Franchising

Franchisors face greater penalties under Code changes accepted by government

Jason Gehrke /

The federal government has accepted in full or in principle most of the 18 changes to the Franchising Code of Conduct recommended by the Code Review inquiry, including greater powers for the Australian Competition and Consumer Commission to enforce the Code.

Federal Small Business Minister Gary Gray and the parliamentary secretary for small business, Bernie Ripoll, recently announced the government’s official response to the recommendations made by Alan Wein following an extensive review of the Franchising Code of Conduct earlier this year.

The Australian Competition and Consumer Commission (ACCC) will have significantly greater enforcement powers, including the ability to issue infringement notices and financial penalties for breaches of the Code (up to $50,000), as well as wider powers to audit franchisor documentation.

A summary of the Code recommendations and the government’s response to each is shown in the table below.

Other accepted recommendations

Subject to further details, franchisees are likely to be recognised as creditors in the event of a franchisor insolvency, and will be able to terminate their franchise agreements under certain conditions if a franchisor goes under.

Good faith will also be further recognised in the Code, subject to further consideration by the government. The ACCC will also be required to prepare additional educational materials to improve understanding of good faith in the franchise sector.

Changes to the disclosure provisions of the Code that have been accepted include the removal of Annexure 2 disclosure, reduced disclosure for single-grant foreign franchisors, disclosure of online sales, and the provision of a risk statement to all potential franchisees.

Restraints of trade against former franchisees will become unenforceable in situations where franchisees who are not in breach of their agreements and are willing to renew are not renewed by their franchisor.

Motor vehicle franchise agreements will be subject to a separate review to examine the impact of minimum terms on these agreements, which raises the possibility of specific Code provisions for auto dealership agreements in future.

Franchisors will also be prohibited from imposing unreasonable significant unforeseen capital expenditure requirements on franchisees, subject to further development of this provision. 

Recommendations not accepted

Two recommendations noted by the government, but not accepted, include the recommendation to disqualify company directors from managing a corporation for breaches of the Code, and allowing courts to order franchisors to provide royalty-free periods or to make top-up contributions to marketing funds.

What next?

The government has announced it will implement the changes as soon as feasible.

It will now move to develop a regulatory impact statement, and seek further stakeholder input during this stage.

Although no implementation timeframe has been provided, the longer before a federal election is held, the greater the likelihood that Parliament will be resumed and legislation submitted to formalise the accepted changes to the Code. (See recent article Can Rudd’s return as PM provide greater certainty for franchising?)

The government has indicated that changes will only apply to franchise agreements entered into after the passage of legislation through Parliament, however this does not include the extended enforcement powers given to the ACCC, which will be able to issue penalties and infringement notices from a future date yet to be determined.

The Franchise Advisory Centre made multiple submissions during the Code Review process, and a number of recommendations made in these submissions have been accepted by the government.

Background

Then federal small business minister Brendan O’Connor announced in January 2013 the review of the Franchising Code of Conduct.

The terms of reference for the Code Review included an assessment of:

  1. The impact of new disclosure requirements introduced in 2008 as a result of the Matthews Inquiry;
  2. The impact of changes to the Code introduced in 2010 as a result of the 2008 Parliamentary Joint Committee Inquiry (which was chaired at the time by Bernie Ripoll, the current parliamentary secretary for small business);
  3. Good faith in franchising;
  4. Rights of franchisees at the end of the term of their franchise agreements;
  5. Enforcement of the Franchising Code of Conduct.

The Code was last reviewed in 2008, and resulted in a number of changes to disclosure requirements, as well as an examination of the issue of good faith and unconscionable conduct by a special panel.

The current Code review is the fourth major review of the Franchising Code of Conduct since 2006, and was conducted by Victorian-based lawyer and mediator, Alan Wein.

Wein received 73 submissions, roughly half the number submitted to the 2008 inquiry, and its 249-page final report was provided to the government on April 30 less than 12 weeks after the review commenced, and which made 18 recommendations to change the Franchising Code of Conduct.

After receiving the Wein Report, the government issued a Discussion Paper in June seeking public input on the recommended changes to the Code, and received a further 160 submissions by the close date on July 9. The federal government issued its official response to the Wein Report on July 25, with its position on each recommendation summarised in the table below.

View the government’s official response to the Code Review here.

View the government’s media release announcing the Code changes.

 

Summary of government responses to the recommendations of the Franchising Code of Conduct review

Rec #

Recommendation overview

government position

 

 

 

1

Disclosure on notice of intention to renew

Accepted in Principle

2

Short form disclosure for single-grant foreign franchisors

Accepted

3

Disclosure of online sales

Accepted

4

Removal of Annexure 2 disclosure

Accepted

5

Provision of risk statement to potential franchisees

Accepted

6a

Termination of franchise agreement in the event of franchisor insolvency

Accepted in Principle

6b

Franchisees recognised as creditors in the event of franchisor insolvency

Accepted in Principle

7

Prohibition on franchisors imposing unreasonable unforeseen capital expenditure.

Accepted in Principle

8

Prescription of marketing funds to be held in trust, audited, co-owned outlets to contribute, etc

Accepted in Part

9

Inclusion of an express obligation of good faith in the Code.

Accepted in Part

10

Prohibiting franchisors from forcing franchisees to opt out of ex-franchisee contact list.

Accepted

11

Franchisor consent to resale subject to all information being supplied by franchisee.

Accepted in Principle

12

Removing enforceability of restraint of trade clauses under certain conditions.

Accepted

13

Recognition of alternative dispute resolution in addition to Office of Franchising Mediation Advisor.

Accepted

14

Prohibition of franchisor dispute resolutions costs imposed on franchisees and litigation in jurisdiction where franchisee operates.

Accepted in Principle

15a

Civil pecuniary penalties for breaches of the Code.

Accepted in Principle

15b

ACCC to issue infringement notices for Code breaches.

Accepted

15c

Wider random audit powers for the ACCC.

Accepted

15d

Disqualification as company director for serious breach of the Code.

Noted

15e

Court-ordered royalty holidays or payments to marketing funds.

Noted

16

Analysis of minimum terms for motor vehicle dealerships.

Accepted

17

No more reviews of the Code for minimum five years.

Accepted in Principle

18

Improve clarity of policy intent in the Code, and adopt minor technical changes.

Accepted

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Jason Gehrke

Jason Gehrke is the director of the Franchise Advisory Centre and has been involved in franchising for 20 years at franchisee, franchisor and advisor level.

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