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Chapter 3
Franchising in Australia
The Australian franchising sector
3.1
Although the franchising model has become increasingly popular in Australia,
the absence of an official register of franchisors makes it difficult to glean
highly accurate statistical information on the franchising sector. The limited available
data on the franchising sector is primarily derived from willing respondents to
industry surveys, meaning that estimating trends and patterns across the entire
sector can be problematic. Another factor that needs to be considered is that the
results from these surveys are composed only from information provided by franchisors,
which can potentially skew the results on contentious issues, such as disputes.
3.2
The Australian Competition & Consumer Commission (ACCC) commented
that the shortage of statistical data on franchising 'contrasts with the level
of information available about general business demography in Australia',
noting that more comprehensive data would improve the effectiveness of its
enforcement role and allow for a more informed debate about the sector. The
ACCC recommended that:
The committee consider the targeted collection and publication
of information about the franchising sector to assist the ACCC, other
government agencies, franchisees and prospective franchisees to better
understand franchising.[1]
3.3
Presently, the Australian Bureau of Statistics (ABS) collects only
limited data on franchising in Australia through its survey on business
characteristics. The information collected is restricted to the proportion of
businesses surveyed that identify as being involved in franchising as either a
franchisor or franchisee.[2]
The committee makes a recommendation relating to the ABS's collection of data on
franchising at paragraph 7.28, in the context of franchising dispute levels and
mediation.
3.4
With that qualification, a brief statistical snapshot of the franchising
sector in Australia is presented below. The majority of the information has
been extracted from a biennial survey undertaken by the Asia-Pacific Centre for
Franchising Excellence within Griffith University. The survey is sponsored by
the Franchise Council of Australia.
Franchise numbers and size
3.5
As indicated in the previous chapter (paragraph 2.4), the Franchising
Australia 2008 Survey reported that there were approximately 1100 business
format franchisors in Australia. This has been estimated as being one franchise
for every 20,000 citizens, around five times the density of franchise systems
as exists in the United States.[3]
Sizes of franchise systems in Australia ranged from one to 2950 units. They
vary in size from multinational franchise systems with thousands of franchisees,
such as McDonald's, through to fledgling operations with just one or a handful
of units operating under the franchise system. Survey responses indicated that the
median number of franchise units per franchise was 20. According to the survey authors:
This means that half the sample of franchisor respondents holds
very small systems which will not be economically sustainable unless the
systems continue to grow.[4]
3.6
The ABS business characteristics survey indicates that five per cent of
businesses identified themselves as franchisees, and one per cent identified
themselves as franchisors. Businesses employing between 20 and 199 people were
most likely to be franchisees (10 per cent), and four per cent of businesses
employing over 200 people identified as franchisors.[5]
Types of businesses
3.7
The Franchising Australia 2008 Survey indicates that 28 per cent of
franchisors are involved in retail trade, followed by 16 per cent in
accommodation and food services, and 15 per cent in administration and support
services. From a franchise unit perspective, the survey indicates that there
are more units per franchisor in the accommodation and food services industry
than the other two categories. It should be noted, however, that the
arbitrariness and breadth of business types within each industry classification
diminishes the value of these figures. For instance, cleaning and gardening
services are categorised with travel agents, while pet services and mechanics
find themselves situated together in a separate category called 'other'.[6]
Age of franchise systems
3.8
Offering more clarity are the survey's figures on the length of time
franchise systems had been in existence. Approximately one third commenced
franchising in the 1990s, one third from 2000-2005 and one fifth since 2006.
