In the last Franchising Alert, we discussed the Federal Government’s announcement of a review of the Franchising Code of Conduct. Alan Wein was appointed to conduct this review and a report was delivered following a consultation process in April 2013. Following a further consultation period on Wein’s recommendations, the Federal Government has released its response to the review. This article looks at the Government’s response and what it may mean for the sector.

The Wein Report made 18 recommendations across a range of areas. Of particular interest to industry participants is the suggested inclusion of an obligation on franchisees and franchisors to act in good faith, and an increase of the ACCC’s enforcement powers in respect of any breaches of the Franchising Code of Conduct (the Code).

The Federal Government has accepted in principle the majority of Wein’s recommendations.

Good faith

Wein recommended that the Code be amended to include an express obligation for both franchisees and franchisors (as well as prospective franchisees) to act in good faith in pre-franchise agreement negotiations, in performance of the franchise agreement and disputes if they arise.

The recommendation does not propose a statutory definition of good faith, but rather that the Code incorporate the common law relating to good faith. Good faith is generally regarded as a duty to act honestly and reasonably, obeying both the letter and the spirit of the agreement and not acting for extraneous purposes. Of concern, however, is that the law on good faith in Australia is not settled. The High Court is yet to consider the existence of such duty.

The Government has accepted this recommendation in part but has also expressed its concern on extending good faith to the pre-contractual negotiations which would be going beyond the developments in case law. The Government is also concerned that relying solely on an unwritten definition of good faith may create uncertainty, particularly for franchisees without legal representation as to their obligations. To deal with this, they propose to provide guidance as to what the good faith obligations require, enlisting the ACCC’s assistance in preparing educational materials for industry participants.

Expansion of the ACCC’s enforcement powers

The Wein Report makes a number of recommendations regarding the amendment of the Competition and Consumer Act 2010 (CCA) with the aim of increasing both the ACCC’s investigative and enforcement powers regarding breaches of the Code.

The Government has accepted this recommendation for the most part. The ACCC will be empowered to issue infringement notices under the CCA for breaches of the Code. Investigative powers will also be increased allowing the ACCC to use its random audit powers to assess a franchisor’s compliance with all aspects of the Code. The government will also introduce civil penalties under the CCA for breaches of the Code, however, the maximum penalty is yet to be determined.

Interestingly, the Government has declined to implement the recommendation that a court should be able to disqualify a person from being a company director for a breach of the Code, noting that this is a serious penalty which should be reserved for existing breaches of the Australian Consumer Law such as misleading and deceptive conduct. However, the Government will consider provisions allowing a court to disqualify a person from participating in the franchising sector, either permanently or temporarily.

Other key recommendations

Other recommendations from the Wein Report accepted by the Federal Government which will be of interest to those in the sector are as follows:

  • The Government is planning to relax disclosure requirements from foreign and master franchisors to submaster franchisors, as the benefits to providing such extensive disclosure to sophisticated business partners is marginal compared to the cost of doing so. Furthermore, due to lack of use in the industry, the short-form disclosure documents provided for in Annexure 2 of the Code will be removed.
  • Franchisors will have to provide a risk statement to potential franchisee before entering into a franchise agreement. While the exact content of this statement has not been finalised, it is likely to include the need for the franchisee to obtain independent professional advice, to conduct detailed research of the franchise, to both understand the business potential and risks, and whether the franchise is a ‘good fit’ for the franchisee.
  • The Government has accepted Wein’s recommendation that franchisees who wish to renew their franchise agreements and have complied with all relevant requirements (including confidentiality and intellectual property provisions) should not be bound by any restraint of trade clauses in their franchise agreements if the franchisor elects not to renew their agreement.

What next?

The question now is when the Federal Government will implement the Code reforms. Despite indications that these reforms have bipartisan support, with the Federal election looming it is possible that any such reforms won’t be seen until at least next year.