More to the new Franchising Code than meets the eye
This article appears in the July/August 2014 issue of Business Franchise Australia & New Zealand
A new Franchising Code of Conduct announced in April this year is the most significant regulatory change to the $132 billion Australian franchise sector since it was first regulated in 1998, and will come into effect from January 1 next year.
However in contrast to the extended implementation timeframe, 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, Federal Small Business Minister, Bruce Billson said that the new Code followed the recommendations of the 2013 Wein Review, and subsequent consultation with the franchise sector.
In a six-page media statement titled ‘The Future of Franchising’, the 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 $8,500 without having to seek a court order.
It should be noted that this will be a new Franchising Code of Conduct to apply to franchise agreements entered into on or after 1 January 2015, and is not just a series of changes to the existing Code.
The government contends that the new Code will be good for the sector because it will:
1. Reduce red tape;
2. Improve information available to franchisees;
3. Strengthen the balance in franchise agreements; and
4. Improve conduct in the sector and the overall effectiveness of the Code.
Two Codes instead of one?
The government’s statement claims that red tape will be reduced by the elimination of short-form Annexure 2 disclosure, socalled ‘double-disclosure’ for international franchisors operating in Australia; removing the need to summarise agreement provisions in the disclosure document, and other changes to the Code to reduce ambiguity.
The Regulatory Impact Statement (RIS) prepared by government suggests that this will save the sector several million dollars per year in legal costs, however for the first few years this will most likely be negated by the very real prospect that the franchise sector will be subject to two simultaneous Franchising Codes – the current version, and the new Code to commence in 2015. This two-Code scenario was not flagged in the Minister’s original statement or RIS, and appears to be an unexpected complication in legal implementation that risks actually causing greater confusion and red tape for the franchise sector, not less.
Operating two simultaneous Codes would be at odds with the government’s claim of reducing red tape and defies common sense. Further clarity on the need for a two-Code environment is expected later this year as the government looks at this development in more detail.
More information for franchisees In improving information available to franchisees, the new Code will require 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 allocate 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.
Changing the balance
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.
Regulating franchise conduct
To improve conduct in the sector, penalties of up to $51,000 for major breaches of the Code will be introduced, as well as powers for the ACCC to apply fines of up to $8,500 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 draft new Franchising Code itself.
Breaches worth 300 points accrue a penalty of up to $51,000. The Treasury website which has announced the changes to the Code notes that the ACCC can issue infringment notices of up to $8,500 without seeking a court order.
Based on 300 units equalling a financial penalty of $51,000, this would mean that an infringement notice of $8,500 would be equal to 50 penalty units.
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 following.
A key element of the new Code requires both parties to an agreement to act in good faith toward 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. With the public consultation period now closed, the government will be taking feedback provided by key stakeholders such as the Franchise Council of Australia and others into consideration prior to issuing a final draft of the new Franchising Code of Conduct later this year.
Once that is released, the sector will have a much clearer understanding of its obligations and red tape burden for 2015 and beyond.
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. He advises both potential and existing franchisors and franchisees, and conducts franchise education programs throughout Australia, and publishes Franchise News & Events, a fortnightly email news bulletin on franchising issues and trends.
Contact Jason at:
P: 07 3716 0400