Australia yesterday moved one step closer towards a new regime of franchise regulation, with the introduction into parliament of the Competition and Consumer Amendment (Industry Code Penalties) Bill 2014 (Bill) and Explanatory Memorandum.

The introduction of the Bill follows a consultation period in relation to an Exposure Draft of the Bill, together with a draft of a new Franchising Code of Conduct (Code).  The government received extensive feedback in relation to the draft Bill and Code.

The Bill is the first step towards implementing changes that were recommended in the Review of the Franchising Code of Conduct conducted in 2013 by Mr Alan Wein.  One of Mr Wein’s recommendations was that pecuniary penalties and infringement notices be introduced as remedies for contraventions of the Franchising Code.  The Bill provides the framework for these penalties to apply, by providing that:

  • if regulations prescribe an industry code, the industry code may prescribe pecuniary penalties not exceeding 300 penalty units for civil penalty provisions of the industry code;
  • a person who breaches a civil penalty provision of a prescribed industry code will be liable to pay a civil penalty under section 76 of the Competition and Consumer Act 2010 (the maximum amount of such civil penalty is to be specified in the Code, but is expected to be $51,000); and
  • alternatively, the ACCC may issue an infringement notice to a person who it has reason to believe has breached a civil penalty provision of a prescribed industry code (up to $8,500 for a company, and $1,700 for an individual).  The payment of an infringement notice will not constitute an admission of liability, but would exempt the person from court action being taken against them in relation to the alleged contravention.

While the Bill is largely identical to the Exposure Draft, and does not contain any surprises, the language of the Second Reading Speech does appear to indicate that the government will be addressing some of the criticisms raised against the draft Code that was circulated with the Exposure Draft.  Perhaps the two most significant proposed changes to the Code were:

  • the introduction of an express duty for parties to a franchise agreement to deal with one another in good faith; and
  • the introduction of civil penalties for breaches of the Code.

While it is widely accepted within the franchising community that these will be features of the new Code, concerns were raised by many that the breadth of the changes proposed went too far.  The Second Reading Speech suggests that these issues may be addressed in the forthcoming revised Code.  In particular:

  • The language proposed in the draft Code in relation to the duty of good faith went beyond the recommendation of the Wein Report that the Code should import the common law duty of good faith into the franchise relationship.  The draft Code also specified that such a duty would include an obligation for a person:
  1. to act honestly and not arbitrarily; and
  2. to cooperate to achieve the purposes of the franchise agreement.

The Second Reading Speech appears to suggest that this kind of deeming provision will be dropped, in favour of a guidance note, when it says: “we will be providing some guidance for participants around what might be considered good faith“.

  • The draft Code also specified civil penalties for a range of provisions of the Code that were imprecise, and susceptible to “technical” breaches.  Many people raised concerns that the language of the Code was too imprecise, and the specific obligations too unclear, for civil penalties to apply in this way.

In an apparent acknowledgement of this concern, there is a statement in the Second Reading Speech that:

Pecuniary penalties will only apply to provisions of the Franchising Code that are fundamental to the purpose of the Code and where non-compliance is likely to cause significant detriment to the other party.

It will be interesting to see how this is dealt with in the Code, but hopefully it signals that mere technical breaches that have no substantial impact on the other party will not be subject to penalties.

The next step in the implementation of the franchising reforms will be the passing of Regulations prescribing the new Code.  It is expected that this will occur within the next two months, at which time we will see the final version of the proposed Code.  The government has indicated that it still intends for the new Code to commence from 1 January 2015.