Is the Franchising Code of Conduct working for franchisees?

The purpose of the Franchising Code of Conduct as set out in clause 2 is to "regulate the conduct of participants in franchising towards other participants in franchising". There is a degree of political correctness in the stated purpose. It would be more accurate to state that its purpose is to "regulate the conduct of franchisors towards franchisees" as the Code's obligations are imposed on franchisors to protect franchisees. (The compulsory mediation provisions may be argued as an exception in that both franchisor and franchisee are committed to mediation as a prerequisite to litigation. But, given the usual disparity in resources that characterise franchise relationships, mediation can be regarded as a franchisee protection initiative).

The above discussion on semantics should not be interpreted as discounting the commercial reality that in, terms of information and power, franchisees are disadvantaged or as an argument that the Code shouldn't protect franchisees. It was of course a consideration of these factors that led to the introduction of the Code in the first place.

It is nevertheless important, in my opinion, that a debate as to the effectiveness of the Code should recognise that it represents the most comprehensive regulatory document for the protection of franchisees that exists anywhere in the world. If the extent of the franchising world can be measured by the number of countries that McDonald's has a presence in (100) only about a quarter have specific franchise regulation to protect franchisees. Many of these regulatory schemes are minimalist and provide little real protection for franchisees. Australia is the only country that provides real franchisee protection by way of comprehensive prior disclosure, conduct regulation (including transfer rights and protection from arbitrary termination) and mediation.  

In this context the Code is a very significant advance for franchisee protection. It confers rights in relation to its three limbs - prior disclosure, conduct and mediation - that did not exist at common law prior to the Code.

So, when the Code is assessed in comparison to the law that existed prior to its introduction it is working very well for franchisees.

But, ignoring history, is it really working for franchisees? In relation to what the Code does, it does it effectively and well. Existing prior disclosure, conduct and mediation obligations can be, and should be, refined but in substance they are sound.  The problem is not what the Code does as much as what it doesn't do or what franchisees would like it to do.

It is, of course, possible for a revised Code to incorporate every item on every franchisee's wish-list. It is possible to introduce mandatory renewal rights, mandate good faith obligations of uncertain application, guarantee a financial return, provide goodwill compensation to an exiting franchisee.

But if such initiatives were to be introduced they would clearly change the legal and commercial nature of franchising as it is practised throughout the world and would inevitably impact on the use of franchising as a strategy for business development.

Entry costs for franchisees would inevitably increase. Small entrepreneurial systems responsible for much of the vitality and diversity in franchising would be much less likely to emerge - to the detriment of not only the business itself, and consumers, but also those aspiring business entrepreneurs who would have less opportunity to be franchisees.

Andrew Terry, Australian School of Business at UNSW, and Special Counsel, Deacons

This article appears courtesy of Franchising Magazine