Home > News > Government Response to Review of the Franchising Code of Conduct

Government Response to Review of the Franchising Code of Conduct

Spread the love

By Raynia Theodore, Principal, MST Lawyers

On 24 July 2013 the Government released its response to the report on the Review of the Franchising Code of Conduct (“the Code”) which was conducted by Mr Alan Wein.

In his report Alan Wein made 18 recommendations most of which have been accepted by the Government.

In summary the key changes include:

1.  Amending the Code to ensure that when a franchisor gives notice of its intention to renew or extend a franchise agreement the franchisor also reminds the franchisee of their entitlement under the Code to request a current disclosure document.

2.  Whilst the Government has accepted that the disclosure requirements in the Code create “unnecessary red tape” in multi level or master franchising arrangements, the Government intends to consult further with participants in the sector on the content of an alternative short form disclosure document.  The Government will also move to ensure foreign and master franchisors are not obliged to update their disclosure documents annually.

3.  Amending the Code to require a franchisor to disclose:

(a) the rights of the franchisor and franchisee to conduct and benefit from online sales; and

(b) whether the franchisor is permitted or intends to conduct online sales.

4.  Removal of the Annexure 2 short form disclosure document, which is not utilised in the franchise sector.

5.  Developing a risk statement (following further consultation with key participants in the sector) to make new franchisees aware of matters such as whether the franchise system is a good fit, the importance of obtaining professional advice, the need to research the franchise system, the need to read the franchise documents and the prospect of unforseen significant expenditure.

6.  The Government will further consult with participants in the sector and relevant experts in respect of the following recommendations:

(a) that franchisors and franchisees be granted the right to terminate the franchise agreement if:

(i) the other party goes into administration; and

(ii) the administrator does not turn the business around or find a buyer for the business within a reasonable time (60 days suggested).

(b) allowing the proportion of a franchise fee paid by a franchisee to a franchisor which has gone into external administration (voluntary administration, receivership or liquidation) that is referable to the unexpired portion of the term of the franchise agreement, to be proved as an unsecured debt in the external administration.

The Government’s comment in relation to both these recommendations is that they raise “complex issues” which warrant further consultation.

7.  Amending the Code to remove the requirement for a franchisor to disclose “unforseen capital expenditure”, including a list of common examples of unforseen capital expenditure in the risk statement mentioned in paragraph 5 above and introducing a requirement that a franchisor be able to demonstrate significant capital expenditure is reasonable when it was not originally disclosed.  The term significant will be defined possibly as a percentage of turnover or profit.

8.  Amending the Code to make the administration of marketing or other co-operative funds transparent and ensure that marketing and advertising funds are spent on legitimate expenses.  The Government did not accept the recommendation that franchisee contributions should be held on trust for franchisees.  The Government will also move to amend the Code to provide that any vote that a marketing or other co-operative fund not be audited must be conducted annually.

9.  The introduction of an express obligation to act in good faith.  The Government will provide guidance on the application of the duty following further consultation.

10.  Amending the Code to prohibit franchisors from encouraging former franchisees to make a request of a franchisor that their details not be disclosed in the franchisor’s disclosure document.

11.  Amending the Code to allow franchisors to request certain information from an existing franchisee before agreeing to a transfer or novation of a franchise agreement.

12.  Amending the Code to ensure post termination restraints or non-competition clauses are unenforceable in circumstances where a franchisor chooses not to renew or extend a franchise agreement and:

(a) the franchisee had a wish to have the franchise agreement renewed on substantially the same terms;

(b) the franchisee was not in breach of the franchise agreement;

(c) the franchise agreement does not contain provisions allowing for compensation to be paid to the franchisee if the franchise is not renewed;

(d) the franchisee abides by confidentiality obligations;

(e) the franchisee does not infringe the intellectual property of the franchisor.

The Government has made comment that it will ensure that the implementation of this recommendation does not limit the operation of the unwritten law dealing with restraint of trade clauses over and above the circumstances listed above.

13.  Amending the Code to ensure that the dispute resolution behavioural rules in clause 29(8) of the Code apply to any dispute resolution process.

14.  Amending the Code to prohibit a franchisor from attributing its dispute resolution costs to the franchisee (unless a Court so orders) and to include mechanisms in the Code to ensure that an appropriate court (i.e. a court in an appropriate jurisdiction) deals with the dispute.

15.  Amending the Competition and Consumer Act 2010 (Cth) to allow for:

(a) appropriate maximum pecuniary penalties for breaches of the Code – different penalties may apply for different breaches of the Code;

(b) the Australian Competition and Consumer Commission (“ACCC”) to issue infringement notices for Code breaches (similar to “on the spot” fines);

(c) the ACCC to conduct a wider audit of a franchisor’s compliance with the Code than is presently allowed;

(d) Courts to make orders in the event of a Code breach that a person be banned from being a franchisor or being involved in the sector.

The Government will give further consideration to the above.

16.  Consulting relevant stakeholders about standard contract terms for automotive dealership franchise agreements.

17.  No further review of the Code for 5 years after the amendments take effect.

18.  Amending the Code to make the policy intent of its provisions clearer, to remove ambiguities and to improve certainty of industry practice.  The Government has indicated that the amendments will apply to franchise agreements entered into after the amendments are enacted, however the ability of the ACCC to enforce pecuniary penalties and issue infringement notices for breaches of the Code would apply from the commencement of the proposed amendments  for all agreements.

Conclusion

Whilst we believe most of the recommendations made by Alan Wein are sensible and we agree with the approach taken by the Government, in particular the acceptance of the recommendations to introduce an express duty for the parties to a franchise relationship to act in good faith and the introduction of pecuniary penalties for breaches of the Code, we believe great care will need to be taken to ensure that amendments to the Code are clearly drafted.  The Government has itself accepted that there is a need for clearer drafting and a need to remove the ambiguities that currently exist in the Code.

The Government has indicated that it wishes to implement the changes “as soon as practically possible”, however, in relation to some of the recommendations the Government still needs to consult participants in the sector and other experts.  This will not occur and legislation will not be drafted before the federal election is held.  However, the Shadow Business Minister, Bruce Bilson, in a recent speech has supported the government’s response.

So at this stage whilst the timeframe for change is unclear it appears that both sides of the political fence are committed to making changes to the Code.

What this means for the sector is that both franchisors and franchisees need to prepare for the proposed changes.  Franchisors in particular should start planning and seeking advice as to how their processes and franchise documents will be impacted by the proposed changes to the Code.

Should you require further information, please contact John Sier or Raynia Theodore of our Franchising team on (03) 8540 0200.