A recent report commissioned by the Federal Government has found that the franchise sector in Australia operates well and that the Franchising Code of Conduct (‘Code’) is generally working in practice.

In early May Gary Gray, the Commonwealth Minister for Small Business, released a report into the efficacy of the Code.  The report, undertaken by Mr Alan Wein, was commissioned by the Federal Government as part of a review of the amendments made to the Code in 2008 and again in 2010.

The comprehensive 230 page report contains 18 categories of recommended changes to Australia’s current franchising regulation, many of which are uncontroversial in light of public discourse and previous franchise sector reviews that have already publicly highlighted may of the key issues.  Of particular interest are the recommendations in relation to disclosure, good faith, dispute resolution, and penalties and enforcement.

Disclosure

A number of recommendations have been made in relation to disclosure requirements under the Code.  The purpose of the disclosure requirements is to ensure that franchisees, and prospective franchisees in certain circumstances, are provided with important information about the franchise and the franchisor.  Some of the recommendations include an amendment to:

  • an amendment so that the provision of a notice triggers a requirement to provide disclosure if the notice relates to a franchisor’s intention to renew a franchise agreement;
  • the prescribed short-form of disclosure that a foreign or master franchisor must provide to a master franchisee and a requirement to provide a copy of all short-form disclosure documents to franchisees;
  • ensure that only franchisees who do not also act as franchisors are provided with the full Annexure 1 disclosure document by their immediate franchisor;
  • remove the Annexure 2 short-form disclosure document;
  • disclosure, requiring the franchisor to disclose the rights of the franchisor and franchisee to conduct and benefit from online sales; and
  • the obligations of franchisors, requiring them to provide prospective franchisees with a short summary of the key risks and matters they should be aware of when entering into a franchising arrangement.

Good Faith

The issue of good faith has been an ongoing concern to the franchise industry, with seven out of nine reviews since 2006 supporting the introduction of an obligation to act in good faith. Clause 23A, introduced into the Code in 2010, provides that nothing in the Code restricts the parties common law obligations to act in good faith.  There has been mixed reactions to this clause, with many submitting it does not do enough to ensure parties’ duty of good faith.  More submissions supported an explicit obligation to act in good faith in the Code.  The review also supported this approach and has recommended the good faith obligation should:

  • be undefined and rely on the unwritten law relating to good faith;
  • apply to both the franchisor and franchisee, or prospective franchisee, as well as the agents of both of these parties;
  • not be contracted out of and where it is, declared void;
  • not prevent a party from acting in its legitimate commercial interests;
  • extend to the negotiation of a franchise agreement, the performance of the agreement, performance of any obligations under the Code, and the resolution of any disputes; and
  • exclude an argument that a franchisor has not acted in good faith because there is no term in the franchising agreement specifying the right of renewal.

Dispute Resolution

Part 4 of the Code currently outlines a dispute resolution procedure for parties to a franchise agreement and provides for the appointment of a Franchising Mediation Adviser by the Minister.  According to the report, the evidence presented to the review highlighted an unwillingness and refusal on the behalf of the franchisors and franchisees to attend mediations and attempt to resolve their disputes.  In response, the report has recommended that clause 29(8) of the Code, which outlines the desirable behaviour of participants in mediation, applies to participation in any alternative dispute resolution process whether under the Office of the Franchising Mediation Adviser, state small business commissioners, privately retained, court appointed or otherwise.

The report also recommends that the Code be amended to ensure that franchisors cannot attribute the legal costs of dispute resolution to a franchisee unless ordered by a court and cannot require a franchisee to litigate outside the jurisdiction in which the franchisee’s business primarily operates. These amendments are aimed at reducing the costs of dispute resolution for franchisees, improving access to justice and restoring the power imbalance between franchisors and franchisees.

Penalties and Enforcement

One of the more significant and controversial recommendations made by the report is to introduce pecuniary penalties and infringement notices for breaches of the Code.

Currently there are no enforcement provisions within the Code itself.  Breaches of the Code are dealt with as a breach of the Competition and Consumer Act 2010 (CCA), with a court able to order a number of non-pecuniary penalties for a breach.  Alternatively, conduct that breaches the Code may be dealt with under other sections of the CCA, such as misleading and deceptive conduct or unconscionable conduct provisions.  The ACCC, which is responsible for enforcing the Code, called for civil pecuniary penalties as a deterrent and remedy to address breaches of the Code which undermine its purpose, as well as infringement notice powers, in its submission to the 2013 review.

The report recommends providing for civil pecuniary penalties up to a maximum of $50,000 as a remedy for Code breaches. The report notes that this figure is sufficient to act as a deterrent of breaches of the Code, as well as giving the court ample discretion to apply the penalty it thinks appropriate.  The report also recommends that the ACCC be given power to issue infringement notices for a breach of the Code.

Where to?

As of Thursday 6th June, the Australian Government announced it is calling for input and comments from stakeholders, franchisees and franchisors on the report’s recommendations to the Code.  Whilst the Federal Government is yet to comment on which, if any, of the 18 recommendations will be implemented, the Minister for Small Business has commented that:

The recommendations provide a roadmap for reforms to assist Australia’s 73,000 franchise small businesses and the more than 400,000 people who work in the sector.