Fundamentally a franchise is a key business relationship that should benefit and reward both the franchisor and franchisee.  Like any relationship, the franchisor and franchisee relationship does need to adapt and grow in response to changes including changes to the regulatory environment applicable to the franchising industry.

It is the Franchising Code of Conduct (Code) that regulates conduct between franchisor and franchisees in a prescriptive sense. But it should be commercial practicalities and mutual commercial benefits that are the leading driver of the franchisor and franchisee relationship.

It is unfortunate that bad franchising stories in part prompted a review and forthcoming changes to the Code.

The Australian Government response on 20 August 2020 to the recommendations of the Parliamentary Joint Committee for changes to the Code show recognition of the dynamic nature of the franchising and the continual need to regulate the conduct of franchisors and franchisees towards each other.

Of course, good franchisors know as a matter of sound business that successful and engaged franchisees are the best ambassadors of their brand.

The best franchisors seek to help franchisees succeed and support them. They don’t rely on franchise agreements that are drafted to impose few obligations on the franchisor but numerous and onerous obligations on franchisees.

The best franchisors seek to avoid disputes and they seek to resolve them as quickly as possible; they respect the relationship which is more than a contract.

The Australian Government’s response to the recommended changes to the Code should be carefully considered by all franchisors. Good franchisors will be prepared for the likely changes to the Code.

Franchising Code changes to come

What are the main elements of the Australian Government’s response to the recommended changes that we, as litigation lawyers who have acted in over 60 franchise disputes over the last four years, urge franchisors to consider? There are several but let us focus here on two of them.

Firstly, the proposal to prohibit franchisors unilaterally imposing significant capital expenditure on franchisees during the term of an agreement except where it has been disclosed before entering into a franchise agreement, is legally required, or is agreed to by the franchisee during the term.

How much more important is this qualified prohibition to a franchise format that is a restaurant or café that may require a periodic fitout to a business site compared to a franchise format that does not require a lease of a business site?

What about franchise systems that rely on expensive technology that rapidly changes? What impact does this have on the decision about the length of a franchise term that should be granted to a franchisee? There are many more relevant questions.

Secondly, one proposed change that affects us as franchise dispute lawyers is a proposal to strengthen dispute resolution options by introducing conciliation and voluntary binding arbitration and expressly allowing for multi-party dispute resolution under the Code.

This is important because it is always in the interests of both the franchisor and franchisee to resolve a dispute as quickly as possible.

Franchisors need to consider the proposed changes to the Code and what actions they may need to take in response to the proposed changes when implemented by the Australian Government.

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