Withholding consent on transfers
The ACCC is alleging that the actions of the franchisor in withholding its consent to the proposed transfer of franchised businesses within its network, among other things, was both unconscionable under section 51AC of the Trade Practice Act and in breach of the Franchising Code of Conduct (Code).
Regulation 20(2) of the Code provides that a franchisor must not unreasonably withhold consent to the transfer of a franchise. Regulation 20(3) then goes on to provide a non-exhaustive list of circumstances in which it is reasonable for a franchisor to withhold consent. A franchisor is taken to have given consent to the transfer under Regulation 20(4) if the franchisor does not, within 42 days after the request was made, give to the franchisee written notice:
- that consent is withheld; and
- setting out why consent is withheld.
The manner in which Regulation 20 of the Code is drafted means that a franchisor will be obliged to establish reasons for consent being withheld if it receives a request for consent that it does not want to proceed with.
If a franchisor intends to rely on factors outside those listed in Regulation 20(3), even if the specific factors are listed in the franchise agreement, a franchisor needs to ensure that the reasons given for withholding consent are reasonable.
Given that some of the grounds for withholding consent will be subjective, such as the suitability of the proposed transferee, consideration should be given to having formal policies in place that can be relied on to support a decision if challenged. If a franchisor has policies in place which it follows, including selection criteria for prospective franchisees, these policies can be used to support a decision to withhold consent. Even if the policies are not publicly available, these policies can assist a franchisor to argue that it has acted fairly and consistently in relation to all requests for consent. Particular care should be given when formulating such policies to ensure that they do not become a rod for the franchisor’s back.
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