3.9
A conclusion that may be drawn from these statistics is that the vast
majority of extant franchise systems in Australia have commenced operation
during a period of economic prosperity. They have also commenced in a period
during which franchising regulation has been in place.[7]
3.10
The survey further found that a substantial portion (nearly one third)
of franchisors begin franchising very early in the life of their business. Some
14 per cent of survey respondents operated for just one year before launching
their franchise system, and a further 17 per cent franchised either immediately
or within their first year of operation.[8]
Franchise system exit data
3.11
A contentious aspect of statistical information on the sector is the
extent to which franchisors exit franchising. Few statistics are available on
this given that the Franchising Australia survey does not specifically outline
the number of new entrants in the survey, from which the number that have
exited since the previous survey could be determined. Ms Jenny Buchan has noted
that:
Griffith University conducts the biannual [sic] franchising Australia
survey. The Griffith database records the former franchisors that are no longer
contactable two years later but this is not a matter of public record.[9]
3.12
Mr Jason Gehrke of the Franchise Advisory Centre has commented that the
rate of exits may be significant:
When releasing the Franchising Australia 2006 survey findings at
the Franchise Council national conference on October 21 that year, the authors
specifically commented on the number of entrants and exits when compared with
the previous survey. While the overall number of franchise systems in Australia
had increased by approximately 100 from 2004 to 2006, this increase was made up
of 200 new entrants and 100 franchisors that had ceased franchising since the
2004 survey. In other words, for every two new franchisors, one franchisor
exited over a two-year period, accounting for a loss of almost 12% of the 850
franchisors identified in the 2004 survey.[10]
3.13
A possible explanation for franchisor exit is that, particularly for
those who may have entered franchising without significant experience of brand
development, success proved more difficult to attain than they had initially
expected.
3.14
Using a comparison between franchisors listed in a franchising
publication from 1998 and the Franchise Advisory Centre's current database,
Gehrke estimated that 30 per cent of the 1998 franchisors had ceased to
franchise, and most appeared not to be operating in any capacity any more.[11]
Franchisee characteristics
3.15
Franchisees are mostly aged between 30 and 50, with just fewer than half
being sole owners and a similar figure being husband and wife operators.[12]
Only 43 per cent were reported to have independent business experience, half of
these in the same industry. Prior to becoming franchisees, around 40 per cent
had no salaried experience in the same industry or business experience of any
kind.[13]
3.16
These findings are consistent with anecdotal evidence put to the
committee. Typically, franchising attracts so-called mum and dad investors who
want to get into business but, lacking relevant experience, feel a sense of
security from having an established franchise brand and system behind them.
Franchisee turnover
3.17
The Franchising Australia survey reported that most initial terms of
agreement are for fixed five (67 per cent) or ten (17 per cent) year terms.[14]
These agreements carried a median initial fee for accessing the system of
$30,000.[15]
With respect to agreement renewal, the Franchising Australia survey reported
that:
Over half the franchisors (52 per cent) reported that 98 per
cent of their franchisees had renewed their agreements upon expiration of the
initial term. Only 5 per cent of franchisors indicated that none of their
eligible franchisees had renewed. Overall, franchise agreement renewal was
standard practice in the sector.[16]
3.18
The survey did not provide information on the 43 per cent of franchisors
that fell somewhere in the middle of having almost all their eligible
agreements renewed and those that had none.
3.19
The Franchising Australia 2008 Survey also reported that the median time
franchisees remained in a system was seven years, which could indicate that a
significant proportion of franchise agreements are not being renewed.[17]
Interestingly, the committee heard from one witness that seven years also equates
to the amount of time it takes to recoup a franchisee's initial investment: '...
seven years is the standard payback period'.[18]
3.20
By way of comparison, the 1998 franchising survey stated that 55 per
cent of fixed term agreements were for five years and 27 per cent for ten,
suggesting that a shift in preference for five instead of ten year terms has
occurred in the past decade. The proportion of franchisors using perpetual
agreements was virtually unchanged at below ten per cent.[19]
Data from earlier periods was unavailable. From an anecdotal perspective, Mr Robert
Gardini told the committee that previously in the motor vehicle dealership
sector franchise agreements were often evergreen; they had no fixed terms. He
indicated a trend over time such that these agreements have now been replaced
with fixed term agreements, some of which are as short as 12 months in duration.[20]
Dispute levels
3.21
A relatively high 17 per cent of franchisors reported having been in a
dispute with at least one franchisee that was referred to an external adviser,
though this was down from 35 per cent in 2006.[21]
The survey stated:
Major causes of substantial disputes were compliance with the
system (66 per cent), profitability (37 per cent), territorial issues (21 per
cent), communication problems (18 per cent) and fees (16 per cent).[22]
3.22
The strong possibility that non-respondents to this survey are more
likely to be involved in disputes with franchisees must be considered. Further,
62 of 286 franchisor respondents to the survey did not answer the question
about disputes, which would suggest an underestimation of the level of disputes
within the sector.[23]
Regulatory and representative bodies in Australian franchising
3.23
Following is a list of the regulatory and representative bodies for the
franchising sector in Australia who were involved in this inquiry.[24]
Australian Competition &
Consumer Commission (ACCC)
3.24
The ACCC is an independent statutory authority responsible for enforcing
the Trade Practices Act 1974 as it applies to the franchising sector.
