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:
- Increased penalties: increasing the maximum civil pecuniary penalty under the Code to $133,200, doubling the penalties that apply for its breach. The Government will also impose pecuniary penalties for breaches of clauses in the Code regarding the use of marketing funds.
- Increased disclosure requirements: targeted improvements to the information that must be disclosed to prospective franchisees, including:
- financial information must be part of the disclosure documents and franchisors are required to make a statement as to the accuracy and appropriateness of the financial information provided;
- improved information must be contained in marketing fund financial statements;
- more information around restraints of trade must be provided;
- more information in relation to supplier rebates, commissions and other payments must be provided; and
- franchisors will be required to prepare and issue to prospective franchisees a Key Disclosure Information Fact Sheet to simplify and improve upfront information available to them.
- Dispute resolution: introducing conciliation and voluntary binding arbitration as a means of improving dispute resolution options, as well as clarifying that in certain circumstances franchisors cannot refuse to take part in alternative dispute resolution.
- Significant capital expenditure: strengthening franchisees’ rights when a demand for significant capital expenditure is made, including by prohibiting franchisors from requiring franchisees to undertake significant capital expenditure unless it is disclosed prior to entering into a franchise agreement, it is legally required or the franchisee agrees.
- Notice to terminate: requiring the franchisor to provide the franchisee with seven days’ notice of a proposed termination in special circumstances, so that a mediator or arbitrator can assist the parties to negotiate. (The Government did acknowledge, however, that it is important for franchisors to retain the right to act quickly (including presumably by terminating the agreement) when addressing concerns around fraud or public health or safety).
In addition, the Government has indicated that consultation with the franchising sector will inform its development of:
- a public register of franchisors, to help prospective franchisees make an informed decision before entering a franchise agreement; and
- amendments to the Code to facilitate negotiated early exit of franchise agreements.
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.
Unfair contract terms and the Oil Code
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.
This publication is introductory in nature. Its content is current at the date of publication. It does not constitute legal advice and should not be relied upon as such. You should always obtain legal advice based on your specific circumstances before taking any action relating to matters covered by this publication. Some information may have been obtained from external sources, and we cannot guarantee the accuracy or currency of any such information.