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Executive summary
The Parliamentary Joint Committee on Corporations and
Financial Services inquired into the operation of Australia's Franchising Code
of Conduct (the Code) with a view to identifying justifiable improvements to
the Code. The committee has made eleven recommendations which are consistent
with its overall aim of raising the standard of conduct in Australian
franchising.
The nature of franchising
Franchising is an ongoing relationship between two separate
commercial parties, a franchisor and a franchisee. The franchising relationship
is based on a prescribed business model which is offered by the franchisor and
carried out under their guidance and oversight by franchise owners
(franchisees). The nature of franchising dictates that each party's obligations
are ongoing and variable, forming an interdependent contract that is
fundamentally based on an ongoing relationship.
Contracts of this nature underpinning the franchising
relationship can impair the viability and success of individual franchise
agreements for the following reasons:
- differing expectations about the obligations of each party to the
agreement; and
- an asymmetric power dynamic within franchise agreements, with
potential to lead to abuse of power.
Pre-contractual arrangements
The time during which a prospective franchisee is considering
entering into a franchise agreement represents the best opportunity for both
franchisee and franchisor to make an accurate and informed assessment about
whether this is the right agreement for them. Undertaking unbiased pre-agreement
education is important, but even more critical is obtaining sound legal and
business advice before entering into a franchise agreement.
The franchisor disclosure process mandated in the Code is
intended to assist, not replace, due diligence by prospective franchisees.
Better disclosure does not necessarily mean more disclosure; disclosure
documentation should be in line with Code requirements and should focus on the
provision of information which is difficult and/or expensive for the franchisee
to obtain through other means.
Recommendation 1 (paragraph
4.80)
The committee recommends that the Franchising Code of
Conduct be amended to require that disclosure documents include a clear
statement by franchisors of the liabilities and consequences applying to
franchisees in the event of franchisor failure.
This amendment would ensure that, before franchisees agree
to enter into a franchise agreement, they are aware of their liabilities in the
event of franchisor failure.
Recommendation 2 (paragraph
4.91)
The committee recommends that the government investigate the
benefits of developing a simple online registration system for Australian
franchisors, requiring them on an annual basis to lodge a statement confirming
the nature and extent of their franchising network and providing a guarantee
that they are meeting their obligations under the Franchising Code of Conduct
and the Trade Practices Act 1974.
A system of this nature would generate an annual guarantee
from franchisors that they are meeting their obligations under the Code. It would
also mean that, for the first time, a central government agency would have
useful data on how many franchises are operating in Australia.
Recommendation 3 (paragraph 4.101)
The committee recommends that the government review the
efficacy of the 1 March 2008 amendments to the disclosure
provisions of the Franchising Code of Conduct within two years of them taking
effect.
Some of the concerns about the disclosure process raised
with the committee during its inquiry should be mitigated by the 1 March 2008 amendments if they function as intended. It is too soon for the committee to
judge their efficacy at this stage.
Issues arising during franchise agreements
Although many franchise agreements result in successful and
profitable ongoing business relationships, issues arising during the term of
the agreement can cause tensions with the potential to escalate into disputes.
There are substantial practical difficulties in trying to
regulate specific elements of conduct in a franchise agreement. A useful regulatory
alternative would be the introduction into the Code of an overarching standard
of conduct in franchising.
The end of a franchise agreement
Franchise agreements can end in early termination or through
expiry and non‑renewal of an agreement. Key concerns relating to end of
term arrangements raised during the inquiry included:
- non-renewal of franchise agreements at the expiration of the
first term, including whether there should be a right to automatic renewal or
whether non‑renewal by a franchisor should only be permitted where 'good
cause' can be shown;
- the circumstances in which a franchisor should be able to
terminate an agreement, including potential abuses of current termination
provisions within the Code;
- whether a payment for the franchisee's contributed value to the
business should be mandated if the agreement is terminated or not renewed for
whatever reason;
- what happens when a franchisor fails;
- transferability of equity in the value of the business as a going
concern.
Recommendation 4 (paragraph
6.40)
The committee recommends that the government explore avenues
to better balance the rights and liabilities of franchisees and franchisors in
the event of franchisor failure.
Although the Code gives franchisors the ability to terminate
franchisees, it does not provide reciprocal termination provisions for
franchisees. In the event of franchisor failure, this can have serious
consequences for franchisees who have no avenue to exit the business.
