Franchising

Time running out for details of new Franchising Code

Jason Gehrke /

The final details of the new Franchising Code of Conduct due to come into effect on January 1, 2015 are still to be released to the franchise sector despite an initial announcement by Small Business Minister Bruce Billson more than six months ago.

With only two-and-a-half months to go until the new code becomes law, the Australian franchise sector is still waiting for its final version to be released.

As franchisors prepare to update their disclosure documents by the October 31 deadline required under the current code, many are wondering when the new code will be released and whether there will be enough time to make changes to their franchise agreements and disclosure documents before the scheduled January 1 implementation date.

The current void of information is the latest stage in an extended process of reviewing the Franchising Code of Conduct, which commenced with ultimately unsuccessful state government moves to legislate the sector in South Australia and Western Australia in 2008, followed by two federal reviews since then.

A long road towards change

The first federal review was held in late 2008 by a parliamentary joint committee under the chairmanship of Labor MP Bernie Ripoll, and was the first ever review of franchising not instigated by a Small Business Minister. This might explain why it took then Small Business Minister Craig Emerson almost a year to announce the government’s response to the review findings, which resulted in a number of changes to the code being introduced on July 1, 2010.

However, less than three years after those changes had taken effect, and after a merry-go-round of no less than five different business ministers under the former Labor government, another review of the code was announced in January 2013, which resulted in the 18 recommendations of the Wein Review.

Labor’s subsequent loss of the federal election in September 2013 meant that the Labor government was unable to implement the recommendations of the Wein Review, which passed to the new Coalition government to consider.

Release of draft new code

On April 2 this year, Small Business Minister Bruce Billson announced a draft of a new Franchising Code that addressed many of the recommendations of the Wein Review, and which would be scheduled for implementation from January 1, 2015.

At the time of writing, the April draft remains the only public version available to the franchise sector, despite the significant likelihood of changes made during the consultation period following the April draft’s release.

Even in April, the consultation period for the new code was opened and closed in the same month, allowing just 17 business days for the franchise sector to provide input into the most sweeping changes to franchise regulation in nearly 16 years.

Announcing the new code on April 2 in a six-page media statement titled “The Future of Franchising”, the Small Business Minister announced key elements of the new code included the introduction of an obligation to act in good faith, financial penalties of up to $51,000 for major breaches, and new powers for the Australian Competition and Consumer Commission (ACCC) to issue infringement notices up to $8500 without having to seek a court order.

The Minister further claimed that the new code will reduce red tape for the franchise sector, improve information available to franchisees, strengthen the balance in franchise agreements, and improve conduct in the sector and the overall effectiveness of the code.

The regulatory impact statement (RIS) prepared by government at the time suggested that the new code will save the sector several million dollars per year in legal costs; however, this may not include the initial compliance costs that are likely to be incurred by franchisors to adapt their franchise agreements and disclosure documents to the new code.

Changes proposed by the April 2 draft

Although the final draft of the Franchising Code of Conduct is yet to be released, it is likely to retain most of the major changes proposed in the April 2 version. These are summarised below:

Greater disclosure

The April 2 draft requires franchisors to provide potential franchisees upfront with a risk statement about franchising and to disclose how the proceeds from online sales are dealt. Additionally, franchisors will also need to be more transparent with marketing funds, including holding funds in a separate bank account, and disclosing types of expenses to be allocated to the fund, as well as giving franchisees an option to vote for an annual audit.

Franchisors will also be compelled to contribute equally to marketing and other co-operative funds for any company-owned outlets.

Changes to the balance of power in franchise agreements prevent franchisors from attributing their costs in dispute resolution to franchisees, and require dispute resolution to be conducted in the state where the franchisee is based, not where the franchisor is based.

Additionally, capital expenditure requirements must be disclosed in the franchise agreement and justified to franchisees by a statement outlining the rationale, costs and expected benefits or otherwise agreed by a majority of franchisees in the system.

Restraint of trade provisions have also been targeted, potentially allowing ex-franchisees the freedom to continue operating as independents after the end of their franchise agreement if they are willing to be renewed but the franchisor does not offer a renewal.

Fines and penalties

The April 2 draft code proposed penalties of up to $51,000 for major breaches of the code, as well as powers for the ACCC to apply fines of up to $8500 per breach. The ACCC will also be given expanded power to compel franchisors to provide a wider range of documentation in response to its existing audit powers.

Penalties of up to $51,000 will be based on a penalty units system applied to 10 broad areas of conduct under the new code, and will be reinforced by changes to the Competition and Consumer Act (CCA) which will enable similar penalties to potentially apply to all mandatory industry codes of conduct, including the Oil Code, the Horticulture Code, and the Unit Pricing Code in addition to the Franchising Code of Conduct.

The changes to the Competition and Consumer Act create and recognise penalty units for breaches of an industry code. The number of penalty units that apply to a breach are listed in the April 2 draft code itself.

There are 10 broad areas for which breaches of the draft code will attract a penalty of 300 points, and consequently incur a financial penalty of $51,000. These are listed in the table below:

General nature of Code breach

Clause ref. in draft Code

Failing to act in good faith

(7(2))

Failing to provide a disclosure document, or maintain it in the form prescribed

9(3), 9(10) and 17(1)

Failing to provide a copy of a lease or other agreements required under the Code

Clauses 14(1-4) incl. & 15(1)

Failing to provide financial statements relating to the franchisor

16(1)

Failing to disclose materially relevant facts

18(1)

Failing to indicate the franchisor’s intention to renew a franchisee within the required timeframe, and failing to provide a disclosure document when providing such notice

19(2) and 19(3)

Failing to repay monies to franchisees who have terminated agreements during the cooling-off period

27(3)

Terminating a franchisee without providing a breach notice, the remedy and a reasonable timeframe, or otherwise terminating a franchisee not in breach unless otherwise permitted by the Code

28(2) and 29(3);

 

Failing to disclose details of former franchisees, or failing to remove a franchisee from the list of former franchisees when requested

33(2) and 33(3)

Inducing franchisees not to associate, or hindering franchisees’ freedom of association

34

Failing to attend mediation (applies to both parties to a mediation)

42(3)

Table 1: A summary of the draft Code breaches that attract maximum penalties.

A key element of the draft new code requires both parties to an agreement to act in good faith towards one another before, during and at the end of an agreement.

Good faith is partly defined in the code, requiring parties to act honestly and not arbitrarily, and to cooperate to achieve the purposes of the agreement. If an agreement does not include a clause allowing a franchisee to renew, this does not mean that the franchisor has acted in bad faith.

The inclusion of a partial definition of good faith is at odds with the recommendation from the 2013 Wein Review, which said that good faith should be recognised in the code, but not defined and instead left to the interpretation of the courts as required.

Preparing for 2015

With less than two-and-a-half months left before the government’s implementation date of January 1, 2015, and while waiting for the final version of the code to be released, the best preparation franchisors can do in the meantime is to revisit and comprehensively understand the changes proposed in the April 2 draft version of the code.

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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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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