The Federal Government is currently undertaking a review of the franchising laws, in particular, the efficacy of the 2008 and 2010 amendments to the Franchising Code of Conduct (“Franchising Code”).
A four-month industry review conducted by industry expert, Mr Alan Wein, made 18 recommendations, which included:
- an express obligation on the parties to act in good faith
- a stronger enforcement regime for Franchising Code breaches
- improving franchisor disclosure
- better dispute resolution mechanisms
These recommendations represent the largest overhaul of the Franchising Code since its inception and if these recommendations are adopted there will be significant issues for franchisors to address.
Summary of recommendations arising from the review
A significant focus of the recommendations is to improve disclosure from franchisors to franchisees, by including the following requirements:
- franchisors must notify the franchisee of its intention to renew the franchise agreement under clause 20A of the Franchising Code and provide disclosure documents when providing this notice
- franchisee/franchisor rights in conducting and benefitting from online sales are subject to additional disclosure obligations
- franchisors are to develop and provide a generic risk statement to prospective franchisees at the first point of contact, summarising key risks and issues in operating a franchise
- short form disclosure is to be abolished
These recommendations are aimed to prevent franchisors from acting unconscionably in relation to financial matters, including:
- prohibiting franchisors from imposing unreasonable significant unforeseen capital expenditure on franchisees
- imposing further reporting and regulatory requirements on franchisors in relation to the franchisor’s marketing fund, including an annual audit of the marketing fund statement
Transfer, renewal or end of a franchise agreement
- conferring a specific right for the franchisee/franchisor to terminate a franchise agreement when an administrator is appointed to the other party
- providing that franchisors are entitled to have all information required to be able to consider a franchisee’s request to transfer or novate the franchise agreement, before the franchisor is “deemed” to have granted consent
- restraint of trade clauses cannot be enforced against the franchisee in certain circumstances where the franchise agreement has not been renewed by the franchisor
Currently, some franchisors include attribution of legal costs clauses in the franchise agreement in return for a lower franchise fee. The report recommends a prohibition on franchisors to attribute legal costs in relation to dispute resolution, unless by court order. Further, to improve a franchisee’s access to justice, the franchisor cannot litigate outside of the franchisee’s jurisdiction.
Introduce an express obligation for both the franchisee and franchisor to act in good faith. This may lead to situations where the franchisor/franchisee may have a right under the franchise agreement, however, cannot exercise it as it would breach their obligation to act in good faith.
The report recommends increasing enforcement powers of the ACCC and courts in relation to breaches of the Franchising Code. For example, civil pecuniary penalties of up to $50,000 may be imposed for breaches of the Franchising Code.
Where to from here?
This is an opportunity to have some input into the regulation of the franchising industry which we know is of significant interest to many of our clients. We intend to make submissions in response to the consultation paper and would welcome any feedback you may have from your perspective as to the proposed amendments and any others which may not have been considered.
Submissions close on 9 July 2013.