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Review of the Franchising Code of Conduct

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By Marianne Marchesi, Lawyer, Mason Sier Turnbull

The Minister for Small Business has announced a review of the Franchising Code of Conduct (“the Code”), the mandatory industry code for franchising under section 51AE of the Competition and Consumer Act 2010 (Cth).

Since its inception in 1998, the Code has been reviewed several times. The most recent review in 2010 considered issues such as end of term arrangements, disclosure of additional information by franchisors, dispute resolution and good faith obligations.

The current review brings some of the recommendations from 2010 back to the table, with a particular focus on:

  • Disclosure requirements
  • Good faith obligations
  • End of term arrangements
  • Dispute resolution
  • Enforcement of the Code

Disclosure Requirements

Prior to a franchisee agreeing to enter into a franchise agreement, a franchisor should provide information on the franchisee’s rights and obligations under the franchise agreement. Disclosure enables franchisees to weigh the pros and cons of entering into a particular franchise system.

In 2010, significant amendments were made to the Code surrounding disclosure requirements, such as disclosure of payments to third parties, significant capital expenditure by a franchisee and arrangements to apply at the end of the term of a franchise agreement.

The current review considers whether these changes have positively addressed concerns about franchise failures and inadequate disclosure.

Good Faith Obligations

The 2010 review recommended that an obligation be imposed on franchisors, franchisees and prospective franchisees to act in good faith in relation to all aspects of a franchise agreement. The recommendation was not adopted at the time.

The current review reopens this question, calling for an obligation to act in good faith to be inserted into the Code.

End of Term Arrangements

The current review identifies some issues which have been of particular concern to franchisees, specifically:

  • Franchise agreements being terminated or not renewed without ‘good cause’; and
  • Recognition of a franchisee’s contribution to the goodwill of the franchised business.

The 2010 amendments introduced requirements for a franchisor to provide a franchisee with six months’ notice of the franchisor’s decision to renew or not renew a franchise agreement and to disclose to franchisees what arrangements apply to the end of the term of the franchise agreement.

This review seeks to determine the effectiveness of these amendments in alleviating franchisees’ concerns regarding end of term arrangements.

Dispute Resolution

The 2010 amendments also introduced the concept that both parties to a franchise agreement must approach mediation in a reconciliatory manner where a dispute has arisen.

The current review considers whether these amendments have improved the dispute resolution process, and in particular, whether issues such as stalling negotiations and depleting another party’s resources have been overcome.

Enforcement of the Code

Currently, the Code is enforced by the Australian Competition and Consumer Commission (“the ACCC”). A range of remedies are available for breaches of the Code.

Previous reviews of the Code have recommended the introduction of civil pecuniary penalties for breaches of the Code, however these recommendations have not been adopted.

The current review considers the adequacy of the current enforcement regime and opens the discussion for alternate enforcement options.

Submissions to the review closed on 15 February 2013. MST contributed to the submission made by the Franchise Council of Australia and has also assisted clients in lodging submissions.

A report on the findings, including recommendations, is expected to be completed within three months. 

For more information on the review of the Code or any other Franchising matters, please contact one of our experienced lawyers within our Corporate Advisory and Franchising team on (03) 8540 0200.