Franchising sector reforms inadequate say critics

By Sarah Stowe | 29 Oct 2015 View comments

The Federal GovernmentÕs long-awaited announcement on possible changes to franchising law has met with a mixed reception and criticism of unfinished business. Shadow Small Business Minister Steven Ciobo is just one critic who believes the franchising sector has been let down by the Government’s inadequate response to the inquiries into the sector and its appointment of another panel to undertake further research.

Last week Federal Small Business Minister Dr Craig Emerson announced moves to strengthen the Franchising Code of Conduct and the unconscionable conduct provisions of the Trade Practices Act.

The Government suggests new measures will provide franchisees protection from unconscionable conduct, allow for random audits of franchisors and group action for franchisee redress, the naming and shaming of unscrupulous franchisors, and clarification of end of term arrangements.

However the interpretation of all these measures is not yet clear with an expert panel to be established to report at the end of January 2010 on the possibility of adding further provisions to the Code to prevent specific inappropriate behaviours and consider whether examples of unconscionable conduct or a statement of principles should be included into the Trade Practices Act.

In amendments to the Trade Practices Act protection from unconscionable conduct will relate not just to the how a contract is settled but its terms and conditions as well as the continuing behaviour of the contractual parties. While there will be substantial fines for those engaging in unconscionable conduct or making misleading representations there remain no penalties for breaching the Code itself.

The Government highlighted that Australian Competition and Consumer Commission (ACCC) will be given powers to conduct random audits, take action on behalf of all affected franchisees without requiring each franchisee to be party to the legal proceedings, and issue public warnings about rogue franchisors.

However Opposition MP Steven Ciobo said that the Australian Competition and Consumer CommissionÕs ability to name and shame dodgy franchisors already exists.

“As it is the ACCC can already go after rogue franchisors, but it doesnÕt do so because it doesnÕt have the resources to,” he said. “As it stands Minister Emerson hasnÕt allocated any further resources to the ACCC for this purpose, so effectively thereÕs no change.”

The proposals have also not gone far enough to satisfy South Australian MP Tony Piccolo. The MP has been vocal on the subject of franchise reform and told Franchising “The penalties for unconscionable behaviour are a step forward but not far enough and good faith still has to be dealt with.”

Piccolo has been drafting a franchise-related bill to go before South Australia’s Parliament before the end of the year and intends to go ahead with this unless further measures are announced by the Government.

Responding to the controversial issue of good faith in franchising the Government has stopped short of a good faith negotiation clause and instead announced plans to introduce preventative measures for so-called inappropriate behaviour in franchising agreements.

The Code will also be amended to state it cannot limit any common law requirement of good faith in a franchise agreement.

Steve Wright, the executive director of the Franchise Council of Australia, agrees with the sentiment. He said “The story that we have determined from the GovernmentÕs report is that they have put their faith in franchising and rejected calls for the introduction of an explicit ‘good faith negotiations’ clause in the Code. This is a very good result.”

But in support of stronger action by the Government Ciobo said “Minister Emerson has failed to implement the two main recommendations of the inquiry, which were good faith and the financial penalties for breaches of the Franchise Code of Conduct.

“Instead of that, Minister Emerson will hold yet another inquiry with yet another panel to report back on the need for further changes to the Franchising Code. That panel is scheduled to report back in January 2010 – around 14 months since the very first inquiry.”

Ciobo said the response which had taken the Labor Government almost a year, had come as a massive disappointment to the franchising sector which is worth around $130 billion annually to the economy and employs more than 400,000 people.

“The sector has been made to wait far too long for the Rudd GovernmentÕs response — 339 days, two inquiries, a consultation period and now another panel. The Rudd Government was made well aware of the issues within the sector and the recommendations arising from the inquiries also had bipartisan political support — so why the mucking around?

“Minister Emerson must now make reform of the sector a priority and ensure it does not drag on past the scheduled date in January.”

In its research the expert panel will also address issues of unforeseen capital expenditure, unilateral contract variation, the attribution of legal costs, confidentiality agreements and franchisor-initiated changes to franchise agreements when a franchisee is trying to sell the business.

Under amendments to the Code franchisors will be required to disclose to franchisees the process that determines the end of term arrangements, including whether or not there is a right to renewal, and give franchisees notice of their decision to renew or not to renew a franchise agreement six months before the end of the agreement.

The Government has also listed actions that will be included in Code amendments to ensure easier dispute resolution.

Wright insists the moves are positive. “The Government has not made final decisions yet. It has committed to a consultation process before it proceeds with the proposed measures. But, the franchise community can take comfort that its intentions are clear and that it is headed in a constructive direction.

“In my view, the overwhelming balance of the above initiatives is positive. Only those attempting to sail too close to the wind need be worried.”

* The Federal Government reforms are in response to reports of the Joint Committee on Corporations and Financial Services and the Senate Standing Committee on Economics, and took into account comments on a Government discussion paper on franchising and state franchising reports.