What's New in Franchising - August 2010

As a result of non-compliance with the Franchising Code of Conduct (Code), when seeking to terminate a franchisee, Ray White has offered an enforceable undertaking to the ACCC which is effective for a 3 year period. This undertaking, publicly available on the ACCC website, reinforces for all those involved in the franchising sector, the critical importance of understanding and implementing a compliance system that strictly complies with the Code.

The Code is a mandatory code, compliance with which is required by section 51AD of the Trade Practices Act 1974 (Cth) (Act).

Where a franchisor wishes to terminate a franchise agreement the franchisor is required to comply with the requirements of clause 21 of the Code and advise the franchisee of any alleged breaches, how the alleged breaches may be remedied and provide a reasonable time period for this action to be taken.

Franchisors must be aware that the notice and time requirements in clause 21 of the Code may only be avoided where there are those special circumstances outlined in clause 23 of the Code. These special circumstances include: abandonment of the premises, conviction of a serious offence, failure to hold a licence required to operate the franchised business, is fraudulent in connection with the operation of the business, operates the business in a way that endangers public safety, bankruptcy or an agreement with the franchisee to end the franchise agreement.

Undertaking

Following an attempt to terminate a franchise agreement in circumstances where the action was not based on any of the factors in clause 23 of the Code, nor for which had notice been given in accordance with clause 21 of the Code, on 8 July 2010, Ray White (Real Estate) Pty Ltd provided a three year court enforceable undertaking to the Australian Competition and Consumer Commission (ACCC) to:

1. not terminate a franchise agreement unless it complies with the Code;
2. comply with section 51AD of the Act;
3. implement at its own expense a trade practices compliance program for its employees and other person’s involved in Ray White’s business;
4. maintain and continue to implement the compliance program for 3 years;
5. make the undertaking publicly available on the ACCC website;
6. acknowledge that the undertaking does not derogate from the rights and remedies available to any person arising because of the alleged conduct.

Lessons to be learnt

Franchisors must be mindful of and adhere to their obligations under the Code. Compliance with these obligations will in general avoid intervention by the ACCC or the Courts and the possibility of public exposure of Code contraventions and potentially brand damaging consequences.

The ACCC has wide scope to take action to ensure franchisees are protected by the law. This action includes accepting court enforceable undertakings of the type given by Ray White and usually involves programs to be implemented and maintained at the company’s expense, like educating franchisor staff about compliance with requirements of the Code.

Other remedies are also available under the Act and the franchisee themselves will have the ability to take action to obtain further relief against a franchisor who does not comply with the Code requirements.

If as a franchisor you are placed in a position where you would like to terminate a franchise agreement it is important you are familiar with the provisions in the Franchising Code of Conduct and your system has appropriate procedures in place to ensure staff are adequately trained to be aware of and implement the Code requirements.

If appropriate, where conduct of the franchisee does not fall within clause 23 of the Code but is of sufficient concern to the franchisor, the franchisor may:

1. discuss with the franchisee the prospect of early termination by agreement of the franchise and reach agreement under clause 23 of the Code using the internal system dispute resolution protocols;
2. issue notice to the franchisee of any breaches of the agreement, what the franchisor requires to remedy the identified breaches and require rectification within a reasonable period; or
3. utilise both approaches to facilitate an understanding of the franchisor’s concerns and work out an outcome that is legally compliant and enforceable.

The Code is a mandatory, which means it must be complied with and internal systems need to reflect and incorporate the stipulated requirements or the system must be prepared to address the consequences of non-compliance.

© DibbsBarker 2010