As noted in our earlier update of 15 December 2008, the government has been considering its response to the report by the Parliamentary Joint Committee on Corporations and Financial Services (the Committee) of 1 December 2008 entitled 'Opportunity not opportunism: improving conduct in Australian franchising' (the Report).

On 21 June 2009, the Government released an options paper which invites additional written comment on the amendments proposed in the Report and their probable effect on the franchising industry within Australia.

The options paper takes the form of a series of questions designed to elicit specific comment on certain issues, in particular the likely costs and risks for affected parties.

Submissions are requested by no later than close of business on Friday 10 July 2009.

The recommendations of the Report, if implemented, will have a significant impact on the relationship between franchisors and franchisees, and may result in a substantial increase in compliance costs for all parties. As this may be the last substantive opportunity to influence the Government's thinking before it formalises its proposed amendments to the Franchising Code of Conduct (the Code), we would urge interested parties to participate in this consultation process.

Scope of the consultation

The series of questions produced by the Government have the stated aim of 'clarifying the business compliance activities and costs in relation to the regulatory options identified in the Report', however the government is explicit that the paper does not necessarily reflect the settled position of the government on any of these issues. Further, the paper specifically excludes from its scope, any recommendations or comment regarding the potential expansion of the investigatory powers of the Australian Competition and Consumer Commission (ACCC) or the possibility introduction of pecuniary penalties for breach of the Code (see point 5 of part 3 below). In total, the paper contains 45 questions over four parts, namely:

(a) twelve questions on the proposed additional disclosure obligations and the consequences of a franchisor failure or insolvency event (see points 1 and 6 of part 3 below);

(b) fifteen questions surrounding the proposed governmental online registration system and the collection of statistical data (see point 3 of part 3 below);

(c) nine questions on the proposed additional disclosure obligations and the end-of-term arrangements (see point 2 of part 3 below); and

(d) nine questions concerning the potential introduction of a general obligation of good faith and amendments to the Office of the Mediation Advisor (see point 4 of part 3 below).  

Background to this update

On 25 June 2008, the Committee resolved to examine the Code and its operation within Australia. The Code is a mandatory industry code established under s 51AE of the Trade Practices Act 1974 (Cth) (TPA). Broadly speaking, the Code seeks to regulate the conduct of the parties to a franchise agreement, including ensuring that a prospective franchisee is sufficiently informed about the franchise on offer before entering into it.

The Report was released to the public on 1 December 2008 and, in all, made eleven substantive recommendations. Briefly, the key amendments proposed were as follows.

1 That the Code be amended to require that disclosure documents include a clear statement by the franchisor of the potential liabilities (and other consequences) that may apply in the event of a franchisor failure.

2 That the Code be amended to require the franchisor to disclose (prior to the execution of a franchise agreement) the process that will apply in determining the arrangements at the end of the ordinary franchise term (including for example, renewal of the franchise agreement).

3 That further investigations be undertaken as to the potential benefits of developing an online registration system for franchisors which would require, amongst other things, the lodgement of an annual statement confirming the nature and extent of its franchising network and providing a guarantee that the franchisor is meeting its obligations under the Code and the TPA.

The Committee also believes that the creation of such a system would be a useful means by which the government could acquire data on the operation of franchises generally across Australia.

4 That the Code be amended to include an obligation on each party (including a prospective franchisee) to act in good faith in relation to all aspects of the franchise agreement.

5 That the TPA be amended to include financial penalties for breach of the Code, s 51AC of the TPA (unconscionable conduct) and s 52 of the TPA (misleading and deceptive conduct), enforceable automatically by the ACCC.

6 That the government explore further means by which the rights and liabilities of the parties could be balanced more equitably in the event of franchisor failure.