Franchising Code Review: a chance for improvement but balance must be retained

Stephen Giles, Deputy Chairman, Franchise Council of Australia

The Federal Government has promptly honoured its commitment to review the Franchising Code of Conduct in 2013, with then Small Business Minister Brendan O’Connor announcing on January 4, 2013 a review of the Franchising Code of Conduct by franchise industry expert Alan Wein.

The Minister advised that “the primary purpose of the review is to verify ... that the amendments of the Franchising Code in 2008 and 2010 were working as intended,” but flagged that the review would consider in this context issues including:-

• Questions of good faith in franchising;
• The rights of franchisees at the end of their franchise agreements, including recognition of any contribution they have made to the building of the franchise; and
• The operation of the Competition and Consumer Act with respect to enforcing the Code.

The terms of reference are aimed at building upon the collective efforts of the numerous previous reviews and inquiries into franchising, including in particular the 2007 and 2010 Federal inquiries into franchising and the 2010 inquiry into unconscionable conduct. This is important, and hopefully will help ensure that issues that have been debated and resolved in the past are not unnecessarily re-opened. The appointment of an industry expert, in a similar manner to the way previous minister Craig Emerson appointed three experts to consider unconscionable conduct, appears designed to limit the capacity of people to criticise the outcomes of the review. It probably also indicates that the Government is likely to adopt the thrust of any recommendations.

Minister O’Connor noted that Mr Wein is “appointed to prepare a report suitable for public release within three months.” He also noted that “in gathering evidence to support findings the reviewer is required to undertake appropriate consultation with industry and State and Territory stakeholders.” Use of words such as “evidence” and “verify” indicate that empirical material will be important, as will consultation with the FCA and State Governments that have shown an active interest in franchising. Hopefully this can led to a re-harmonisation of franchising laws under an exclusively Federal regulatory framework.

Although at first glance the review appears relatively limited, the review is likely to be significantly broader in substance. Indeed the Discussion Paper accompanying the review announcement poses 29 separate questions, many clearly inviting a much broader response.

The FCA intends to work collaboratively with Mr Wein, the Government and the Opposition to attempt to achieve a consensus outcome. Our focus is therefore to be proactive in proposing some changes that have minimal compliance cost, and help address any negative perceptions of franchising. At the time of writing, the FCA is preparing a comprehensive submission. The submission will be finalised after franchising forums to be held across Australia with FCA members, and after input from the FCA Legal Committee.

The FCA’s core position

Our sector has been formally regulated by the ACCC since 1998. The foundation of this regulation, the Franchising Code of Conduct (the Code) was created to assist and foster the ongoing relationship between franchisees and their franchisor.

The FCA is strongly supportive of the current regulatory framework, which is clearly world’s best practice when compared to franchising regimes around the world. There are strong protections to franchisees contained in the Code, and these are supplemented by the prohibitions on misleading and deceptive conduct and unconscionable conduct contained in the Competition and Consumer Act.

The Franchising Australia 2012 Survey confirmed the relatively low levels of disputation in the sector, and the recent PwC report indicated that the franchise sector continued to outperform the general economy notwithstanding relatively difficult economic times. Complaints to the ACCC remain relatively low, and there is no evidence of any endemic problems or industry concerns. Accordingly, although some improvements to the Code can be countenanced, the FCA is strongly of the view that no fundamental changes are appropriate.

The FCA considers that there is a need to clarify the position in relation to good faith, and accordingly will be proposing the inclusion of the current common law duty of good faith into the Code such that it applies to all parties to a franchise agreement in relation to the exercise of any right or power.

However the FCA opposes the introduction of any new defined statutory duty of good faith, as this is unnecessary and will create legal uncertainty. The FCA is prepared to consider a proposal for specific penalties for blatant non-compliance with the fundamental disclosure provisions of the Code provided the ACCC is empowered to give clear guidance as to their enforcement policies so that there is no prospect of regulatory abuse. The support for good faith and penalties means there is little if any rationale for separate State based laws in South Australia or else.

The FCA also supports calls to tighten the provisions in the Code that currently recommend that franchisees obtain legal and business advice. The FCA is concerned that franchisees are still not seeking advice in many instances, and sees a high correlation between disputes and a failure of franchisees to take advice. (Under the FCA’s own internal disputes process, in almost 100% of the 80 complaints made to the FCA the franchisee has failed to obtain advice.) The FCA also supports improvements to mediation, but does not support the establishment of any new court or tribunal, as this will seriously harm the effectiveness of mediation. The FCA is continuing its plea for Code simplification, increased Government commitment to pre-entry education for franchisees and other improvements to the Code that do not add material compliance cost. The FCA opposes the creation of automatic rights of extension of franchise agreements at end of term, or any form of compensation payment at end of term or on termination of the franchise agreement. The FCA also opposes the application of consumer unfair contract laws to business contracts such as franchise agreements, as has been flagged by the Shadow Small Business Minister.

A copy of the FCA’s submission and other relevant material is available to FCA members via the FCA’s website,

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