The Australian Franchising Reforms

The new Australian Government has announced a review and reform of the Franchising Code of Conduct (Code). This follows the Wein review in 2013, which was broadly accepted by the previous government.

The Code already heavily regulates franchise relationships in Australia. However, in a further attempt to rebalance the relationship between large franchisors and smaller franchisees in favour of the franchisees, the government intends to target “bully” franchisors and create consistent national dispute resolution regulation for the AU$131 billion industry. The proposed reforms have received the support of the Franchise Council of Australia, which is the peak body for the sector and represents franchisees, franchisors and service providers.

While the Small Business Minister, Bruce Billson, has indicated that “red tape reduction” will be a part of the reform package, the government’s approach appears to heavily favour franchisees over franchisors when it comes to the actual reduction of that red tape. There appears to be little corresponding reduction for franchisors. The government plans to create more national consistency to avoid “jurisdiction shopping” and reduce the regulatory issues created by different dispute resolution rules across state lines. This may result in a new Commonwealth agency being established to deal with franchise disputes or new powers being granted to existing Commonwealth agencies to deal with these matters, but detail has not yet been released by the government on how they intend to create this national consistency. The minister also plans to provide more resources for dispute resolution and provide stronger legal protection for franchisees, although again not for franchisors.

For franchisors, in fact, there are likely to be increased liabilities for non-compliance with the Code, the most troubling aspect of which is the government’s announcement of the potential introduction of AU$50,000 penalties, as suggested in the 2013 Wein review. This will be the first time that penalties for non-compliance have been introduced into the Code. While the existing law gives franchisees broad rights to escape contractual obligations and terminate franchise agreements, the addition of large penalties for breaching the Code will be a substantial increase in risk (with consequent increases in ensuring compliance) for franchisors to ensure that they pay close attention to their legal obligations under the Code.

The government has also confirmed that it intends to extend unfair contract protections in the Australian Consumer Law to small businesses (the ACL currently only extends those protections to individuals) which will affect the franchise sector substantially. Franchisors will effectively need to treat franchisees as individual consumers. By extending unfair contract protections to franchisees in this manner, some of the more onerous (if commonplace) requirements on franchisees in franchise agreements may be held unenforceable by Australian courts. If the new government does this, it would be a world first as no other major unfair terms regime in any other country is drafted to extend protection to business customers.

Unfortunately for international franchisors, the government does not appear to be considering the reintroduction of the disclosure exemption for foreign franchisors operating through a local master franchisee. This means that large foreign franchisors operating through a local master franchisee and distributor will continue to have the administrative and compliance burden of ensuring that disclosure documents and franchise agreements are signed by the overseas franchisor (and not just the Australian master franchisee) each time a new franchisee is established.

While the specifics of the legislative changes have not been revealed, each of the themes announced provide an indication of the government’s direction on this issue. For franchisors, the regulation is about to get even tougher than it currently is and for foreign franchisors there does not appear to be any reduction in “red tape” nor any relief to the already high compliance costs in this sector.

On the positive side, the Australian franchising sector is growing and the performance of companies using franchising as a strategy continue to outperform the broader economy.