternative dispute resolution processes, reducing the need for litigation in favour of mediation or conciliation processes.
“Often, franchisors will have an inhouse legal team that they can defer to in a dispute,” Ms Porter said.
“Whereas franchisees generally won’t have access to this, leaving them with hefty external legal costs, which can be unattainable for some businesses.
“This law aims to find a good outcome through commercial processes.
“With litigation, no one ever wins. Even if someone gets everything they wanted, by the end of the process, they still don’t feel like they’ve won, and it takes its toll both financially and emotionally.”
The laws are no longer black and white when it comes to termination, irrespective of which party wants out.
Under the new laws, a franchisee can request early termination, with the franchisor now required to consider it in good faith.
“In the past, a franchisor could simply say ‘no’ to this request,” Ms Porter said.
“They now have to provide a reason as to why the request has been denied. That doesn’t mean franchisees have the right to exit on demand, but their individual circumstances must be considered.”
On the flipside, franchisors no longer have the right to immediately terminate franchise agreements.
“Under the new laws, franchisors must give notice of their intention to terminate the agreement, and franchisees now have the opportunity to dispute the decision,” Ms Porter said.
“For example, in the real estate industry, if a corporate franchisee lost its corporate licence and was unable to operate the business, previously, that would have been cause for immediate termination.
“Now, franchisees are able to enter dispute resolution, attempt to negotiate a way forward, and try to save the franchise relationship.”
Restraints of trade
Non-compete clauses will no longer apply under the new franchise laws, with new or renewed franchisees free to open a new real estate agency under another brand, following termination of the franchise agreement.
The only exception to this is if the franchisee was in breach prior to the termination.
“This applies to new agreements and those that have been renewed under the new laws,” Ms Porter said.
“So, if a termination takes place prior to renewal, the existing clauses will apply.”
Ms Porter recommends seeking legal advice to properly understand how these amendments impact your business.