On 24 July 2013, the Government released its response to Mr Alan Wein’s Review of the Franchising Code of Conduct.1 We outlined some of the Review’s noteworthy recommendations in our last franchising Focus Paper, “2013 Review of the Franchising Code – Your Guide to the Main Points”. As promised, we’re back again to update you on which recommendations have met with the Government’s approval, and what this means for the franchising sector.
The Government has accepted (at least in principle) the majority of the Review’s recommendations, including all of the recommendations discussed in our previous Focus Paper. In this Focus Paper, we take you through 6 key recommendations that have been accepted, and which should be of interest to franchise participants.
The big six
The Government has accepted that:
The Franchising Code of Conduct (“Code”) should include an express obligation to act in good faith.
In accordance with Recommendation 9 of the Review, the Code will incorporate the common law relating to good faith rather than adopting a statutory definition of “good faith”. However, the Government expressed concern about the Review’s recommendation that such an obligation should extend to the negotiation of a franchise agreement, rather than just to its performance, and said it would further consider this aspect of the recommendation. The Government also proposes to provide guidance and education to franchising participants about how the obligation of good faith applies at common law, enlisting the help of the ACCC for this task, but without limiting or defining how the common law interpretation of “good faith” would apply.This potentially represents a very significant change in risk profile for participants in the sector, but especially for franchisors. With a general obligation of this kind added to the Code, and non-binding guidance from the Government, franchisors will be in the position that, despite complying with all of the Code’s prescriptive requirements (eg. with regard to the content of franchise agreements and disclosure documents), or even with the Government’s guidance as to what the good faith obligations require, they may nevertheless be liable for failing to act “in good faith”.
Foreign or master franchisors should be allowed to provide short-form disclosure to master franchisees, rather than the full disclosure that the Code currently mandates.
The Government accepted that the current disclosure requirements “create unnecessary ‘red tape’”, but resolved to consult further with franchise participants before deciding on the precise content of the new short-form disclosure.
The short-form disclosure document in Annexure 2 of the Code should be removed.
The Government accepted the Review’s evidence that the “industry does not utilise the alternative, shorter form of disclosure which Annexure 2 [of the Code] allows for”. The amendment will mean that all franchisors, except those foreign or master franchisors permitted to provide the new short-form disclosure discussed in point 2 above, will be obliged to provide full a full disclosure document that complies with Annexure 1 of the Code.
The Code should be amended so that franchisors must provide prospective franchisees with a risk statement summarising the key risks and matters to be aware of when going into franchising.
While the final form of the risk statement has not been finalised, and will require further consultation with stakeholders, the Government has indicated that the risk statement is likely to draw a franchisee’s attention to matters such as:
4.1 the need to consider whether the franchise system is “a good fit” for them;
4.2 the importance of obtaining professional advice from a person with franchising expertise; and
4.3 the risks of franchising both generally and specifically in the context of the franchising system being considered.
A franchisor should be prohibited from enforcing a restraint of trade clause where the franchisor refuses to renew the franchise agreement of a franchisee who is not in breach but wishes to renew.
Recommendation 12 of the Review initially called for a prohibition on the enforcement of restraints of trade by a franchisor that refuses to renew a franchise agreement, provided certain other conditions were also satisfied. Significantly, however, the Government indicated that it will extend this prohibition beyond this Recommendation, so that restraint of trade clauses will be unenforceable “not only in cases of non-renewal … but also where the franchisor has not extended a franchise agreement, and where the franchisor has terminated the franchise agreement ‘without cause’”, provided the franchisee is not in breach under the relevant franchise agreement.
The ACCC should have the power to seek pecuniary penalties for breaches of the Code.
While agreeing that the ACCC should be able to seek pecuniary penalties, the Government indicated that it intends to consider the matter further before determining an appropriate maximum penalty. It will also consider whether different maximum penalties should apply for different Code breaches.
The Government has indicated that it intends to implement the reforms “as soon as feasible”. Although a federal election is imminent, there appears to be bipartisan support for the proposed reforms, and so it seems likely that they will be implemented sometime this calendar year or shortly thereafter.While all franchise participants will need to be aware of the impending amendments to the Code, some of which we have outlined above, it is likely that these amendments (with the exception of the ACCC’s powers of enforcement and provisions relating to pecuniary penalties) will only apply to franchise agreements entered into after the date of amendment.2
Furthermore, there are still some steps that the Government must take prior to amending the Code and its associated legislation (such as the Competition and Consumer Act 2010). As discussed, the Government intends to conduct further consultation on certain issues prior to finalising the form of the Code amendments and will also undertake its newly-established ‘Details-stage Regulatory Impact Statement’ review in respect of the reforms.
Nonetheless, it would appear that the majority of the Wein reforms are going to become reality for the franchise sector, and in a number of respects will represent a significant shift in the franchising landscape.