KEY POINTS

  • The Federal Government released a draft of an updated version of the Franchising Code of Conduct (Code) on 1 April 2014.
  • The Code was drafted in response to the review of the Code (currently in operation) undertaken by Alan Wein in 2013 (Wein Review).
  • Bruce Billson, the Commonwealth Minister for Small Business, issued a media release on 1 April 2014, which detailed 4 key areas the Government intends the Code to address.
  • The major changes to the Code include greater penalties, the implementation of good faith requirements and a greater focus on the balance between franchisors and franchisees.
  • The Government intends the updated Code to come into effect on 1 January 2015.

The Wein Review

Alan Wein conducted a review of the Code (currently   in operation) in 2013, which resulted in the publication of the Review of the Franchising Code of Conduct Report, released on 30 April 2013 (Report).  The Report made 18 recommendations, ranging from improved disclosure obligations, the introduction of good faith requirements, greater enforcement powers for the Australian Competition and Consumer Commission (ACCC) and greater penalties for breaches of the Code (Recommendations).

In response to the Recommendations, the current Government proposes to focus on 4 key areas highlighted in the Report (Proposals):

  • diminishing red tape
  • enhancing information available to franchisees
  • striking more of a balance between franchisors and franchisees
  • improving the conduct of franchisors and franchisees.

The Proposals were open to public submissions for 3 weeks following their release; the due date for submissions was 30 April 2014.

The Government intends for the updated Code to come into operation on 1 January 2015.

The following discussion focusses on how the Proposals will affect the Code (currently in operation).

Duty to Act in Good Faith

Franchisors and franchisees who have entered into a franchise agreement, or who propose to enter into a franchise agreement, will be required to act in good faith with respect to their franchise agreement and the Code (Duty).  The Duty requires that parties ‘act honestly, and not arbitrarily, and to cooperate.’  The Duty applies to  all dealings, disputes and negotiations with respect to a franchise agreement and the Code.  The Duty may not be excluded or limited by a franchise agreement.

Imbalance

The Proposals posit a number of changes to the Code which seek to redress the imbalance inherent in franchise agreements (i.e. to assist franchisees).  A 2 page information statement (Statement) is to be provided by the franchisor to a prospective franchisee once ‘it becomes apparent to the franchisor’ that the franchisee intends to enter into a franchise agreement. The Statement must detail the pros and cons of entering into a franchise agreement, with an emphasis upon the value of seeking independent legal/fnancial advice with respect to the proposed franchise agreement.

The Proposals envisage the addition of a clause in the Code to prevent franchise agreements from containing a provision which seeks to oblige franchisees to pay  the franchisor’s costs incurred with respect to any dispute(s) between the franchisee and the franchisor. Such a clause is included in the Proposals because the Review found that if franchisees were obliged to pay    a franchisor’s costs with respect to a dispute with the franchisee, then franchisees were less likely to raise any disputes or concerns they had with the franchisor.  The Proposals also require that any dispute(s) under the franchise agreement be dealt with in the State in which the franchised business is operating.

The Proposals seek to prohibit franchisors from requiring franchisees to contribute signifcant sums of capital to the franchisor, except in certain circumstances, for example, where the franchise agreement specifcally envisages such capital expenditure.

Enforcement and Investigations

The ACCC will be given the power to issue infringement notices (Notices) where it ‘has reasonable grounds to believe that a person has contravened a civil penalty provision’ of the Code.  The Notices are similar to expiation notices – if a person complies with a Notice, then no court proceedings may be brought against    the person named in the Notice for the contravention specifed in the Notice, and paying the penalty in the Notice does not amount to an admission of guilt.  The maximum penalty which may be included in a Notice    is $8,500.  The maximum penalty with respect to    major breaches of the Code will increase to $51,000. The ACCC will also be given greater powers to audit franchisors to ensure that franchisors’ disclosure statements meet the standards prescribed by the Code.

Implications

The Proposals will alleviate some of the imbalance between franchisors and franchisees, focussing on improving the position of franchisees.  The Proposals also provide the ACCC with greater enforcement and investigatory powers to ensure that franchisors are acting in accordance with the law and dealing with franchisees appropriately.  The Proposals also seek to ensure that franchisors and franchisees act reasonably and appropriately towards each other, at all stages of their relationship.