The Federal Government has issued an Exposure Draft of the proposed changes to the Franchising Code. However there is no need for immediate action, as the proposed commencement date is 1 January 2015, and further changes are likely as a result of franchise industry consultation. Submissions on the drafting and implementation of the Exposure Draft are due by April 30, 2014.

On April 2 the Federal Government issued an Exposure Draft of the Competition and Consumer (Industry Codes – Franchising) Regulation 2014, accompanied by a statement from the Small Business Minister Bruce Billson entitled The Future of Franchising. The Exposure Draft has been issued for public comment, with submissions closing 30 April 2014. Submissions are invited "only on the technical aspects of implementing the law", with the policy direction settled and indeed summarised in The Future of Franchising statement. The statement and Exposure Draft are the Government's formal response to the report by Alan Wein following his review of the Code in 2013.

The Franchise Council of Australia has been working collaboratively with the Government to endeavour to give effect to the Wein Report recommendations in a manner that is practical, and reduces compliance costs. The FCA has had further constructive discussions with the Government since the Exposure Draft was issued, and is preparing a detailed submission on the Exposure Draft that expands upon the issues raised during discussions. The Government seems sensitive to the issues, and keen to ensure that the Franchising Code of Conduct has broad industry support.

The franchise industry will find no real surprises in the Minister's statement, as the policy is largely in line with industry expectations. Many of the suggestions by the franchise sector are reflected in the Exposure Draft, and with further fine tuning the Exposure Draft should deliver the promised improvements and reduced compliance costs. It should however be noted that in its current form the Exposure Draft does not fully reflect either the Minister's comments in the release that accompanied the exposure draft, or the extensive industry input provided to the Department of Treasury. It does not currently deliver on many of the red tape savings flagged by the Minister. Indeed if no changes are made to the Exposure Draft compliance costs will increase in some areas, and possibly overall.

Other specific areas that will require attention are the proposed new good faith obligation, penalties and the enforcement of post-termination restraints. It had been expected that the Department would simply follow the recommendations of the Wein Report and the industry submissions and introduce into the Code the current common law duty of good faith. Not only has this not occurred, but the wording used in the Exposure Draft is extremely problematic and also introduces a financial penalty for breach of the new good faith obligation. Industry cannot support the current drafting, as it will create substantial legal uncertainty and increase disputation, contrary to the intent expressed by the Minister.

The Exposure Draft has also taken the proposed new penalty regime much further than is warranted. Rather than provide penalties for a fundamental breach of the Code, the Exposure Draft imposes penalties of 300 penalty units ($51,000) for a wide range of specific breaches. There is no distinction between fundamental breaches, and trivial breaches, and some of penalties have been introduced in areas such as mediation, where they are totally inappropriate.

The FCA has also raised problems with the wording of the provisions that seek to prevent franchisors from enforcing post-termination non-compete provisions where the franchisee does not secure an extension of the franchise term.

There are also serious implementation concerns, with the new Code only applying to franchise agreements entered into or renewed on or after 1 January 2015. This will create a duplicate regulatory regime, as the old Code will apply to all agreements entered into before January 1, 2015. The FCA had suggested an alternative that essentially created a single regulatory regime that would apply to all franchise agreements.

Although the changes required to the Exposure Draft are significant, there do not appear to be any policy concerns. Accordingly we anticipate that significant further changes will be made to the Exposure Draft prior to the enactment of the Regulations and the consequential amendments to the Code. At this stage, we are advising clients to hold fire on making any amendments to their franchise agreements or disclosure documents. Given the likelihood of changes and the lead time of 1 January 2015, there is no immediate need to act.

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