Major changes recommended by Franchise Inquiry report
The Parliamentary Joint Committee on Corporations and Financial Services inquired into the operation of Australia’s Franchising Code of Conduct (‘Code’) with the objective to identify areas of the Code needing improving. The committee made eleven recommendations in its 165-page inquiry report, titled “Opportunity not Opportunism: Improving conduct in Australian Franchising” handed to Federal Parliament on 1 December 2008. Federal Parliament will now consider the recommendations and what changes may be made as a result of the Inquiry report.
Background
The Inquiry was conducted over a period of five months, received 159 submissions and involved public hearings in Sydney, Brisbane, Canberra and Melbourne. Up to 15 representatives from both the Government and Opposition made up the Inquiry committee. In a statement following the release of the Inquiry report, chairman Bernie Ripoll MP said the report will “act as the basis for change in the sector to put the squeeze in the rogues and reward those doing the right thing in franchising”. “However we must also respect the freedom of a contract, the freedom to bargain, and most importantly to allow people to get on with the business of being in business”.
The Inquiry’s recommendations focused on the following areas of the franchise relationship:
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Pre-contractual arrangements
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The end of a franchise agreement
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Dispute resolution in franchising
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Good faith in franchising
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Enforcement of the Code
Pre-contractual arrangements
Recommendation 1
the Code be amended to require that disclosure documents include a clear statement by franchisors of the liabilities and consequences applying to franchisees in the event of franchisor failure.
Recommendation 2
the government investigate the benefits of developing a simple online registration system for Australian franchisors, requiring them on an annual basis to lodge a statement confirming the nature and extent of their franchising network and providing a guarantee that they are meeting their obligations under the Code and the Trade Practices Act 1974.
Recommendation 3
the government review the efficacy of the 1 March 2008 amendments to the disclosure provisions of the Code within two years of them taking effect.
The end of a franchise agreement
Recommendation 4
the government explore avenues to better balance the rights and liabilities of franchisees and franchisors in the event of franchisor failure.
Recommendation 5
the Code be amended to require franchisors to disclose to franchisees, before a franchising agreement is entered into, what process will apply in determining end of term arrangements. That process should give due regard to the potential transferability of equity in the value of the business as a going concern.
These recommendations are raised to address key concerns for both franchisor and franchisees at the end of a franchise term which include:
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Non-renewal of franchise agreements at the expiration of the first term, including whether there should be a right to automatic renewal or whether non-renewal by a franchisor should only be permitted where ‘good cause’ can be shown;
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Whether a payment for the franchisee’s contributed value to the business should be mandated if the agreement is terminated or not renewed for whatever reason;
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Transferability of equity in the value of the business as a going concern.
Dispute resolution in franchising
Due to a lack of sound data, the true extent of disputation in the franchising sector is difficult to determine. When disputes do occur and cannot be resolved through internal processes, parties may choose into formal mediation. If mediation fails, litigation is an alternative avenue for pursuing settlement although this is prohibitively expensive for most franchisees. It is felt that the need for mediation or litigation may be mitigated by the introduction of an explicit obligation into the Code for all parties to a franchise agreement to act in good faith.
Recommendation 6
the name of the Office of the Mediation Adviser be changed to the Office of the Franchising Mediation Adviser and that the Code be amended to reflect this change.
Recommendation 7
the government require the Australian Bureau of Statistics to develop mechanisms for collecting and publishing relevant statistics on the franchising sector.
Good faith in franchising
The committee believed that the best way to provide a deterrent against opportunistic conduct in the franchising sector is to explicitly incorporate the existing and widely accepted implied duty of parties to a franchise agreement to act in good faith.
Recommendation 8
the following new clause be inserted into the Code:
6 Standard of Conduct
Franchisors, franchisees and prospective franchisees shall act in good faith in relation to all aspects of a franchise agreement.
Enforcement of the Code
Many franchisees made submissions to the inquiry outlining perceived inaction by, and ineffectiveness of, the Australian Competition and Consumer Commission (ACCC) in pursuing complaints against franchisors alleged to be in breach of the Code. Notwithstanding the limitations of the ACCC’s role, there seems to be room for improvement by the regulator in taking a more active role in the franchising sector.
Recommendation 9
the Trade Practices Act 1974 be amended to include pecuniary penalties for breaches of the Code.
Recommendation 10
the introduction of pecuniary penalties for breaches of section 51AC, section 52, and the other mandatory industry codes under section 51AD of the Trade Practices Act 1974.
Recommendation 11
greater freedom for the ACCC to investigate based on credible information indicating that a party to a franchising agreement may be engaging in conduct contrary to their obligations under the Code.
This would assist in cases where franchisees are too fearful of retribution to provide information.
Federal Parliament will now consider these recommendations before making any announcements on potential changes to either the Code or the Trade Practices Act 1974. The recommendations if accepted would correct the perceived power imbalance between the franchisor and the franchisee in the franchising world, recognise a franchisee’s contribution to business growth and give the regulatory body, the ACCC, more capacity.
Please do not hesitate to contact a member of our Franchising team if youhave any queries.
