The Fairness in Franchising Report: What are the key recommendations?

The Fairness in Franchising Report (Report), published by the Parliamentary Joint Committee on Corporations and Financial Services (Committee) on 14 March 2019, unveils over 70 recommendations designed to level the playing field between franchisors and franchisees in Australia.

These recommendations include substantial reform to the Franchising Code of Conduct (Code) and the Competition and Consumer Act 2010(Cth) (Act).

The Report also recommends providing the ACCC with greater investigative and enforcement powers.

What are the key recommendations 

Set out below is a snapshot of some of the key recommendations in relation to Code amendments, as well as civil penalties, unfair contract terms and powers of the ACCC.

1. Mandatory disclosure obligations for franchisors

The Committee recommends that the Government impose more onerous disclosure requirements on franchisors, including (amongst others):

• Earnings information. Amending the Code to oblige franchisors to provide incoming franchisees with the prior two years’ business activity statements, a profit and loss statement, balance sheet and an assessment of labour costs.[1]
  
  
• Marketing funds and fees. Clauses 15 and 31 of the Code set out requirements relating to marketing fees and funds, specifically:
  
  
  • under clause 15, if a franchise agreement provides that a franchisee must pay money to a marketing fund, the franchisor must prepare and provide to a franchisee an annual financial statement for the fund. A breach triggers a fine of 300 penalty units; and
    
    
  • under clause 31, franchisors must keep all marketing fees and advertising fees in a separate bank account.[2]

The Report recognised that the reference to a ‘marketing fund’ in clause 15 of the Code and ‘marketing and advertising fees’ in clause 31 created a loophole for franchisors to avoid the obligations under clause 15, by claiming that they did not operate a ‘marketing fund’ as such.

The Committee recommends amending the language of clauses 15 and 31 to make clear that each clause applies where a franchise is required to make regular payments to franchisors to cover marketing fees. The Committee also recommends that clause 31 be amended to provide for civil penalties for breach, but does not specify what those penalties are.[3]

• Third line forcing. Mandate under the Code that franchisors must disclose to incoming franchisees where the maximum resale price of each product is below cost price and the margin between the two.[4]
  
  
• Supplier rebates and commissions. Amend the Code to provide that all supplier rebates, commissions and other payments in relation to the supply of goods or services to franchisees by the franchisor or suppliers mandated by the franchisor be disclosed to franchisees.[5]

2. Termination rights

Additional termination rights for franchisees under the franchise agreement are proposed where:

• the franchisee is over-geared or suffering personal hardship – recommendation for an early exit right for franchisees in circumstances where the franchisee has been unable to restructure their finances, or to sell under the transfer provisions of the Code;
  
  
• the franchisee’s EBITDA has been negative for three fiscal quarters. The franchisor would be responsible for meeting the terms and conditions of breaking any third party leases and would be prohibited from imposing any further costs on the franchisee; and
  
  
• NPAT is negative for both parties for three financial quarters. Both parties should fairly share the costs associated with breaking leases and managing the termination.[6]

3. Cooling off period

The Committee recommends amending clause 26 of the Code to clarify that a franchisee may terminate a franchise agreement and any associated arrangements (including leases) up until 14 days after the last of the following have occurred:

• a franchise agreement has been signed;
  
  
• a payment to the franchisor has been made;
  
  
• the disclosure documents have been received by the franchisee; and
  
  
• the lease has been received by franchisee.[7]

4. Collective bargaining and dispute resolution

In seeking to enhance the collective powers of franchisee groups, the Committee recommended the Government establish a dedicated franchisee industry association and allow franchisees to collectively bargain with their franchisors.

With dispute resolution, the compulsory dispute resolution scheme under the Code would be retained with an option for binding arbitration to be included.[8]

5. Increased civil penalties for breaches of Franchising Code

The current penalty for a breach of the Code is capped at 300 penalty units (or $63,000). In the Committee’s view, this penalty is too low, and is often treated as a cost of doing business.

As a result, the Committee made three key recommendations:

1. The limit on penalties set in s 51AE(2) of the Act should not apply to breaches of the Code. To get around s 51AE(2), the penalties applicable for a breach of the Code should be prescribed in legislation.

2. Raise the quantum of the penalties available for a breach of the Code. The Committee agrees with the ACCC that penalties could be set at a multiple of three times the value of the benefit obtained from the offence, and recommends that the penalties be increased, such as to at least reflect the penalties currently available under the Australia Consumer Law (ACL), being the greater of:

• 10 million;
  
  
• three times the value of the benefit obtained from the offence; or
  
  
• 10% of the annual turnover of the business.

3. Civil penalties (and infringement notices) be made available for all breaches of the Code.[9]

6. Unfair contract terms

The Committee also recommended the Government consider changes to the unfair contract terms provisions of the ACL, including, amongst others:

• consider amending s 23 of Schedule 2 of the ACL to provide that unfair contract terms in small business contracts and franchise agreements are prohibited; and
  
  
• amend the Act to provide that civil pecuniary penalties and infringement notices apply where the provision of a standard form franchise agreement to a small business contains an unfair contract term.

Currently, the ACCC cannot seek penalties when a contract term is declared unfair, or issue infringement notices where a term is likely to be unfair. The Committee did not give detail as to the quantum of penalties it recommends.[10]

7. New powers for the ACCC

The Report condemned the practice of ‘churning and burning’ – ‘churning’ being the perpetual sale of a single, underperforming franchise and ‘burning’ being the opening of unviable new outlets to profit from upfront fees.

To overcome systemic ‘churning and burning’ in franchising, the Committee recommended that the ACCC be provided with power to intervene and prevent the marketing and sale of franchises where a franchisor shows a track record of the practice.[11]

Where to next?

The Government, which has yet to comment on the Report, has been urged by the Committee to act quickly and to establish a ‘Franchising Taskforce’ to investigate how to best implement a number of its recommendations.

The Report no doubt comes as a warning to big players in Australia’s franchising industry, with the Committee recommending various government agencies conduct investigations into Retail Food Group for a number of different breaches.

The report canvasses a complete sector overhaul and franchisors should keep an eye on regulatory movements in 2019.

The full list of recommendations can be found in the operation and effectiveness of the Franchising Code of Conduct report.

^{[1] Recommendation 6.3.
[2] Recommendation 6.7; 6.9.
[3] Recommendation 6.8.
[4] Recommendation 7.1
[5] Recommendation 8.1.
[6] Recommendation 11.1.
[7] Recommendation 10.2.
[8] Recommendation 15.2.
[9] Recommendation 16.1.
[10] Recommendation 9.1.
[11] Recommendation 4.1.}