In our March Focus Paper entitled “Whose Goodwill is it Anyway? – Goodwill and Franchise Relationships”, we foreshadowed the April 2013 release of the Franchising Code of Conduct review (Review) commissioned by the Federal Government.1 This Focus Paper outlines some of the recommendations of interest to franchise participants following the Review’s release.

As promised, the Review, released on 30 April, examines the 2008 and 2010 amendments to the Code and makes 18 recommendations relating to key areas including:

  • franchisors’ disclosure obligations;
  • good faith in franchising;
  • franchisees’ end of term rights; and
  • the enforcement of the Code under the Competition and Consumer Act 2010.

Among the most noteworthy of the Review’s raft of recommendations are that the Code be amended to:

  • allow foreign or master franchisors to provide a short-form disclosure document to master franchisees, rather than the extensive disclosure currently required of franchisors under the Code;
  • remove the current short-form disclosure document in Annexure 2, so that all franchisors (except as outlined above) must provide a full disclosure document in accordance with Annexure 1 of the Code;
  • include an express obligation to act in good faith, which would apply to parties during the negotiation and performance of the franchise agreement, including in the resolution of disputes;
  • prohibit a franchisor from enforcing a franchise agreement’s restraint of trade clause against the franchisee, where the franchisor refuses to renew the agreement even though the franchisee wants the agreement renewed and is in compliance with its terms; and
  • allow the imposition of civil pecuniary penalties of up to $50,000 for breaches of the Code.

We provide further detail about these recommendations in what follows.

Foreign and Master Franchisors

Prior to the 2008 Code amendments, the Code did not apply to franchise agreements where the franchisor was “resident, domiciled or incorporated outside Australia” and only granted a single franchise in Australia. Following the 2008 review, however, this exemption for foreign franchisors was removed so that Code applied equally to all franchisors, whether foreign or Australian.

To remove duplication and unnecessary costs, the Review recommends that foreign or master franchisors be allowed to provide a short-form disclosure document to master franchisees, instead of the full disclosure currently required under Annexure 1 of the Code.

The Review notes that requiring foreign franchisors to provide a full disclosure document to master franchisees “has been labelled overly burdensome on foreign franchisors in the Australian market” and that “[m]uch of the information provided by the foreign franchisor appears to be irrelevant to franchisees who predominantly receive information pertinent to them from a master franchisee”.2

Importantly, as the Review highlights, such an amendment could make Australia more attractive to foreign franchisors “as compared to other jurisdictions such as the United Kingdom or New Zealand which do not have any franchising specific regulation”.3

Removing Annexure 2 Disclosure

In contrast to the recommendation above, the Review also recommends removing the short-form disclosure document in Annexure 2 of the Code, so that all Australian franchisors must provide full disclosure in accordance with Annexure 1.

Currently, a franchisor can provide short-form disclosure under Annexure 2 if its business has an expected annual turnover of less than $50,000. As industry submissions note, however, Annexure 2 disclosure is rarely used since the Code entitles franchisees to request full disclosure in any case.4

Good Faith

The issue of good faith in franchising has long been a topic of industry debate. One concern is that franchisors, who in many cases have superior bargaining power when compared to franchisees, may wield this power to take advantage of franchisees in the negotiation and performance of franchise agreements.

While the 2008 review recommended that the Code be amended to include a general obligation on the parties to act in good faith, the then Federal Government took the view that an express good faith obligation may create uncertainty, and instead opted to amend specific areas of the Code to address industry concerns.

The 2013 Review again recommends that the Code include an express obligation to act in good faith, indicating that such an obligation should extend to the negotiation and performance of franchise agreements (including dispute resolution) and the performance of obligations under the Code.

While acknowledging that some uncertainty exists as to the precise content of good faith obligations, the Review notes that some industry codes such as the Oilcode5 already impose requirements of good faith upon parties, and that overall “the weight of opinion supports the inclusion of such an obligation in the Code”.6

Restraint of Trade

As discussed in our March paper, the effect of restraint of trade provisions in franchise agreements is another area of frequent tension between parties to franchise arrangements.

Giving a nod to the case law we discussed establishing “that a franchisee can obtain goodwill for their contribution to building the franchise system”, the Review focuses on the situation where a franchisor declines to renew the franchise agreement despite the franchisee wishing to renew.

The Review recommends that the Code be amended to prevent a franchisor from enforcing restraint of trade provisions when:

  • the franchisee wishes to renew the franchise agreement on substantially the same terms;
  • the franchisee is not in breach;
  • the agreement does not allow the franchisee to be compensated in the event of non-renewal; and
  • the franchisor does not renew the agreement.

Penalties

The Code does not currently contain enforcement provisions, even though the 2008 review of the Code recommended their inclusion. At the time the Federal Government took the view that pecuniary penalties were inappropriate since courts have power to compensate parties for loss caused by breaches of the Code and make various other remedial orders.7

The recent Review again recommends amending the Code to allow civil pecuniary penalties of up to $50,000 to be imposed for breaches, and to give wider audit powers to the Australian Competition and Consumer Commission to enable it to monitor Code compliance more effectively.

The Review argues that a “mandatory code which lacks adequate enforcement powers will not adequately deter improper conduct”, and accordingly such amendments would “indicate to the industry that the government considers breaches of the Code to be serious matters”.

Next Steps

It remains to be seen which (if any) of the Review’s 18 recommendations will be adopted by the Federal Government.

On 17 June 2013, the Government released a Consultation Paper seeking stakeholder input on the optimum response to the Review’s recommendations.9 The Consultation Paper identifies several options for amending the Code in relation to each recommendation.

For example, industry participants have been asked to comment on whether the Review’s recommendation about good faith should be implemented in full (if at all), or whether the policy intent of the recommendation could be implemented in an alternative way – such as:

Responses to the Consultation Paper’s discussion questions are due by on 9 July 2013. However, given that there is no time frame for the Government to finalise its inquiry, and considering that it is an election year, the outcome (and timing of the outcome) is not clear.