Its role is to ensure compliance with the Franchising Code of Conduct (the
Code) and the TPA through education, liaison and, where necessary, enforcement
action. To this end, it develops educational and compliance materials such as
guidelines, articles and fact sheets, and gives presentations in each state and
territory.[25]
Office of the Mediation Adviser
(OMA)
3.25
The OMA is a government funded body established in 1998, when the Code
first came into effect. The role of the OMA is to appoint mediators to assist
franchisors and franchisees in resolving their disputes without going to court.[26]
However, franchising parties in dispute do not have to use an OMA mediator;
they can use an alternative mediator if both parties agree.
Department of Innovation, Industry,
Science and Research (DIISR)
3.26
DIISR provides policy advice to the Minister for Small Business,
Independent Contractors and the Service Economy on franchising matters. As part
of its role, DISSR monitors industry representations and statistics produced by
the OMA, with the objective of identifying any systemic problems in the
franchising sector that impede the operation of the Code.[27]
Franchise Council of Australia
(FCA)
3.27
According to its website, the FCA is the peak industry body representing
franchisors, franchisees, service providers and suppliers involved in franchising.
It is a nationally incorporated not-for-profit association which was
established in 1983. Membership of the FCA is voluntary and is open to any
organisation or individual involved in the franchise sector, including
franchisees, franchisors, lawyers, accountants, banks, consultants, academics
and publishers.[28]
Franchisees Association of
Australia Inc (FAAI)
3.28
The FAAI is a voluntary organisation which exclusively represents
franchisees. The majority of FAAI board members are either current or past
franchisees or are representatives of organisations that have franchisees as
members. The FAAI is a collective organisation, with a number of affiliated
organisations.[29]
3.29
A number of industry-specific representative bodies also participated in
the inquiry, including:
Franchising regulation in Australia
3.30
Franchising in Australia is regulated under the Trade Practices Act
1974 (TPA) and the Trade Practices (Industry Codes – Franchising)
Regulations 1998, which contains the Franchising Code of Conduct. Section
51AD of the TPA prohibits corporations from contravening an applicable industry
code. Section 51AE of the TPA provides for the making of regulations to
prescribe an industry code and to declare an industry code as mandatory or
voluntary. The Trade Practices (Industry Codes – Franchising) Regulations
1998 establishes the Franchising Code of Conduct as a mandatory industry
code that binds parties to franchise agreements.
Franchising Code of Conduct
3.31
The Franchising Code of Conduct (the Code) came into effect as a
mandatory code, enforceable under section 51AD of the TPA, on 1 July 1998. Its purpose 'is to regulate the conduct of participants in franchising
towards other participants in franchising'.[30]
The provisions of the Code are described briefly as follows.
