Franchising Code of Conduct

Key issues:

• The Parliamentary Joint Committee on Corporations and Financial Services released its report entitled “Fairness in Franchising”.
• The Report recommends an overarching franchising framework that attempts to be fair for all participants.
• If you are not already doing so as a franchisor or franchisee, we strongly encourage all documentation exchanged during the franchisee-franchisor relationship to be reviewed by an appropriate advisor.

After a year in the making, the Parliamentary Joint Committee on Corporations and Financial Services (Committee) released its report entitled “Fairness in Franchising” (Report) on 14 March 2019. The Report listed over 70 recommendations, including substantial changes to the Franchising Code of Conduct (Franchising Code) and increasing the responsibilities and powers of the Australian Competition and Consumer Commission (ACCC) in relation to franchises. 

As a business structure, franchising exhibits a substantial disparity in power between franchisors and franchisees. This power imbalance is inherent to the structure, given that the franchisor owns the business model and has control over operations and franchisee contracts. The Report recommends an overarching franchising framework that attempts to be fair for all participants and which recognises that in franchising (just like banking and financial services, as recently uncovered in the Banking Royal Commission disclosure alone is an insufficient regulatory response to power imbalances and exploitative behaviour by powerful corporations.

After conducting public hearings across the country (and with input from franchisors, franchisees, industry experts and industry associations), the Committee found that it needed to improve: 

• the awareness of prospective franchisees and ensure they have access to appropriate legal and business advice prior to entering a contract; and 
• the accuracy and meaningfulness of the information provided to prospective franchisees. 

Recommendations

Disclosure has been the principal protection for franchisees. However, the Committee discovered the extent and breadth of misconduct and exploitation by franchisors, demonstrating that disclosure and transparency alone, while vitally important, are an insufficient response to power and information asymmetry. Accordingly, most of the recommendations are designed to curtail this misconduct and exploitation. 

The recommendations related to:

1. creating a Franchising Taskforce to assist with implementing the Report’s numerous recommendations;
2. further development of an industry association;
3. increasing disclosure, both prior to and during the franchise relationship;
4. creating a public franchise register;
5. increasing transparency regarding third line forcing, including by disclosing supplier rebates and commissions;
6. whistleblower protections, similar to those recently published; 
7. cracking down on unfair contract terms;
8. clarifying the cooling off period available to franchisees;
9. providing additional exit rights to franchisees;
10. allowing franchisees to undertake collective action;
11. adding binding arbitration as a method of dispute resolution;
12. aligning industry codes by adding civil pecuniary penalties for breaches of the Franchising Code, similar to Australian Consumer Law;
13. intervening in egregious cases of churning (repeated sale of failed franchise location) and burning (continually opening new, likely unviable, outlets to benefit from upfront fees);
14. increasing education and resources available to franchisees; and
15. encouraging clarity regarding retail lease arrangements.

For the franchisee

As a franchisee, the recommendations are designed to redistribute the power imbalance inherent in the franchisor-franchisee relationship so that it is further in favour of the franchisee. The Committee heard many instances of misconduct and exploitative behaviour by the franchisors, and consequently drafted many of the recommendations to attempt to prevent this type of behaviour in the future. 

While the recommendations are optimistic for the franchisees, it is unclear at this stage how many of these recommendations will be put into a legally enforceable framework and how long that may take. We note that some of the recommendations, such as a public register of franchise documents, have been submitted in previous reviews but ultimately rejected by government. 

For the franchisor

As a franchisor, the recommendations are likely to force you to comply with good corporate governance practices; which many are already observing on the basis that the franchisor stands to profit from a successful franchisee. We note that a significant number (nearly half) of the recommendations are directed to the proposed Franchising Taskforce or other regulatory bodies to investigate in more detail before any legislative action is taken. 

In summary

In developing its recommendations, the Committee attempted to avoid imposing unnecessary burdens on franchisors that treat franchisees fairly. Instead, the Committee aimed to lift standards and conduct across the entire industry. The Report provided a significant number of recommendations to further tailor the relationship between franchisee and franchisor, all with a view to adjusting the power imbalance between franchisees and franchisors. 

In the wake of this Report, if you are not already doing so as a franchisor or franchisee, we strongly encourage all documentation exchanged during the franchisee-franchisor relationship to be reviewed by the appropriate advisor: whether that is a lawyer, to ensure compliance with unfair contract term laws, or an accountant, to ensure appropriate disclosure or review of financial information. Ultimately, the provision of accurate information benefits all parties and achieves the goal of setting up the franchise business for success. 
 
For more information or discussion, please contact HopgoodGanim Lawyers’ Private Enterprise or Commercial Contracts teams.