Australia—The Australian Government has released its exposure draft of new franchising laws in October 2024 for public consultation, with submissions due at the end of a very short consultation period ending on 29 October 2024.

Dentons Franchising and Distribution Partner Robyn Chatwood welcomed the release for comment of the Competition and Consumer (Industry Code-Franchising) Regulations 2024 exposure draft, but emphasised that the proposed laws in their current form might significantly and materially impact the viability of some franchise models in Australia.

“Some of the most contentious aspects of the draft laws are that they mandate that franchisors must provide a reasonable opportunity for franchisees to make a return on their investment. This requirement is likely to spark disputes, as what constitutes a ‘reasonable opportunity’ will vary based on the specifics of each agreement. And the draft laws may inadvertently attract unsuitable franchisee entrants who might misinterpret the regulations as a guarantee on their investment, unlike other small business or investment opportunities that do not offer such assurances,” Robyn Chatwood said.

“Another more controversial issue is the new laws requiring franchisors to compensate franchisees for early termination of agreements could significantly alter the economics and viability of some franchise models. This may lead to franchisors being more cautious in selecting franchisees, particularly those with less experience. We foreshadow disputes where franchisees have invested in excess of the requirements of the franchise agreements – yet are expecting compensation under the new laws.”

Robyn Chatwood continued, “Certainly, the risk of non-compliance in the franchising sector will increase. The draft laws propose that a penalty will apply to virtually every substantive obligation of franchisors and franchisees where the obligation is breached. It seems, for example, a sledgehammer to crack a walnut to apply a penalty of almost $200,000 to a breach of a requirement for a franchisor to keep for 6 years anything the franchisee or prospective franchisee gives the franchisor in writing if giving it is required or permitted by the new law.”

The background to the government’s proposed changes is that, in 2023, Dr Michael Schaper (previously Deputy Chair of the Australian Competition and Consumer Commission and the ACT Small Business Commissioner) was asked to review Australia’s main law regulating the franchising sector - the Franchising Code of Conduct. The purpose of the Review was to evaluate the effectiveness and fitness for purpose of the Code. A trigger for the Review was that the Code was scheduled to sunset in April 2025. Dr Schaper’s final report was published in February 2024. The Australian Government responded to that Review report in May 2024 agreeing with all of Dr Schaper’s recommendations. The scene was therefore set for the Code to be changed.

Dentons Franchising and Distribution Managing Associate, Suman Reddy said many in Australia’s franchise sector are fatigued.

“There has been almost constant tinkering to this key piece of legislation since it was first enacted in 1998 - the Code has been amended at least ten times since 1998 and eight times since it was remade with effect from 2015.”

“One positive to come out of the whole review process is the commitment stated by the Australian Government to stabilise the law. The proposed law is set to stay in place without amendment until 2030 – so hopefully we will see some stability and a reduction in compliance costs associated with the near-constant amendments that have been the history of regulation in this sector”

Dentons encourages those operating in the franchise sector as well as the automotive or machinery dealerships sectors

in Australia to keep informed about developments following from the exposure draft.

Partner Robyn Chatwood added, “At the minimum, we suggest setting aside budgets and anticipating costs in changing template agreements, related disclosure documents and key clauses such as restraints of trade clauses in agreements. And we also encourage engagement in the consultation process.”

All interested parties are invited to share their views on the draft regulations as part of a public consultation process.

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