Disclosure
3.32
Part 2 of the Code establishes the requirement for franchisors to
provide certain information to prospective or renewing franchisees in a
disclosure document, no less than 14 days before the agreement is entered into
or renewed. This material must be read and understood by the franchisee. The
franchisor must also provide to the franchisee a copy of the Code and a copy of
the franchise agreement in the form in which it is to be executed. In turn, the
franchisor must receive a written statement from franchisees that the
disclosure document has been read and understood, and a written statement from
prospective franchisees that they have sought independent expert advice (or
have been told that such advice should be sought but have elected not to seek
it).[31]
3.33
Information that must be disclosed in accordance with Part 2 of the Code
includes:
- details of the franchisor's business experience;
- history of litigation relating to the franchisor's business
dealings;
- existing franchisees operating within the franchise network;
- the details of franchises that have ceased to operate or changed
hands in the past three years;
- intellectual property rights;
- exclusivity of territory;
- rights and obligations concerning the supply of goods or
services;
- history of the franchise business in that location/area;
- details of compulsory marketing funds;
- various payments the franchisee is required to make;
- obligations of both parties; and
- financial details of the franchisor.[32]
Conditions of the agreement
3.34
Part 3 of the Code stipulates certain conditions relating to the
franchise agreement. It establishes a cooling off period, ensures that
franchisees are allowed to form associations with other franchisees, and sets
out disclosure requirements concerning marketing funds and change of franchisor
ownership. Part 3 also addresses the rights and obligations of the parties with
respect to transferring the franchise and terminating the franchise agreement.[33]
Dispute resolution
3.35
Part 4 sets out the procedures for resolving franchising disputes. The
Code states that mediation must take place where a dispute cannot be resolved
between the parties themselves and either party refers the matter to a
mediator. The mediation adviser, appointed by the Minister in accordance with
section 25 of the Code, appoints a mediator of their choice where the parties
cannot agree to a mediator on their own. The parties (or their representatives)
must attend mediation to attempt to resolve the dispute, though no requirement
to participate in good faith exists within the Code. If, after 30 days of
unsuccessful mediation, either party asks the mediator to terminate the mediation,
this must occur. The Code does not provide for the mediator to make a determination
about the merits of each party's case in the event of failed mediation.[34]
Relevant Trade Practices Act provisions
3.36
The conduct of parties to franchise agreements is also regulated by
relevant provisions of the TPA governing conduct in commercial activities.
These are:
- section 51AC prohibiting unconscionable conduct;
- section 52 prohibiting misleading or deceptive conduct;
- section 53 prohibiting making false or misleading representations
about the supply of goods or services; and
- section 59 making false or misleading representations about the
profitability or risk or other material aspect of any business activity.
3.37
Where the court is satisfied that any of these provisions have been
contravened, the TPA provides for courts to grant an injunction (section 80),
allow an action to recover the amount of loss or damage (section 82), or make
an order to vary the contract (section 87).
3.38
Section 51AC governing unconscionable conduct prohibits parties in trade
and commerce from engaging in 'conduct that is in all the circumstances,
unconscionable'. The provision does not seek to define what constitutes
unconscionable conduct in statute, though it does list a number of matters courts
may have regard to in determining unconscionability. These include the
requirements of an applicable industry code, the extent of negotiation of a
contract and the extent to which the parties acted in good faith.
3.39
The committee notes that, at the time of tabling this report, the Senate
Standing Committee on Economics was conducting an inquiry into the need for a
statutory definition of unconscionable conduct and the scope and content of any
such definition.
3.40
The ACCC is responsible for 'compliance with the Act and the code by
education, liaison and, where necessary, enforcement action'.[35]
The ACCC investigates potential breaches of the TPA and may commence
proceedings in the Federal Court if it deems there is sufficient evidence to
support successful litigation.[36]
Private actions seeking remedy for alleged breaches of the TPA may also be
taken to the Federal Court.
Relevant case law
Ketchell v Master Education
Services Pty Ltd
3.41
Ketchell v Master Education Services Pty Ltd (Ketchell) centred
on whether or not a technical breach of clause 11 of the Franchising Code of
Conduct rendered the agreement illegal and unenforceable. A requirement of clause
11 of the Code is that an agreement cannot be entered into until the franchisee
has provided the franchisor with written acknowledgement that the disclosure
document and the Code have been received, read and had an opportunity to be
understood. In Ketchell, the franchisor failed to ensure the franchisee had
provided this document before entering into their franchise agreement. The
franchisee, Mrs Ketchell, argued that the franchisor was not entitled to
receive disputed payments under the agreement because it had breached the Code.[37]
3.42
