Summary – what you need to know

On 22 March 2018, the Senate referred an inquiry into the operation and effectiveness of the Franchising Code of Conduct (Franchising Code) to the Parliamentary Joint Committee on Corporations and Financial Services (Committee). The Committee released its Fairness in Franchising report (Report) on 14 March 2019.

The Report found systemic problems in franchising arrangements, including exploitation in certain franchise systems, and, as a result, made a raft of recommendations that would involve significant changes to the Franchising Code and the power and responsibilities of the ACCC. These recommendations aim to mitigate the worst impacts of the power imbalance between franchisors and franchisees. If implemented, these recommendations would have very real practical impacts on the way franchisors engage with franchisees.

Going forward franchisors can expect:

  • increased regulatory scrutiny of franchise arrangements and a greater likelihood of enforcement action being taken by the ACCC, and indeed the potential for action from other regulators such as ASIC and the ATO;
  • potential claims for damages by franchisees in respect of unfair treatment by franchisors; and
  • a need for franchisors to review and amend franchising agreements and their disclosure statements and supporting documentation, such as operations manuals, to ensure their compliance with any resulting amendments to franchising regulations.

Context – “Franchising is big business in Australia

The Report notes that:

  • franchising was estimated to have contributed approximately 9% of Australia’s GDP in 2016, so it is “big business in Australia”;
  • the traditional view of franchising, and one that appears to exist in all successful franchise operations, is that franchising is a mutually beneficial relationship between franchisor and franchisee where franchisees have access to leadership, training and support within a proven business system, while franchisors can grow their business and develop their brand with the support of a network of franchisees;
  • despite the above, franchising arrangements commonly involve a power imbalance between the franchisor and franchisee , characterised by a combination of:

- the franchisor’s contractual power;

- the degree of operational control the franchisor has over the business; and

- information asymmetry between franchisee and franchisor (for example, in relation to earning potential of a particular franchise).

In a scathing assessment, the Committee found that:

"the current regulatory framework has manifestly failed to deter systemic poor conduct and exploitative behaviour and has entrenched the power imbalance."

The Committee also referred to the following themes which recurred throughout the inquiry:

  • transparency and accountability;
  • fairness and protection; and
  • education and awareness.

What recommendations have been made?

In this context, the Committee has taken a “two-pronged” approach to improving regulation of franchising which involves:

  • a number of significant amendments to the Franchising Code; and
  • greater enforcement powers for the ACCC.

The Report makes a total of 71 recommendations. Below we highlight 10.

Where to from here?

Businesses should prepare themselves for the following possible consequences coming out of this report.

Increased scrutiny and enforcement action

The Committee has stated that it “expects the ACCC to undertake a series of investigations to root out misconduct and exploitative behaviour in the franchise sector”. While there are specific recommendations that the ACCC, ASIC and the ATO conduct investigations into the operations of Retail Food Group, the Committee has generally advocated for a more proactive approach to investigations and enforcement action by the regulators.

This, coupled with the Committee’s call to the Government to adequately resource the ACCC to investigate complaints about unfair contract terms, means franchisors should be prepared for greater oversight of their franchise systems and that there is a greater likelihood of enforcement action being taken, particularly in relation to persistent or systemic breaches or instances of exploitative behaviour by franchisors.

Review of existing franchise agreements

Franchisors will need to review their franchise agreements, disclosure documents and supporting operational material, and potentially existing franchise agreements, for compliance with any amendments to the Franchising Code. The Report contemplates a suite of changes to the Franchising Code. Usually, changes to the law will not operate retrospectively. However, it is possible that any changes made as a result of the Report would give businesses a “window” in which to review their existing arrangements and bring them up to speed with the amendments. This is the approach we have seen in the legislation to repeal the intellectual property exemption in the CCA, discussed in a previous G+T insight, and given the long term nature of franchise agreements and the political considerations involved, there is a chance that the Government would take a similar approach here.

Class actions and claims for damages

Although no pecuniary penalties are currently available under the unfair contract terms regime, the ACL gives a right to damages for persons who have suffered loss or damage because of a contravention of these provisions. Franchisees may bring actions against franchisors, either through class actions or separately, to recover damages for losses incurred by reason of unfair contract terms, or for example, due to misleading representations that induced them to enter franchise agreements.