Further to our recent e-alert of 17 June 2013 “Australian Franchising Code of Conduct Review – The Key Recommendations“, the Federal Government has recently accepted outright or in principle most of the recommendations in the Wein Report.
In preparing its response, the Government released a consultation paper and sought input on options that could be implemented in response to the Wein Report. Hunt & Hunt made submissions in support of the following recommendations contained in that report:
We submitted that the Franchising Code of Conduct (“Code”) should be amended to prohibit franchisors from imposing unreasonable significant unforeseen capital expenditure. ‘Unreasonable’ and ‘significant’ should be defined having regard to the financial impact on the franchisee of the required expenditure to be measured against the likely benefit to the franchise and taking into account current economic circumstances. The franchisor would need to be able to demonstrate a business case for the need for capital investment in the franchised business. Implementation of this recommendation should address the imbalance of power between franchisors and franchisees that currently exists where franchisees are often required to submit to costly upgrades of premises without adequate consideration by the franchisor. The Government accepted this in principle with a further consideration being a percentage of turnover or profit being used to define what would be a “significant expense” and the need to balance necessary expenditure for compliance with Australian Standards or implementation of innovative systems which improve the franchise as a whole.
We submitted that the Code should be amended to include an express obligation to act in good faith, that good faith should be defined in the Code so as to extend beyond the common law application to include pre-contract negotiations and performance of the agreement as well as in dealing with disputes. We also submitted that a provision should be included in the Code requiring that every franchise agreement must contain a good faith clause. The Government response was to accept this recommendation, in part, to include the express obligation in the Code and extend it as submitted. However, the Government would not go as far as providing a definition in the Code, opting instead for the Australian Competition & Consumer Commission (“ACCC“) to provide educational material to assist parties to understand their duties under this requirement.
We agreed with the recommendation that the Code should be amended to allow franchisors to request certain information from a franchisee before they agree to a transfer or novation of a franchise agreement. In our submission this should be qualified to provide the request is limited to a defined time period so as to not allow repeated requests for information to frustrate or delay the transfer or novation. The Government accepted this recommendation in principle, however, considered that the duty to act in good faith would likely assist in this issue but would take this into consideration in the implementation encouraging the industry to clarify time periods and the information required in the drafting of the franchise agreements.
We submitted that an analysis of a minimum term and standard contractual terms for motor vehicle franchise agreements should be undertaken prior to a future review of the Code. In our submission we pointed out that the term of franchise agreements were often insufficient to allow dealers to recoup capital investments and be able to enter into premises leases and financial facilities on reasonable commercial terms, this having an impact on profitability or requiring dealers to bind themselves to longer-term arrangements than they are able to secure from the franchisors, which led to significant losses on termination. To this end, we submitted that in circumstances of non-renewal not being due to a breach by the dealer, the franchisor should be required to compensate the franchisee for reasonable loss on initial capital expenditure and any ongoing obligations incurred in reasonable contemplation that the agreement would be renewed. The Government accepted the need to review the standard contract terms for automotive dealerships and will consult further with stakeholders about this.
The Government has indicated its intention to implement the changes as soon as possible, subject to normal Parliamentary processes. Given the uncertainty as to the Federal election dates and the current Government’s focus, this may not take place this year.
It is proposed that changes to the Code will only apply to franchise agreements entered into after the amendments are enacted, however, the ability of the ACCC to enforce pecuniary penalties and issue infringement notices for breaches of the Code would apply from the commencement of the proposed changes for all agreements.