FRANCHISING MATTERS @ M+K
Welcome to another edition of Franchising Matters. Inside, we discuss amendments to the Code, the State inquiries into franchising, recent cases and more...
We welcome your feedback. If you have any questions in relation to the topics contained in this edition, topics you would like discussed in future editions or have any general franchise issue you would like to discuss, do not hesitate to contact us.
AMENDMENTS TO THE CODE
As you would know from 1 March 2008 all Disclosure Documents and Franchise Agreements must comply with the new Franchising Code of Conduct ("Code"). A copy of the new Code must be provided with all Disclosure Documents. The new Code can be found at www.comlaw.gov.au Simply type “franchising” in the Quick Search option. We have previously provided a detailed outline of the changes. If you have not received a copy of our outline and would like to receive one please contact us.
One of the amendments to the Code has had an unintended retrospective effect. The Code now prohibits a Franchise Agreement from containing a waiver of any verbal or written representations made by the Franchisor. This prohibition is currently effective from 1 October 1998. On contacting the Federal Government's Office of Small Business we were informed that it was not intended for this clause to be retrospective. We are told the matter is being investigated. We will keep you updated with any developments. In the meantime, potentially all representations made by franchisor's can be relied upon by franchisees even if the franchisee has signed a waiver or no representations certificate.
Notwithstanding the recent enactment of the new Code changes, the new Federal Labour Government has indicated that it will be looking at the possible inclusion of a good faith obligation into the Code. This is despite the fact that the Courts already have the ability to imply such a duty into franchise agreements when necessary.
UPDATE: Ketchell’s case
In our last hot topic we discussed the decision of Ketchell v Master Education Services in which the NSW Court of Appeal found that the franchisor's failure to strictly comply with the requirements of regulation 11(1) of the Code (requirement for the franchisee to provide signed written statements that it has received, read and had a reasonable time to understand the disclosure document and the Code) rendered the Franchise Agreement illegal and unenforceable.
The High Court has granted leave for the Franchisor to appeal the decision. However, before the appeal can proceed the franchisor is required to undertake to pay all of the franchisee’s costs of the appeal. The franchisor has indicated that it is unable to fund the appeal. However, given the potential impact of this decision on the franchising industry, the Franchise Council of Australia has agreed to fund the appeal. The Franchise Council has received some support from the industry but is still seeking further support so that the appeal can proceed.
We will keep you posted as more information comes to hand.
ACCC INVESTIGATIONS
Bakers Delight
The Australian Competition and Consumer Commission ("ACCC") has finalised its investigation into the Bakers Delight franchise chain. The investigation was commenced to investigate complaints regarding unconscionable conduct allegations including churning (selling franchises destined to fail and then reselling them to other franchisees) and collusion with banks.
The ACCC has now announced that it does not consider that Bakers Delight has engaged in unconscionable conduct, nor misleading and deceptive conduct. The ACCC found that:
- the evidence available did not demonstrate unconscionable conduct;
- franchisee allegations were difficult to substantiate;
- Bakers Delight's actions to rectify situations regarding alleged misleading verbal representations were reasonable, or there were other causes of franchisee losses;
- there was no evidence of widespread or systematic compliance problems.
The ACCC does not usually make comment on its investigations, however it has done so in this case due to the high level of publicity which has surrounded the allegations and the ACCC's investigation. This is a timely reminder that if there is actual or suspected conduct of a misleading, deceptive or unconscionable nature, Franchisors may face not only the inconvenience, cost and stress of an investigation, but also publicity and public scrutiny of the operation of the franchise system.
The ACCC noted that the relative "bargaining disadvantage" that franchisees face will lead to ACCC action where there is evidence supporting claims of unconscionable or misleading behaviour. Franchisors must be mindful of the position of power they have in respect of bargaining and avoid abusing the power imbalance.
Allphones
The ACCC commenced proceedings against Allphones Retail Pty Limited, a leading mobile phone retailer and franchisor, in April 2008. The ACCC alleges that Allphones engaged in misleading and deceptive conduct (towards existing and prospective franchisees).
We will keep you informed as further developments come to hand.
19.08.2008
FCA Member
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