The Australian Government has released a report containing 18 recommendations following a review of the Franchising Code of Conduct. The key recommendations focus on protecting franchisees by improving disclosure by franchisors, providing an express obligation to act in good faith and strengthening the enforcement regime to include financial penalties. The Government is now looking for input into the recommendations and has opened a 3 week consultation period, which closes on 9 July 2013.
On 4 January 2013, the Australian Government announced the commencement of a review of the Franchising Code of Conduct (Code), to assess the effectiveness of amendments made to it in 2008 and 2010. Alan Wein, an experienced mediator in the franchising sector, conducted the review. Mr Wein received 73 submissions and conducted over 30 interviews during the review process.
The report makes 18 recommendations, which primarily protect the interests of franchisees, and have been endorsed by the Franchise Council of Australia. The Government has now opened a 3 week consultation period and is looking for input from the franchising sector.
So what are the major changes being proposed?
A franchisor’s obligations to disclose certain information to franchisees
The review’s main focus was whether a franchisor’s obligation to disclose certain information to a prospective franchisee effectively informs the franchisee without being too onerous to the franchisor itself.
The review proposes a new requirement that a franchisor provide a prospective franchisee with a short, standalone summary of the key risks and matters they should be aware of when going into franchising. It is envisaged that this summary will be provided at a prospective franchisee’s first point of contact with a franchisor, rather than alongside the disclosure document, and will arguably overcome any risk that a prospective franchisee is put off by lengthy disclosure documents and does not read them.
The review also recommends a franchisor discloses the rights of both parties to conduct online sales.
An overarching obligation of good faith in franchising
There has been longstanding debate about good faith in a franchising context. Currently, the Code contains specific good faith amendments, rather than an all-encompassing obligation.
Ultimately, in the face of “consistent anecdotal evidence of questionable behaviours in franchising”, the review concludes that the Code should include an express obligation on all parties to act in good faith, which would extend to the pre-agreement negotiation.
A franchisee’s rights at the end of the franchise term
The review looked at the rights of a franchisees upon the expiry of its agreement and, in particular, whether the Code should entitle all franchisees to compensation at the end of their term.
The review opts for a compromise of sorts; where a franchisee is willing to renew a franchise agreement on substantially the same terms but the franchisor does not wish to renew, provided the franchisee undertakes to protect the franchisor’s confidentiality and intellectual property rights, any restraint of trade clause within it cannot be enforced against that franchisee.
The review considered whether 2010 amendments requiring parties to approach dispute resolution in a reconciliatory manner has had a positive influence on the conduct of franchising mediation.
It seems there is still room for improvement. That said, the inclusion of a good faith obligation will assist with ensuring the integrity of the Code’s existing dispute resolution process. The review proposes that the Code also makes clear that the requirement to act in a reconciliatory manner applies to all forms of alternative dispute resolution, not just mediation.
The review also recommends that a franchisor is expressly prohibited from attributing the costs of dispute resolution to a franchisee without a court order.
The Code has previously been criticised for not imposing penalties for breaches. The review recommends that breaches be punishable by up to $50,000, and in some cases, a breach of the Code could disqualify a person from managing corporations. It also suggests the ACCC’s powers should be extended when it comes to assessing a franchisor’s compliance with the Code.
Additionally, the review proposes the courts be given powers to make specific orders in relation to franchising, eg requiring a franchisor to give a royalty-free period to a franchisee affected by a breach of the Code.
The review makes a number of other recommendations, including a right of termination for a franchisee upon a franchisor appointing an administrator, prohibition on a franchisor imposing unreasonably significant unforeseen capital expenditure and separate accounting for marketing and advertising costs.
Franchising is now a $130 billion plus industry in Australia. It is no surprise then, that the review’s recommendations focus on the rights of smaller franchisees.
As above, the Government is now looking for your input. It remains to be seen whether the Government will take up the recommendations, but this is the franchising sector’s chance to highlight any concerns and respond to the recommendations. Submissions close on 9 July 2013.