The franchise industry in Australia is valued at over $130 billion with the recent Wein Report commissioned by the Federal government they probably want to show how much they care about the sector. Despite the impeding election, the Federal Government has recently undertaken a review of current franchising law, presumably as a sign that it has a continuing interest in protecting the rights of the small business sector.
What about microeconomic reform? A reduction in red tape associated with the establishment of a small business, and increasing access to funding from a banking sector only interested in property as collateral may all provide more material assistance to the small business sector? We can probably assume that these changes are much more difficult to implement. So, proposing further amendments to the Franchising Code of Conduct (“the Code”) on the other hand is all the government has come up with.
Frequent changes to the Code cause confusion and uncertainty in the sector, as illustrated by the controversy over the potential for South Australia to develop its own Franchising Code under the auspices of the Small Business Commissioner that arose in late 2011.
There was a review of the Code only three years ago, which resulted in further amendments to the Code in an attempt to improve protections for franchisees.
Apparently there were defects in those recent amendments because here just three years later and the Federal Government has just completed yet another review. The result, a report making 18 new recommendations to improve protections for franchisees under the Code by experienced Melbourne-based mediator Mr Alan Wein. (For Mr Wein’s full Review of the franchising code, follow the link here.)
The Wein report makes the following main recommendations:
• An express obligation on the parties to act in good faith
• A stronger enforcement regime for Franchising Code breaches, with specific monetary penalties
• Improved franchisor disclosure
• Revised dispute resolution procedures
KEY SUMMARY OF WEIN’S RECOMMENDATIONS
Disclosure
It is recommended that the Code be amended to include the following new matters:
• Franchisors to notify franchisees of their intention to renew and provide fresh disclosure documents when providing this notice
• Online sales are subject to additional disclosure obligations
• A generic risk statement to prospective franchisees is to be prepared, summarising key risks and issues in operating a franchise
• The option of short form disclosure is to be abolished
Financial Matters
These recommendations are aimed to prevent franchisors from acting unconscionably in relation to financial matters, including:
• A prohibition against requiring franchisees to undertake ‘unreasonable significant unforeseen capital expenditure’ – a recommended change that could significantly reduce the capacity of franchisors to undertake a rebrand of their franchises
• Imposing further reporting and regulatory requirements on franchisors in relation to the franchisor’s marketing fund, including an annual audit of the marketing fund statement
Transfer, Renewal or End of a Franchise Agreement
• Conferring a specific right for the franchisee/franchisor to terminate a franchise agreement when an administrator is appointed to the other party
• Providing that franchisors are entitled to have all information required to be able to consider a franchisee’s request to transfer or novate the franchise agreement, before the franchisor is “deemed” to have granted consent
• Restraint of trade clauses cannot be enforced against the franchisee in certain circumstances where the franchise agreement has not been renewed by the franchisor – a recommendation that could have very significant implications for franchise network across Australia
Dispute Resolution
The report recommends a prohibition on franchisors to attribute legal costs in relation to dispute resolution, unless by court order.
Further, to avoid forum shopping to allow the franchisor to impose additional legal costs on franchisees, the franchisor cannot litigate outside of the franchisee’s jurisdiction.
Good Faith
The report recommends the introduction of an express obligation of good faith for both the franchisee and franchisor. This has been discussed for many years and there was a question whether this was implied by the common law in any case. This recommendation intends that this implied obligation become explicit.
Enforcement
The report recommends increasing enforcement powers of the ACCC and courts in relation to breaches of the Franchising Code. For example, civil pecuniary penalties of up to $50,000 may be imposed for breaches of the Franchising Code.
REIN IT IN, THE ELECTION WILL DECIDE – LABOR OR LIBERAL?
It is somewhat ironic that the report has concluded and submissions made just before the announcement of the Federal election, which will take place on 7 September 2013. If the Rudd Labor wins the election, the recommendation make by the Wein report are likely to be implemented. If the Abbott Liberal government wins the election, the recommendations are likely to be put on the backburner or at worst be substantially revised before any amendments to the Code are even considered.
The current situation is therefore rather ironic. Another layer of regulatory uncertainty hangs over the small business sector, in part caused by a government expressing its interest in protecting and nurturing the sector. This is not a positive for the sector, although the long-term benefits of finally getting the Code “right” may flow in time. Hopefully this is the last round of proposed amendments for at least several years.
This is the message coming from the Franchising Council of Australia submission made in response to the report, – For Mr Wein’s full Review of the franchising code, follow the link here.)
Once the election result is known, those involved in the sector will be in a much better position to assess the outcome of any potential legislative changes to the sector. Until then, much of the current discussion regarding changes to the Code are speculative at best and participants in the sector should assume the current Code will continue at least until mid-2014.