On appeal to the NSW Court of Appeal, the court adopted the strict
common law rule that courts cannot enforce a contract prohibited by statute,
concluding that the clause 11 breach rendered the whole agreement illegal and
void, making the terms of the agreement unenforceable.[38]
However, the High Court subsequently reversed this decision, finding that it is
not the intention of the TPA to automatically make void any franchise agreement
in which there has been a technical breach of the Code. The court held that:
Section 51AD [of the TPA] does not in its terms prohibit the
making of a franchise agreement where a franchisor has not complied with the
Code. That section and the Code are concerned with the regulation of the
conduct of participants in the franchising industry; in particular the conduct
of franchisors. It is not to be inferred from a purpose which promotes or
prescribes better and fairer business practices that contractual relations
between parties will be affected.[39]
Hoy Mobile Pty Limited v Allphones
Pty Ltd
3.43
The High Court's decision had followed similar reasoning in Hoy
Mobile Pty Limited v Allphones Pty Ltd (Allphones). In this case, the
franchisor argued that, on the basis of the NSW Court of Appeal's judgement in
Ketchell, the agreement should be considered void because it (the franchisor)
had itself breached the Code. The rationale behind the franchisor's argument
was to sidestep its obligations under the agreement through its own breach of clause
11. The court rejected this, stating that the purpose of the Code is to protect
franchisees, rather than to prevent them from being able to enforce the terms
of their franchise agreement because of a technical breach of the Code.[40]
Implications for the franchising
sector
3.44
The NSW Court of Appeal's strict approach in Ketchell seems to have been
rejected, but uncertainty about the implication of technical breaches of the
Code remains. While such breaches seemingly do not automatically render a franchise
agreement illegal and void, it is still not clear as to the appropriate
remedies, available through the TPA, to be applied for minor breaches of the
Code.[41]
Franchisors that do not observe the letter of the law when complying with the
Code, or do not retain appropriate evidence of same, are in a potentially
vulnerable position in the event of a dispute with a franchisee.[42]
Other mandatory industry codes
3.45
Two other prescribed mandatory industry codes have been established
under section 51AE of the Trade Practices Act 1974 (TPA). They are the
Oilcode and the Horticulture Code.
Oilcode
3.46
The Trade Practices (Industry Codes – Oilcode) Regulations 2006
(the Oilcode) came into effect on 1 March 2007. It operates as a mandatory
industry code under section 51AE of the TPA and replaced the repealed Petroleum
Retail Marketing Sites Act 1980 and Petroleum Retail Marketing Franchise
Act 1980.[43]
3.47
The Oilcode regulates the conduct of suppliers, distributors and
retailers in the downstream petroleum retail industry. It was implemented to establish
the following:
- consistent and transparent approaches to terminal gate pricing
and fuel re‑selling agreements;
- standard contractual terms for supplier-retail re-selling
agreements; and
- an independent dispute resolution scheme.[44]
3.48
As with the Franchising Code of Conduct, the ACCC is responsible for
administering the legislation under which the Oilcode operates. The Oilcode's
effectiveness is also monitored by the ACCC.[45]
3.49
The most relevant aspect of the Oilcode to this inquiry is the dispute
resolution scheme. Under section 41 of the Oilcode, the Minister is required to
appoint a Dispute Resolution Adviser (DRA). This person must arrange mediation
or other assistance where the relevant parties cannot resolve the dispute
themselves and is granted the authority to make a non-binding determination
about the dispute.[46]
Section 45(1) also stipulates that mediation and assistance provided in accordance
with the Oilcode must be carried out in good faith.
3.50
These dispute resolution processes do not restrict parties to the
dispute from making direct complaints to the ACCC or pursuing litigation.[47]
Horticulture Code
3.51
The Trade Practices (Horticulture Code of Conduct) Regulations 2006
(the Horticulture Code) came into effect on 14 May 2007. It regulates participants in the horticulture industry and was implemented to achieve the
following objectives:
- provide greater clarity and commercial transparency between
growers and wholesale traders; and
- establish a dispute resolution scheme.[48]
3.52
The dispute resolution procedure provisions stipulate the circumstances
in which a mediator may be appointed to resolve disputes. In contrast to the
Oilcode, the Horticulture Code does not oblige the parties to mediate in good
faith, and the appointed mediator may terminate the mediation if it is unlikely
to resolve the dispute.[49]
State regulation
3.53
Although franchising is directly regulated by Commonwealth legislation
and regulation, redress where unfair contracts have been entered into has also been
available in New South Wales under state legislation. Mr Gardini told the
committee that difficulties for motor dealers accessing remedies under section
51AC of the TPA could until recently be circumvented using NSW industrial
relations legislation:
Previously the issues of good faith and unconscionable conduct
could be dealt with to some extent in the application of the unfair contracts
provision in part 9 of the Industrial Relations Act 1996 of New South Wales.
Remedies under section 106 of the IRA give the Industrial Relations Commission
the power to vary or find void contracts which are deemed to be unfair.
