Three and a Half Years On

Carrie Peterson | Principal Solicitor | Peterson Haines & Paris Maggs | Solicitor | Peterson Haines

Three and a Half Years On

January 2015 was significant, some say because Australia defeated South Korea to win the AFC Asian Cup, or because Croatia elected its first female President, or the Church of England ordained its  first female bishop, but for Australian business, it was significant because of the introduction of the new comprehensive Franchising Code of Conduct (Code).

Since that time, there have been countless articles written explaining the new and most significant changes to the Code, which expert advice included the introduction of an obligation to act in good faith (not to be confused with an obligation to act in the other party’s interests) and amendments to disclosure requirements.

But what is actually going on in practice? The Australia Competition and Consumer Commission (ACCC), Australia’s competition regulator and, self-described, national consumer law champion, has  seen an increase in complaints relating to small business and more specifically, breaches of the Code.

The ACCC’s latest Small Business 2017 Snapshot, released on 23 March 2018, noted at least 600 complaints in 2017 (of the 5000 complaints pertaining to small businesses) relating to franchising. As  such, the ACCC took several enforcement actions last year including against franchisors for breaches of the Code.

Commenting on the ACCC’s Small Business 2017 Snapshot, ACCC Deputy Chair Dr Michael Schaper said:

“We want small businesses to have a level playing field and every chance to succeed, so it’s our job to ensure everyone plays by the rules.”

So, three and a half years on, has this “new” Code really made a difference? From all accounts, everyone wants the answer to be yes, however that is now in question.

In February 2018 a decision was made by the Senate to launch a parliamentary inquiry into the Australian franchising sector.

The Inquiry, moved by Nationals Senator John Williams, will be reviewing, amongst other things, enforcement of the Code, as well as the impact of the amendments to unfair contract terms. Previously,  the unfair contract provisions of the Australian Consumer Law (ACL), which is set out in Schedule 2 of the Competition and Consumer Act, did not provide protection against unfair contract terms for  small businesses.

The changes to the unfair contract terms, brought about in November 2016, now protect small businesses, in that they now protect contracts where:

  • At least one party to the contract is a small business (which is a business that employs less than 20 people); and
  • The upfront price payable under the contract is $300,00 (or less or $1,000,000 or less if the contract is for more than 12 months); and
  • The contract is a standard form contract (that is, the contract is pre-prepared and is not normally negotiated) for the supply of goods or services.

With the significant increase in the number of mobile franchisees, the change to the unfair contract terms is critical as it underpins the basic and fundamental issue confronted by franchisees, being the  balance of power come negotiating time. The Courts have found that in order for the term of the contract to be deemed unfair, the term must:

  • Cause a significant imbalance in the parties’ rights and obligations;
  • Not be reasonably necessary to protect the legitimate interests of the party advantaged by the term; and
  • Cause loss or damage to the small business if it was to be relied upon.

The Inquiry is expected to report back in September 2018.

Financial penalties for breach of the Code

Despite the Inquiry into the effectiveness of parts of the Code, there have been some notable victories since the Code’s introduction.

Importantly, in 2016, the ACCC instituted proceedings against Pastacup Franchisor Morlid Pty Limited (Morlid) and its former director, for breaches of the Code.

The ACCC sought, amongst other things, penalties and declarations. In this case, the ACCC alleged that the previous director’s directorship and management of two previous franchise companies, that  became insolvent, was something that Morlid ought to have disclosed to the franchisees. The Code provides that a person may be personally liable for a breach of the Code if they:

  • Are a party to the breach of the Code;
  • Attempt to breach the Code;
  • Assist another party to breach the Code;
  • Induce another party to breach the Code;
  • Are “knowingly concerned” with a breach of the Code.

The Court found that Morlid’s failure to disclose information amounted to a breach of the disclosure requirements under the Code, and in 2017, the Federal Court of Australia ordered Morlid to pay  $100,000 in penalties, representing the ACCC first court ordered financial penalties for breaches of the Code. The company’s director was also ordered to pay $50,000 for being “knowingly concerned”  in the breaches of the Code, by failing to comply with the new disclosure requirements.

Dr Schaper described the proceedings as:

“….the first in which the ACCC has sought penalties for breaches of the Franchising Code. The ACCC is pleased that the revised Code provides for the Court to impose penalties for serious breaches.  We expect that the availability of such remedies will act as a significant deterrent to others,”

Dr Schaper went on to say:

“…..changes to the Franchising Code require increased disclosure prior toentering a franchise agreement. The ACCC has made it an enforcement priority to ensure small businesses receive the protections of industry codes of conduct, including the Franchising Code.”

What next?

The latest figures released by the Australian Bureau of Statistics show that there are approximately 79,000 franchise units operating in Australia. With over 2.2 million small business operating in  Australia, these franchise units account for approximately 4 per cent of small business in Australia, with the franchise units generating annual sales revenue of $146 billion for the economy. Franchisors  and franchisees employ almost half a million Australians, and that number is growing.

So what does this all actually mean? For one thing, it means franchising is increasingly in the forefront of the watchdog’s proverbial mind, and importantly, it means that franchisors now know that there  are actual financial consequences for breach of the Code.

But does that mean the franchisees should change their usual recommended conduct prior to entering into a Franchising Agreement? The answer to that is a resounding No. An increase in protection should in no way replace proper duediligence at the commencement of, and prior to, entering into any Franchising Agreement. Further, whilst it can be tempting to cut corners, such as the cost of legal  advice, especially given the increase in the number of (and desirability of) mobile franchises (which cost less than a traditional franchise), no amount of increased protection provided by the ACCC or  any Inquiry can replace a franchisee doing all they can to protect themselves at the outset.

Carrie Peterson is the Principal Solicitor of Peterson Haines with almost 19 years’ experience in dispute resolution and commercial litigation. Carrie is also an Associate Member of the Australian  Restructuring Insolvency and Turnaround Association.

Paris Maggs is a Solicitor with Peterson Haines, with experience in dispute resolution, commercial litigation and insolvency. Paris joined Peterson Haines
in October 2017.

Peterson Haines is a modern, progressive Sydney law firm, providing expert legal advice on dispute resolution. They work with clients in a range of other industry sectors including franchising.
www.petersonhaines.com.au