Australia’s Minister for Small Business issued a report entitled ‘The Future of Franchising’ in April 2014 (Report).

The government’s continual review and monitoring of franchisors’ compliance under the Franchising Code of Conduct (Code) since its inception in 1998, is against a backdrop of factors such as:

  • The franchising industry being responsible for the employment of almost half a million Australians;
  • Concerns regarding disparate bargaining power between individual, often first-business-owner franchisees and corporate franchisors; and, as an adjunct to this -
  • The suite of Commonwealth legislation which provides the regulatory framework for franchisee and franchisor conduct, including the Competition and Consumer Act and its Consumer Law provisions; theAustralian Securities and Investments Commission Act, and the Corporations Act.

The government’s 2013 review of the Franchising Code has resulted in the following key changes (which have been released for public comment by way of a draft bill and regulations):   

  1. Reducing red tape

Key aspects here include:

  • Curtailing the need for ‘double disclosure’ in master franchises;
  • Removing the requirement to summarise key disclosure document provisions; and
  • Removing the short form disclosure requirements (being rarely used and redundant).

These, in conjunction with the general objective of clarifying and streamlining the Code’s drafting, all aim to increase the ease with which businesses may ensure Code compliance.

Certainly, the removal of franchisor and master franchisor/franchisee duplicating disclosure can only assist in creating a more attractive franchising market into which foreign franchisors will consider expanding.

  1. Improving information available to franchisees

The government is pressing for increased transparency to franchisees by requiring:

  • An information sheet setting out key risks and due diligence to be performed prior to entering into a franchise agreement;
  • Increased disclosure of franchisors’ online trading and the potential impact this may have on franchisees’ operations;
  • Franchisors to remind franchisees, upon renewal, of the right to receive an updated disclosure document;
  • Increased transparency regarding marketing fund spending, including a voting right for franchisees to require an annual audit of this fund.

The mechanisms behind this voting process will be interesting to see.

  1. Strengthening the balance in franchise agreements

The imbalance of bargaining power mentioned above is to be addressed by:

  • Precluding franchisors’ requirements for significant capital expenditure unless it is (i) covered at disclosure; (ii) agreed to by franchisee majority vote; or (iii) justified by way of written rationale provided to the franchisees;
  • Abolishing the requirement that one party covers another’s costs in dispute resolution;
  • Preventing franchisors from engaging in dispute resolution outside the State in which the franchisee’s business is located (unless agreed otherwise at the time of the dispute);
  • Removing unreasonable restraints of trade which prevent franchisees from using their skills acquired in operating the franchise (and, as a result, stifles competition); and
  • Requiring franchisor-owned stores to contribute to marketing funds.

The removal of restraints of trade again speaks to the constant tension between preserving the franchisor’s goodwill and intellectual property, and franchisees laying claim to their goodwill contributions to the franchise. The distinction between independent skill and contribution to franchisor-owned goodwill is a fine one – one which clear franchise agreement drafting (and no doubt, the case law arising from this) will be required to resolve.

The manner in which franchisors’ required contributions to marketing funds will be monitored will also be an interesting development – perhaps one which will unfold in conjunction with audits provided upon franchisee majority vote which we referred to earlier.

  1. Improving conduct in the sector and the overall effectiveness of the Code

The Report highlights that franchisors’ misconduct is capable of having a deleterious effect on individual franchisees. Likewise, one franchisee’s misconduct has the potential to impact not only franchisors, but an entire franchisee network.

As a result, changes to the code include:

  • Introducing an obligation of good faith;
  • Introducing penalties of up to $51,000 for serious Code breaches;
  • Increasing the Australian Competition and Consumer Commission’s auditing powers to investigate documents supporting statements and information made at disclosure; and
  • Reducing franchisor’s intervention where prospective franchisees wish to discuss franchise opportunities with current franchisees.

Together, these should create a significant regulatory framework for the conduct of both franchisors and franchisees, and alert franchisors to the increasingly stringent requirements for transparency with and fairness in disclosure to franchisees.