However, this avenue was significantly diminished when the High Court’s
decision in Fish v Solution 6 Holdings held that the jurisdiction of the
commission only extended to contract disputes whereby a person performs work in
an industry. Since this decision in 2006 the trend has been to exclude the
application of section 106 to commercial contracts. This has meant that the
majority of motor vehicle dealers in New South Wales who may once have been
able to seek remedy through the commission will now have to use alternative
recourse unless they can satisfy the requisite jurisdictional elements of
section 106.[50]
3.54
State-based retail tenancy laws are also relevant to franchising parties,
outlining the rights and obligations of landlords and tenants entering into a
tenancy agreement for designated retail premises. Provisions within these acts
include disclosure requirements, end of term arrangements, minimum terms, the prohibition
of certain conduct, rent negotiation, transfer arrangements and dispute
resolution procedures.[51]
Committee view
3.55
Taking into consideration the fact that many franchise systems operate
across multiple state jurisdictions, the committee believes that franchising is
most appropriately and usefully regulated at the Commonwealth level.[52]
Background to the current regulatory system
3.56
The following section contains a brief description of the various
reviews, recommendations, guidelines, regulations and amendments that have
preceded the regulatory framework governing franchise agreements extant in
2008. It is notable for the fact that some of the contentious issues raised during
this inquiry were identified by the parliament as long as 30 years ago, when
franchising was in its infancy.
Swanson and Blunt reviews
3.57
Major reviews of the TPA in 1976 (Swanson Committee) and 1979 (Blunt
Committee) identified problems in the regulation of franchise agreements.[53]
The Swanson Committee focused primarily on the issue of compensation to
franchisees for goodwill on termination or non-renewal of their agreement by
the franchisor, recommending a right to fair and equitable compensation.[54]
The Blunt Committee addressed a wider array of issues, identifying pre-agreement
disclosure, compensation for unjustified termination and transfer between
franchisees as 'principal problems'. It recommended amendments to the TPA to
mandate certain disclosure; stipulate the circumstances in which agreements
could be terminated; provide rights to franchisees with respect to transferring
the franchise to another person; and apportion goodwill upon termination or
non-renewal of an agreement by the franchisor.[55]
Exposure drafts of a franchising
bill
3.58
In 1986 two draft bills were prepared in an attempt to enact specific
franchising legislation. The first draft contained a number of provisions that encapsulated
and added to the recommendations contained in the Swanson and Blunt reviews. It
sought to establish a comprehensive disclosure regime and cooling off period; prohibit
unilateral contract variations; set out the right to transfer interests; and
stipulate termination and non-renewal procedures (including minimum notice
periods). It did not provide for automatic rights of renewal or entitlement to
payments for goodwill at the end of an agreement, nor did it seek to prescribe
the circumstances in which termination could occur.[56]
The second draft bill pared back the provisions contained in the first,
omitting the provisions on termination and non-renewal and curtailing the
prohibition of unilateral variations of the agreement.[57]
The bill was not enacted.
Beddall Committee report
3.59
In 1990, the House of Representatives Standing Committee on Industry,
Science and Technology (Beddall Committee) conducted a broad inquiry into small
business regulation.[58]
The committee recommended that franchise-specific legislation be reconsidered
to 'ensure fair dealing' between franchising parties, providing for pre‑agreement
disclosure, cooling off period, conditions applying to alterations of
agreements and conditions for the termination/renewal or transfer of
franchises.[59]
Voluntary franchising code of
practice
3.60
A voluntary franchising code of conduct was introduced in 1993. Administered
by the Franchising Code Administration Council Ltd (composed of representatives
of franchisors, franchisees and the government), it reflected the Beddall
Committee recommendations by including provisions on disclosure to franchisees,
a cooling off period, standards of conduct based on unconscionability, and
dispute resolution procedures.[60]
Reid Committee report
3.61
In 1997, the House of Representatives Standing Committee on Industry,
Science and Technology (Reid Committee) held an inquiry into 'business conduct
issues arising out of commercial dealings between firms'.[61]
The Reid Committee report recommended specific franchising legislation
'providing for compulsory registration of franchisors and compliance with codes
of practice'.[62]
The committee made their recommendation on the basis that 'self-regulation has
not worked in part because it does not provide a viable regulatory strategy
when there is such a disparity in the powers of the parties'.[63]
The following year, a Franchising Code of Conduct was introduced as a mandatory
industry code enforceable under the TPA.
