STATE INQUIRIES INTO FRANCHISING
Following on from the federal government's inquiry into franchising (and the subsequent changes to the Code), both the South Australian and Western Australian governments commenced their own Inquiries into franchising. The findings and recommendations of both Inquiries have now been released.
The WA Inquiry was initiated due to concerns about the fairness of franchise arrangements, particularly what happens at the end of a Franchise Agreement. The specific events of concern included the closure of the KFC store at Rockingham at end of the franchise agreement, and concerns regarding a further 3 stores in WA with franchise agreements due to expire before the end of 2008. The terms of reference of the inquiry included to review the adequacy of existing legislation (state and federal), identify trends of unconscionable conduct which may not be covered by existing laws, examine the adequacy of remedies and recommend changes as appropriate and review practices in respect of unconscionable conduct and licence renewal around Australia and internationally.
The Inquiry found that generally the existing legislation was satisfactory, however some improvements were identified in respect of disclosure of the Code, enforcement and the understanding about the Code by franchisees and prospective franchisees.
Some of the Inquiry's recommendations include:
- education - aimed at prospective franchisees in respect of the Code, basic contract law, the franchise relationship, business and franchise risks and the franchisee's responsibilities; marketing information and advisory services;
- disclosure and due diligence - additional disclosure regarding the rights, responsibilities and risks to franchisees; greater financial disclosure, including amount of rebates; registration of franchise systems;
- end of agreement arrangements - to be disclosed in the Disclosure Document; requirement to conduct a review 12 months prior the expiry of a Franchise Agreement;
- dispute resolution - review of the current mediation processes and seeking a more cost effective and accessible system; making mediation compulsory and making mediation agreements enforceable;
- enforcement - additional funding to the ACCC, and the establishment of a dedicated franchise enforcement unit within the ACCC, prescribing penalties for breaches of the Code.
The South Australian Inquiry identified similar problems to those identified by the WA Inquiry but went much further in its recommendations. The SA Inquiry's recommendations included the provision of educational information to franchisees, the mandatory registration of Disclosure Documents, greater disclosure regarding the Franchisor's experience as a franchisor, disclosure of the amount and method of calculation of rebates, penalties for breaching the Code and imposing a duty to act in good faith.
Importantly, both Inquiries have highlighted education for franchisees as an important issue. Both Inquiries recommend that additional education be provided and that awareness of assistance and education should be improved.
One of the key points that we can take away from these Inquiries is that the more informed a franchisee is, and the better understanding they have of franchising, business in general and risk, before they enter the franchise system, the great chance there is of a good, mutually beneficial relationship. Managing franchisee expectations and honest, fair representation of the franchise system are also key. Franchisees should be encouraged to avail themselves of all information available. Franchisors should encourage Franchisees to conduct a thorough due diligence and also seek business, accounting and legal advice.
OCEANWALK AWARDED DAMAGES
Oceanwalk Pty Ltd was the Master Franchisee for the Mr Whippy territory in south-eastern Queensland. The master franchise was for a term of 10 years (ending in May 2003) with an option to renew for a further 10 years. Oceanwalk exercised its option in accordance with the Master Franchise Agreement.
The Franchisor, Mr Whippy Pty Ltd refused to recognise the renewal. On the basis that Oceanwalk had not complied with the terms of the Agreement, as it:
- did not use its best endeavours to seek new business sites; and
- did not render assistance and advice as required under the Agreement (eg: providing adequate reports).
At trial, Oceanwalk was awarded $143,654.25 in damages for breach of contract for the refusal to renew. On appeal, the judgement was upheld.
Oceanwalk was required to use its best endeavours to locate new business sites. No new sites had been established during the period 1998 and 2003. Oceanwalk argued that they had been seeking new sites, however no suitable sites were identified. Property consultants engaged in 2001 by Mr Whippy identified a number of sites, however, none were considered suitable. Mr Whippy had not produced evidence to the contrary. The Court held that an obligation to use best endeavours merely requires a person to do all he reasonably can in the circumstances to achieve the contractual objective, but no more.
Oceanwalk was also required to provide assistance and advice to Mr Whippy, including, providing various reports. Mr Whippy alleged that the reports were insufficient as they were not provided regularly enough (the content of the reports was not in issue). The Court found that Oceanwalk had not breached its obligation to furnish written reports in relation to the Business being conducted. Under the Agreement, written reports were to be furnished 'from time to time and in any event at intervals of not less than 30 days'. As no maximum interval was specified, there was nothing requiring Oceanwalk to furnish a certain number of reports per year. In this case, Oceanwalk furnished reports, on average, approximately 4 times per year. The Court held that this was sufficient to meet the reporting requirement. The fact that there had been no complaint regarding reporting intervals during the term of the Agreement was significant.
This case highlights the need to provide written warning and notices to Franchisees throughout the term where appropriate, and to keep detailed records of any "disciplinary action" or problems as they arise.
Celebrating 100 years, Macpherson Kelley Lawyers (M+K) now employs over 100 people and is experienced in all areas of commercial law. Operating in Melbourne and Dandenong, M+K's Franchise Lawyers assist a diverse client base in all aspects of franchising and licensing, including; Trade Practices Act compliance, trade marks, intellectual property, leasing and employment.
19-Aug-2008