On 24 July 2013, the federal government released its response to the review of the Franchising Code of Conduct conducted by Mr Alan Wein. The report had been presented to the government on 30 April 2013 and made various recommendations, the majority of which the government has accepted or accepted in principle.
This update addresses, subject to the calling of the federal election, some of the changes that are expected to be introduced and areas where the government has indicated it will not follow the proposed recommendations.
ACCC Powers: Civil Pecuniary Penalties & Infringement Notices
The Wein Review suggested that the Competition and Consumer Act 2010 (Cth) be amended to impose civil pecuniary penalties up to a maximum of $50,000 for contraventions of the Code.
The government agreed to legislate to provide the ACCC with power to seek pecuniary penalties. However, it stated that further consideration should be undertaken in regards to the appropriate maximum penalty.
The government has also accepted the recommendation to allow the ACCC to issue infringement notices for breaches of the Code and to extend their current audit powers under section 51ADD of the Competition and Consumer Act 2010 to investigate a franchisor’s compliance with all parts of the Code.
The government did not accept Mr Wein’s recommendation to include a breach of the code as one of the grounds for which a court may make a disqualification order (prohibiting a person from managing a company). It was noted that there may be scope for a limited partial disqualification power such as banning a person from being a franchisor. Disqualification from managing a company, however, was not considered an appropriate remedy for a contravention of the code.
The recommendation that the Code be amended to include an express obligation to act in good faith has also been accepted, in part, by the government.
The review recommended that the obligation should extend to the negotiation of a franchise agreement, the performance of the agreement and any obligations under the Code and the resolution of any disputes. This recommendation was met hesitantly by the government, following concerns from stakeholders about the applicability of a duty of good faith in the negotiation stage of a franchise agreement. The government has said that more consideration is needed.
Similarly, the recommendation by Mr Wein that the obligation to act in good faith not be defined and instead find meaning in the ‘unwritten law’ has also been approached with caution. The government said that such an approach would create uncertainty in regards to what is required of parties subject to the obligation given the various judicial approaches to good faith at a state level and the lack of any clear High Court guidance on the issue.
The government has, however, recognised that an express obligation to act in good faith will require investment in education for the franchise sector and in its response indicated that it will approach the ACCC to facilitate such education.
Restraint of trade clauses
Another recommendation accepted by the Government relates to the enforceability of ‘restraint of trade’ or ‘non-compete’ clauses.
The government intends to amend the Code so that restraint of trade clauses in franchise agreements will be unenforceable provided that:
- The franchisee wishes to have the franchise agreement renewed on substantially the same terms;
- The franchisee is not in breach of the agreement;
- The agreement does not contain provisions allowing a franchisee to make a claim for compensation in the event that the franchise is not renewed;
- The franchisee abides by all confidentiality clauses in the agreement and does not infringe the intellectual property of the franchisor; and
- The franchisor does not; renew the franchise agreement, fail to extend the franchise agreement or terminate the agreement ‘without cause’.
Concerns were made during the consultation process that acceptance of this recommendation would allow franchisees to orchestrate circumstances so as to avoid being bound by a restraint of trade clause. The government addressed this by noting its intention to introduce an express obligation of good faith to counteract such orchestrated attempts to avoid the clause.
Failure of the franchise
Right to terminate & potential recognition of franchisees as unsecured creditors
The Wein Review also recommended that franchisors and franchisees be provided with a statutory right to terminate within a reasonable period of time following the appointment of an administrator. Termination in these circumstances would only be able to occur in the event the business cannot be turned around or a purchaser for the franchise system is not found.
The government accepted this recommendation in principle, however, noted that it may have unintended adverse effects such as on the franchisor’s and franchisee’s access to credit and the ability of the administrator to sell the business as a going concern.
A further recommendation from the review, accepted in principle by the government, was to ensure franchisees can be made unsecured creditors by apportioning the franchisee fee across the term of the franchise agreement. Such an approach would have the effect of rendering the unexpired portion of the fee as a debt in the event of the franchise failing.
The government in its response, noted approval of the policy intent of the recommendation, however, stated that it raises complex issues in relation to insolvency, taxation and contract law.
The government has committed itself to undertaking further consultation with the industry and experts on both these issues.
Unforeseen capital expenditure
The Wein Review recommended that the Code be amended to prohibit franchisors from imposing unreasonable significant unforeseen capital expenditure on franchisees.
The government accepted the recommendation in principle but acknowledged that ‘a balance should be struck’ between the franchisee’s desire not to have unreasonable expenses imposed on them and the franchisor’s interest in improving the franchise business.
As part of their response, the government intends to introduce a requirement that if ‘significant’ capital expenditure is not initially disclosed in the franchise agreement or disclosure agreement, the franchisor must be able to prove that the expenditure is reasonable. ‘Significant’ in this circumstance is likely to be defined a percentage of turnover or profit.
Although there is no clear indication of when the legislation is expected to be introduced into parliament, the government has stated that the changes outlined will be introduced ‘as soon as feasible’. With the calling of the election for September 7, it is unlikely changes will occur before then given the consultation that is flagged to occur.
It is expected that the changes regarding franchise agreements will only affect agreements entered into after the implementation of the legislation. The ACCC enforcement procedures, however, will be available from a particular commencement date.