Government toughens up Franchising Code with new reforms

Federal Small Business Minister Craig Emerson has moved to protect franchisees from bullying by Franchisors by toughening the Franchising Code and strengthening the unconscionable conduct regulations under the Trade Practices Act.

But in a move that will disappoint many in the franchise sector, the Government will not introduce a ‘good faith’ provision into the Code, claiming that to do so would increase uncertainty in franchising.

Emerson announced the changes almost 12 months after a Parliamentary inquiry into the sector called for the Government to get tougher on rouge franchisors.

Many of Emerson’s reforms are designed to crackdown on perceived imbalances between franchisors and franchisees. Key changes include:

– The Government will amend the Trade Practices Act to allow the Australian Competition and Consumer Commission to conduct random audits of franchisors to check for breaches of the Code.
– ACCC will have the ability to publically name and shame rouge franchisors by issuing public warnings.
– The Franchising Code will be changed to require franchisors to disclose to franchisees the processes that will apply in determining end-of-term arrangements, including whether or not there is some right of renewal beyond the term of the agreement.
– Franchisors will also be required to inform franchisees at least six months before the end of the franchise agreement of their decision either to renew or not to renew a franchise agreement.
– Where breaches of the Code occur, the ACCC will be able to automatically apply for orders providing compensation for all franchisees, rather than the current circumstance where the ACCC needs to get every franchisee to become a party to legal action.
– Penalties of up to $1.1 million for corporations and $220,000 for individuals will apply to anyone engaging in unconscionable conduct or making false or misleading representations. However, there will not be pecuniary penalties for breaches of the Code.
– In order to improve dispute resolution, the Government will amend the Franchising Code to include a list of behaviours expected under the Code that would improve the dispute resolution process, including attending and participating in meetings at reasonable times; making intentions clear at the outset of the mediation (that is, if the aim is to negotiate an exit arrangement, rather than a resolution to enable continued trading); observing confidentiality obligations; and not damaging the franchise brand during the dispute by tactics such as providing inferior goods, services and support.

Emerson will also establish an expert panel to examine the need to introduce further provisions into the Franchising Code to crackdown on specific behaviour that could be considered unconscionable.

This will involve consideration of whether a list of examples of unconscionable conduct or a statement of principles of what constitutes unconscionable conduct should be incorporated into the Trade Practices Act.

The panel will report by the end of January 2010 after consultation with franchising, retail tenancy and small business groups, the ACCC and other interested parties.

The Franchise Council, which has pushed hard for the Government to reject calls for the insertion of a ‘good faith’ clause into the Code, is pleased with Emerson’s recommendations.

“We have determined from the Government’s report that they have put their faith in franchising and rejected calls for the introduction of an explicit ‘good faith negotiations’ clause in the Code,” chief executive Steve Wright said in a statement.

“This is a very good result. In my view, the overwhelming balance of the above initiatives is positive. Only those attempting to sail too close to the wind need be worried.”

But franchising advocate Frank Zumbo, an associate professor at the University of New South Wales, says the Government has missed a golden opportunity to completely crackdown on rogue franchisees.

He is particularly upset about the omission of a good faith clause. While implied good faith has been established by the courts, he claims some franchisors have put clauses in franchise agreements to explicitly exclude this implied cause.

“The danger is that the rogues will exclude this implied duty of good faith – it should have been imbedded into the code,” Zumbo says.

He is also concerned about the idea that a list of specific examples of unconscionable conduct could be inserted into the Code.

“I’m very nervous about this. If you try to prescribe a particular behaviour, you are always chasing your tail to try and stay ahead of the next example of rogue behaviour. You can also get unintended consequences when you prescribe certain behaviour.”

While many franchisee activists will welcome the ACCC’s new random audit powers, Zumbo is unimpressed.

“There is no detail. What is the ACCC going to audit? Will it be an audit of the franchise system? Will it be an audit of disclosure documents or actual behaviour? It’s very uncertain.”

“The reality is that ACCC has necessary power to investigate franchisors at the moment. What we really need is the ACCC to use its existing powers in a better way.”