08 September 2020
The Australian Government has released its response to the Parliamentary Joint Committee’s Fairness in Franchising report (Report), which investigated the operation and effectiveness of the Franchising Code of Conduct (Code).
The Government highlighted the changes already made in response to the Report, in particular the enhanced investigation and enforcement powers of the Australian Competition and Consumer Commission (ACCC) in relation to unfair contract terms and the new whistleblower regime introduced in response to the Whistleblower Protections report, which will provide protections for franchisees and employees of franchisors reporting a breach of an industry code by a franchisor and for employees of franchisees reporting a breach by a franchisee.
For the most part, it appears that the Government has opted for a measured approach to any reforms to be introduced into the franchising sector. It has also flagged that it will engage with key stakeholders on any pivotal issues (such as franchisee termination rights and increased disclosure obligations) before making any changes to the Code.
The main changes proposed by the Government are as follows:
In addition, the Government has indicated that consultation with the franchising sector will inform its development of:
The Government has not commented at this stage on the suggestions set out in the Report recommending franchisees be given a right to terminate where the franchisee is over-geared or suffering personal hardship, or has negative earnings before interest, taxes, depreciation and amortisation (EBITDA) for three fiscal quarters or where net profit after tax (NPAT) is negative for both parties for three financial quarters.
Given any change to a franchisee’s right to terminate under the Code would have a significant impact on franchisors (particularly those who take on a head lease on behalf of franchisees), franchisors may wish to consider providing input to the consultation process in relation to these proposed changes before any draft legislation is prepared.
The Government also recognised the limited effect unfair contract terms laws have had on franchising, but declined to provide comprehensive comments on the future of such laws, stating that it is undertaking a separate review of unfair contract terms laws more generally and any changes to the Australian Consumer Law will be considered by the Legislative and Governance Forums on Consumer Affairs.
However, the Government did say that it would consider appropriate amendments to the Franchising Code relating to retrospective variation of franchise documentation. This focus by the Government could indicate that it wishes to provide franchisees with an additional remedy (above that available via the unfair contract terms laws) where a franchisor unilaterally amends a franchise agreement or manual to the detriment of a franchisee, and/or that it has decided to reject the suggestion that all franchise agreements be subject to the unfair contract terms laws (irrespective of value or size of the franchisee business), but nonetheless wishes to ensure that all franchisees are protected against unilateral variation of franchise documents in certain circumstances.
After it has finalised its amendments to the Code, the Government will consider amending the Oil Code of Conduct to ensure consistency, where appropriate, as part of the Oil Code of Conduct mid-term review.
The Government’s response to the Report follows recent enforcement action by the ACCC against Bob Jane Corporation Pty Ltd for failing comply with the Code and Megasave Couriers Australia Pty Ltd for alleged false or misleading representations about guaranteed income.
These actions, together with the franchising sector being a Compliance and Enforcement Priority for the ACCC in 2020, emphasise the need for franchisors in particular to keep abreast of the implementation of these changes and the outcomes of the planned consultation.
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