On 24 July, the Federal Labor Government released its response to the latest review of the Franchising Code of Conduct (Code) by the Department of Industry, Innovation, Climate Change, Science Research and Tertiary Education.
The Coalition has yet to reveal if it will follow the previous government’s response but franchisors and franchisees should be aware of the potential changes, as they indicate a number of significant amendments to the current law.
The Minister for Small Business, the Honourable Bruce Bilson, emphasised at the recent National Franchise Convention that small business requirements are high on the Coalition’s agenda.
The review made 18 recommendations to Government. A summary of some of the more critical recommendations and responses from the previous government are set out below.
Recommendations relating to disclosure that the previous government have accepted include:
- amendments that require a franchisor to disclose the rights of both the franchisor and franchisee to conduct online sales;
- consultation on a proposal to allow a foreign or master franchisor to provide a short-form of disclosure to a sub-franchisee instead of the greater level of disclosure usually required;
- the removal of the short form disclosure document available to smaller franchises; and
- a new requirement that a summary of key risks be disclosed by a franchisor to its franchisee.
An express obligation to act in good faith for both a franchisor and franchisee is also suggested by the review. The obligation could extend further than the performance of obligations under the Code to the negotiation of the franchise agreement, the performance of the agreement and the resolution of any disputes between the parties. The obligation would not prevent a party from acting in its legitimate commercial interests but good faith could not be limited or excluded by contract.
The former government had accepted this recommendation in part but had raised concerns about the lack of legal knowledge of the parties when dealing with the duty of good faith.
Restraint of trade
The previous government also accepted a recommendation that restraint of trade provisions that prevent a franchisee from carrying on a similar business in competition with the franchisor become unenforceable when a franchisor decides not to renew a franchise agreement. This would only apply in cases where the franchisee wishes to have the agreement renewed and a number of other conditions are met.
The review recommended that dispute resolution provisions be amended to prevent:
- franchisors from attributing legal costs of dispute resolution to franchisees unless ordered by a court; and
- franchisors from requiring franchisees to litigate in a jurisdiction outside the jurisdiction the franchisee’s business operates.
The previous government accepted the costs recommendation and indicated willingness to implement mechanisms in the Code to deal with forum issues.
Penalties for breaches
Perhaps most importantly for franchisors, the review made a number of recommendations relating to penalties for breaches of the Code.
The previous government accepted that a civil pecuniary penalty be available but stated that it would consult further before determining an appropriate fine.
It was accepted by the previous government that the ACCC be empowered to issue infringement notices for breaches of the Code.
The review also proposes that the ACCC be able to conduct random audits of a franchisor’s compliance with all aspects of the Code. The previous government also accepted this recommendation.
Recommendations to enable courts to ban franchisors from managing corporations and from implementing other franchise-specific orders were however not accepted by the previous government.