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Franchising Sector Facing More Regulatory Changes

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With the start of a new year, the franchising sector faces more regulatory changes.

Last year, the franchising industry faced government reviews federally and in Western Australia and South Australia. The reports of these reviews have now been published.

The major federal review was commenced by the Parliamentary Joint Committee in June last year to inquire and report on the operation of the Franchising Code of Conduct (“the Code”). This initiative attracted criticism from many who believed that a further inquiry into the franchising sector, at this time, was unnecessary, particularly as it fell too close to the recent amendments made to the Code in March 2008. There was concern that frequent inquiries into and changes to the Code cause uncertainty and contribute to a destabilising effect on the franchising sector.

Nevertheless, the Committee received submissions from a wide range of interested organisations, government departments and authorities and individuals. The Committee’s report was released on 1st December 2008 and contained 11 recommendations for raising the standard of conduct in Australian franchising. There was a particular emphasis on addressing power imbalances in the franchisor-franchisee relationship.

Key Recommendations

One of the key recommendations was to insert a clause into the Code requiring franchisors, franchisees and prospective franchisees to act in good faith. The purpose of this recommendation is to provide a standard of conduct for parties entering a franchise agreement. It was felt that this may be one solution for avoiding situations where the franchisor’s control over important provisions in the franchise agreement, such as those dealing with non-renewal, termination at will, unreasonable variation, etc. enables “rogue” franchisors to engage in opportunistic behaviour, leaving franchisees vulnerable and at the mercy of their franchisors. Although there is no clear definition of “good faith”, it is generally understood to mean acting fairly, reasonably and honestly. Essentially, it encapsulates the concept of “a fair go”.

Other Key Recommendations

  • That the Code be amended to require that disclosure documents contain a clear statement by franchisors of the liabilities and consequences facing franchisees in the event of franchisor failure, i.e. where franchisors go into administration, liquidation, bankruptcy, etc.
  • That the Government develops an online registration system for Australian franchisors. Through this system, franchisors would be required to lodge on-line annual statements setting out various details relating to their franchise network and also provide a guarantee that they are complying with their obligations under the Code and the Trade Practices Act 1974 (“the TPA”).
  • That the Government explore ways to provide exit options to franchisees in the event of franchisor failure.
  • That the TPA be amended to include monetary penalties (i.e. payment of fines) for breaches of the Code and of certain provisions of the TPA.
  • That the ACCC be given powers to investigate a matter where it has reason to believe that a party to a franchise agreement is engaging in conduct in breach of their obligations under the Code. This may involve the ACCC examining disclosure documents and other material being circulated by a franchisor, as well as speaking with franchisees to obtain further information.

Reports from other inquiries

Reports from the 2008 inquiries conducted by Western Australian and South Australian parliamentary committees into the regulation of franchising provided valuable assistance to the Federal Joint Parliamentary Committee in making its recent recommendations.

In April 2008, the Western Australian state government undertook an inquiry into the fairness of franchise agreements. This report included recommendations that franchisor disclosure be improved, mediation processes be reviewed, specified penalties for breaches of the Code be introduced and that a dedicated franchising enforcement branch within the ACCC be established.

In May 2008, the South Australian parliamentary committee also conducted an inquiry into improving laws regulating the franchisee/franchisor relationship. The report from this inquiry adopted a stronger position on the need for improvements to the regulation of franchising than the Western Australian report. This report included recommendations that a federal registration scheme for franchise disclosure documents be established and that the Code be amended to include a requirement to act in good faith.

It is now up to the Federal and State Governments to determine whether some or all of the recommendations made by the relevant inquiries will be implemented. If implemented, these changes will no doubt alter the way in which franchisors and franchisees do business as we know it today, and add additional costs to franchisors in these tough economic times.

Author: Katerina Bizos