3.62
Another important recommendation was for a new provision within the TPA
to extend the unconscionability protection available to consumers to small
business, which later became section 51AC of the Act.[64]
However, the section 51AC provision does not reflect the committee's suggestion
that 'unfair' conduct be prohibited, instead retaining the more narrowly
applicable term 'unconscionable'.
Mandatory code of conduct
3.63
The provisions of the Franchising Code of Conduct are described above starting
at paragraph 3.32. As far as the transition from a voluntary to mandatory code
is concerned, the most notable difference was the discarding of the standard of
conduct provisions contained in clause 12 of the voluntary code when it became a
mandatory code enforceable under section 51AD of the TPA in 1998.[65]
It should be noted, though, that parties to a franchise agreement are subject
to the unconscionability provisions under section 51AC of the TPA, also enacted
in 1998.
Matthews Review and subsequent
amendments to the Code
3.64
In June 2006, the then Minister for Small Business and Tourism, the
Hon. Fran Bailey MP, announced a review into the disclosure provisions
contained in Part 2 of the Franchising Code of Conduct (Matthews Review).
Completed in October 2006, the Matthews Review recommended a number of
amendments to the Code. The government consequently amended the Code to require
franchisors to:
- disclose materially relevant facts throughout the agreement within
a shorter period (14 days instead of 60);
- provide a copy of the franchise agreement in the form it is to be
executed;
- disclose the history of the franchise site;
- disclose the contact details of former franchisees for the last
three financial years (except where a former franchisee has requested in
writing that their details not be disclosed); and
- where the franchisor is a consolidated entity, provide audited
financial reports for the last two years on request.[66]
3.65
These amendments came in to force on 1 March 2008.
3.66
The government also rejected a number of the recommendations in the
Matthews Review. The most notable of these were the recommendations for
inserting a good faith clause in the Code; requiring franchisors to provide a
risk statement in the disclosure document; amending the code to prevent
unilateral changes to the agreement; and prescribing the registration of
disclosure documents.[67]
WA and SA inquiries
3.67
In April 2008 the Western Australian state government undertook an
inquiry into the fairness of franchise agreements. The report included
recommendations to improve franchisor disclosure and end of agreement
arrangements, review mediation processes for resolving disputes, introduce
specified penalties for breaches of the Code and establish a dedicated
franchising enforcement branch within the ACCC.[68]
In May 2008 the South Australian parliamentary Economics and Finance Committee
also tabled a report on the efficacy of the laws regulating the
franchisee/franchisor relationship. This adopted a stronger position on
legislative reform than the WA government's report. The SA parliamentary committee
concluded that a number of improvements to the regulation of franchising were
needed, including the following recommendations:
- establishing a federal registration scheme for franchise
disclosure documents;
- including risk statements in disclosure material;
- introducing specific penalties for breaches of the disclosure
provisions in the Code;
- amending section 51AC of the Trade Practices Act to include a
statutory definition of unconscionable conduct;
- mandating more effective mediation and providing alternative
dispute resolution avenues;
- amending the Franchising Code of Conduct to include a requirement
to act in good faith; and
- putting a requirement in the Code for franchise agreements to
'include the basis on which termination payments or goodwill or other such exit
payments will be paid at the end of the agreement'.[69]
Franchise-specific legislation
3.68
As referred to above, a specific act dealing with franchising has been
proposed in the past to address the pressing regulatory issues affecting the
franchising sector at the time (see paragraph 3.58). Rather than creating a new
act, a mandatory industry code enforceable under the TPA was introduced to
regulate franchising conduct. The committee does not propose to consider the potential
for parliament to pass a new act to deal exclusively with franchising.
Committee view
3.69
The committee believes that, by making the improvements to the Code that
are recommended in the remainder of this report and by allowing time for the 1 March 2008 amendments to the Code to have an impact, the existing regulatory
framework is developing into the most appropriate mechanism for fostering
franchising in Australia.
3.70
The committee further believes that the Code, and associated legislation
(the TPA), will need to remain dynamic and subject to review as the franchising
sector evolves.
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