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Franchising Inquest 2018: Same Same But Different?

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Eleanor DeMarzi, Lawyer, MST Lawyers

Federal Parliament is currently accepting submissions for another inquiry into franchising and, in particular, the Franchising Code of Conduct.  Their report is due to be released by 30 September 2018.  This inquiry is the latest in a series of government reviews that have scrutinised the franchising industry in recent years.  With current media reports catastrophising franchising as a business model, highlighting franchisor collapses, wage scandals and franchisee financial distress, and the Australian Competition and Consumer Commission’s announcement that it received almost 5,000 reports from small businesses last year, it is unsurprising that Parliament has reacted by launching a further inquiry. 

However, it is arguable whether another inquiry will necessarily have the desired effect of preventing alleged unscrupulous conduct in the franchising industry or whether resources could be better focused on enforcing existing laws that may have been breached by some operators.  In any event, with the spotlight firmly aimed at franchising, it emphasises the need for franchisors to carefully review their franchise agreements and related agreements and the manner in which they deal with franchisees more broadly, to mitigate the risk of disputes or claims being raised, whether by franchisees or regulators.

The “Parliamentary Joint Committee on Corporations and Financial Services” has been tasked with inquiring and reporting into the following broad terms of reference:

  1. Whether the Franchising Code of Conduct (Franchising Code) and the Oil Code of Conduct ensure full disclosure to enable potential franchisees to make fully informed decisions before entering into a franchise agreement. This topic will involve consideration of information provided to prospective franchisees:
    1. In the form of the disclosure document and information statement that franchisees are required to be issued with;
    2. As to their likely financial performance and worst-case scenarios;
    3. Setting out the contractual rights and obligations of the parties, including with respect to termination and geographical exclusivity;
    4. Explaining any leasing arrangements that apply concerning the premises to be occupied and any limitations on the franchisee’s ability to enforce tenants’ rights; and
    5. Estimating the expected running costs of the business, including goods required to be purchased through prescribed suppliers;
  2. The effectiveness of dispute resolution under the Franchising Code and the Oil Code of Conduct;
  3. The impact of the unfair contract laws contained in the Australian Consumer Law on franchise agreements, including whether changes to standard franchise agreements have resulted following the introduction of such laws;
  4. Whether other mandatory industry codes of conduct, such as the Oil Code, contain advantages or disadvantages relevant to franchising relationships in comparison with the Franchising Code;
  5. The adequacy and operation of the termination provisions in the Franchising Code and the Oil Code of Conduct;
  6. The imposition of restraints of trade on former franchisees following the termination of a franchise agreement;
  7. The enforcement of breaches of the Franchising Code and the Oil Code of Conduct and other applicable laws, such as the Competition and Consumer Act 2010; and
  8. Any related matter.

It is clear, therefore, that the inquiry has been given a broad remit to examine all aspects of the relationship between franchisees and franchisors and, in particular, the level of transparency that is afforded to prospective franchisees.

In this regard, in a media release issued by Nationals Senator John Williams, who moved the Parliamentary inquiry, Senator Williams cited the “horror stories” he had heard from franchisees. This ranged from the treatment received by parent companies, the provision of misleading financial figures to prospective franchisees, franchisees being forced to purchase products from suppliers authorised by the parent company when they could be purchased cheaper elsewhere, and a lack of transparency over lease agreements and dispute resolution. 

These issues have been the subject of previous franchising reviews.  Inquiries into franchising have been held in 2006, 2008, 2010 and 2013 (among others).  Similar themes were examined during these inquiries, including the disclosure provisions of the Franchising Code, the operation of the Franchising Code generally, the rights of franchisors and franchisees, the mediation arrangements set out in the Franchising Code and the enforcement of breaches of the Franchising Code. 

Whether or not these are issues which may be addressed by proper legislative amendments or whether it would be more efficient to pursue such issues through the court system, the inquiry demonstrates to franchisors that they remain the subject of strong media, government and public judgment.  Now is the time to ensure that potential issues, either across your franchising system or within particular franchising relationships, are managed appropriately.

Individuals and businesses in the franchising sector are encouraged to submit their opinions and experiences to the franchising inquiry.  For Parliament to produce an informed and meaningful report, it needs to have a balanced view of the real issues facing the franchising industry, particularly across the varied streams in which franchising exists, from food retail to home maintenance. 

MST Lawyers would be happy to assist with any written submissions you may wish to make.  Submissions to the inquiry close on 4 May 2018. Please email, or phone +61 3 8540 0200 should you wish to discuss this matter further.