Opportunity not Opportunism: Improving Conduct in Australian Franchising

On 1 December 2008, the Parliamentary Joint Committee on Corporations and Financial Services reported on its inquiry into the Franchising Code of Conduct (Code) conducted earlier in 2008. Unlike the 2006 'Matthews report' which focused on franchisor disclosure, the report represents a detailed review of the Code in the context of the franchising industry generally.

The Committee made 11 recommendations in the report. If accepted, the changes will:

• Impose significant additional administrative and disclosure requirements for franchisors.
• Introduce a new overarching standard of 'good faith'.
• Impose stricter penalties for noncompliance.

Recommendations

Increased disclosure in the case of franchisor failure

The Committee recommended that the Code be amended to require disclosure documents to include a clear statement of the liabilities and consequences applying to franchisees in their franchise network in the event of franchisor failure. Franchisors would be required to set out the specific implications for franchisees if the franchise fails, rather than a broad statement on the risk of entering into the franchise system. This statement would include information such as ongoing payments and any continuing contractual obligations.

Disclosure of end of term arrangements

It has been recommended that franchisors disclose to franchisees, before a franchise agreement is entered into, what processes will apply in determining end of term arrangements (including the transfer process of equity in the value of the business as a going concern). This would require franchisors to disclose the processes around renewal/non-renewal of franchises and the financial implications for franchisees.

Overarching standard of good faith

The Committee recommended that a new clause be inserted to the Code to provide for a standard of conduct for franchisors, franchisees and prospective franchisees to 'act in good faith' in relation to all aspects of a franchise agreement. It is intended that this standard would permeate all stages of the franchisee/franchisor relationship (from pre-contractual arrangements to disputes).

Online registration system for franchisors

In rejecting a more onerous obligation to lodge disclosure documents and standard franchise agreements, the Committee instead recommended establishing an online registration system for franchisors to lodge annual statements. The statements would:

• Identify the nature and extent of their franchising network.
• Provide a guarantee that the franchisors are complying with their obligations under the Code and the Trade Practices Act 1974 (Cth) (TPA).

The system would likely be managed by the ACCC.

Greater balance between franchisees and franchisors in the event of franchisor failure

The Committee recommended exploring further the rights of parties in the event of failure of the franchise. This may include the introduction of certain rights of franchisees to terminate the franchise in the case of franchisor failure.

Enforcement of the Code

The Committee recommended that the TPA be amended to include pecuniary penalties for breach of:

• The Code
• Section 51AC (unconscionability), section 52 (misleading and deceptive conduct) and other mandatory industry codes under section 51AD.

The Committee also recommended that the ACCC be given the power to investigate where it receives credible information indicating that a party to a franchising agreement may be engaging in conduct contrary to the obligations under the Code.

Mediation

To help ascertain the extent of franchising disputes in Australia, the Committee recommended that mechanisms be put in place by the Australian Bureau of Statistics to collect and publish statistics on the franchise sector generally, with a particular focus on franchise disputes. The Committee also recommended that the name of the Office of the Mediation Adviser be changed to the Office of the Franchising Mediation Adviser to assist recognition of the role.

Next Steps

The franchising industry can likely expect a response from Government in respect of the recommendations in the report early next year. If the Government accepts any or all of the Committee's recommendations it is likely that we will see further legislation amending the Code.

In addition, as the Committee recommended a review of the efficacy of the 1 March 2008 amendments in two years, the Code may again be subject to review in 2010.

This artile appears courtesy of DLA Phillips Fox