Recommendation 5 (paragraph
6.91)
The committee recommends that the Franchising Code of Conduct be
amended to require franchisors to disclose to franchisees, before a franchising
agreement is entered into, what process will apply in determining end of term
arrangements. That process should give due regard to the potential transferability
of equity in the value of the business as a going concern.
Franchisee expectations about renewal need to be better
managed, and the financial implications of non-renewal better understood,
before fixed term franchise agreements are initially signed. Franchise
agreements should clearly stipulate what the end of term arrangements and
processes are, and these arrangements should be fully and transparently disclosed
to prospective franchisees.
Dispute resolution in franchising
Due to a lack of sound data, the true extent of disputation
in the franchising sector is difficult to determine. When disputes do occur and
cannot be resolved through internal processes, parties may choose to enter into
formal mediation. If mediation fails, litigation is an alternative (but
generally expensive) avenue for pursuing settlement.
Suggestions for improving dispute resolution outcomes
included: an increased focus on pre-mediation strategies; the creation of a
tribunal to make determinations; or the introduction of a franchising
ombudsman. But inserting another layer into the resolution process between
mediation and the courts would most likely add another layer of complexity and
expense to the process without achieving materially improved outcomes. Instead,
many of the issues which lead to franchising disputes, and hence the need for
mediation or alternative dispute resolution mechanisms, may be mitigated by the
introduction of an explicit obligation into the Code for all parties to a
franchise agreement to act in good faith.
Recommendation 6 (paragraph
7.22)
The committee recommends that the name of the Office of the
Mediation Adviser be changed to the Office of the Franchising Mediation Adviser
and that the Franchising Code of Conduct be amended to reflect this change.
This name change will aid
understanding and recognition within the sector of the role this office plays
in dispute resolution in franchising.
Recommendation 7 (paragraph
7.28)
The committee recommends that the government require the Australian
Bureau of Statistics to develop mechanisms for collecting and publishing relevant
statistics on the franchising sector.
Improved collection of statistics on franchising in Australia,
with a focus on disputes and dispute-related unit franchise turnover, will help
in developing a better understanding of how extensive disputation truly is.
Good faith in franchising
There remains concern in the sector at the continuing absence
of an explicit overarching standard of conduct for parties entering a franchise
agreement. The interdependent nature of the franchise contract leaves the
parties to the agreement vulnerable to opportunistic conduct. The committee is
of the opinion that the optimal way to provide a deterrent against
opportunistic conduct in the franchising sector is to explicitly incorporate,
in its simplest form, the existing and widely accepted implied duty of parties
to a franchise agreement to act in good faith.
Recommendation 8 (paragraph 8.60)
The committee recommends that the following new clause be
inserted into the Franchising Code of Conduct:
6 Standard of Conduct
Franchisors, franchisees and
prospective franchisees shall act in good faith in relation to all aspects of a
franchise agreement.
Enforcement of the Code
Many franchisees made submissions to the inquiry outlining
perceived inaction by, and ineffectiveness of, the Australian Competition &
Consumer Commission (ACCC) in pursuing complaints against franchisors who are
alleged to be in breach of the Code.
The ACCC is responsible for administration of the Trade
Practices Act 1974 (TPA), and its role extends to litigating in
circumstances where it can substantiate evidence that the TPA, including the
Code, has been breached. The ACCC is not, however, responsible for prosecuting
franchising disputes that relate to contractual disputes. Increased education
efforts by the ACCC about its role would assist in bridging the expectation gap
that seems to exist amongst franchisees. Notwithstanding the limitations of the
ACCC's role, there also appears on the face of it to be room for improvement by
the regulator in taking a more active role in the franchising sector.
Recommendation 9 (paragraph
9.35)
The committee recommends that the Trade Practices Act
1974 be amended to include pecuniary penalties for breaches of the Franchising
Code of Conduct.
The introduction of these penalties would assist the ACCC in
its enforcement role by providing a greater deterrent for conduct that
contravenes the Code.
Recommendation 10 (paragraph
9.37)
The committee recommends that consideration be given to
amending the Trade Practices Act 1974 to provide for pecuniary penalties
in relation to breaches of section 51AC, section 52, and the other mandatory
industry codes under section 51AD.
Similar penalties may be of assistance in improving conduct
beyond franchising.
Recommendation 11 (paragraph
9.39)
The committee recommends that the ACCC be given the power to
investigate when it receives credible information indicating that a party to a
franchising agreement, or agreements, may be engaging in conduct contrary to
their obligations under the Franchising Code of Conduct.[1]
This provision would assist the ACCC in taking investigative
action in cases when franchisees fear retribution if they provide information
directly to the regulator.
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