New Code to require more disclosure to franchisees

Changes to the Franchising Code of Conduct announced by Small Business Minister Craig Emerson recently represent a light touch approach to regulation of the franchise sector, with considerably greater emphasis to be placed on up-front disclosure to potential franchisees before they commit to a franchise agreement.

While the Government’s approach has been welcomed by some parts of the franchise sector, others will be disappointed that the Code reforms did not go further. But despite the announcement last week, a new draft of the Code is yet to be unveiled, and no implementation date has yet been set. Also, a Federal election due sometime this year may have some bearing on the processes and timeframes that may apply from this point forward.

Consequently, one lot of uncertainty about the future of franchising has been replaced by another, in that the detailed wording of a new Code may potentially contain subtle but significantly different interpretations of the changes previously announced by the Government.

Of particular interest is the requirement to develop a plain English guide for potential franchisees to be provided with disclosure documentation. In announcing this requirement, the Minister requested that the plain English guide be prepared by the franchise community, but stopped short of providing further detail about size and scope of the guide, nature of distribution, and ultimately, funding for its development.

Similarly, while the Government also encouraged the Australian Competition and Consumer Commission (ACCC) to take a more robust approach to enforcing the law (which it can be assumed might include using its new powers to conduct random audits and issue substantiation notices), no corresponding announcement about increased funding for the Commission was made.

The Government appears to be overall supportive of a healthy franchise sector in Australia, and has also stated that a further review of the Franchising Code of Conduct should not be necessary for another three to five years.

“In making these reforms the Government is not throwing the baby out with the bath water,” said Dr Emerson.

In announcing the latest changes last week, Dr Emerson said the Government had adopted all the recommendations made by the Expert Panel it established late last year to address issues of unconscionable conduct and to address specific franchising behaviours which had been raised by the 2008 joint parliamentary inquiry chaired by Bernie Ripoll.

The announcement came as something of a surprise so soon after the completion of the expert panel’s report in February, and contrasts sharply with the 11-month delay in the Government’s response to the joint parliamentary inquiry into the Franchising Code of Conduct which presented its recommendations to the government on December 1, 2008.

Expert panel findings released – more disclosure required

In releasing the Government’s official response to the 2008 franchising inquiry, Dr Emerson announced, the creation of a panel of trade practices experts to inquire into and report on the need to introduce into the Franchising Code provisions that prevent specific behaviours that are inappropriate in a franchising arrangement with particular reference to:

• Unforeseen capital expenditure;
• Unilateral contract variation;
• Attribution of legal costs;
• Confidentiality agreements; and
• Franchisor-initiated changes to franchise agreements when a franchisee is trying to sell the business.

In relation to each of these behaviours, the expert panel concluded the following:

1. Unforeseen capital expenditure – The panel found that more disclosure should be provided up front to potential franchisees about the circumstances under which unforeseen capital expenditure might occur, and whether this would be a factor considered in end-of-term arrangements;

2. Unilateral contract variation – Franchisors will be required to disclose up front circumstances in which unilateral contract variations may take place, and disclose the circumstances in which such variations have occurred in the past three financial years;

3. Attribution of legal costs – This also requires better up front disclosure to franchisees about the attribution of costs between the parties in a dispute (including mediation), with instances where legal costs are attributed irrespective of outcome to be dealt with under the unconscionable conduct provisions of the Trade Practices Act;

4. Confidentiality agreements – Up front disclosure will be amended to alert franchisees to the types of information which must remain confidential, including settlements, mediation outcomes, intellectual property, trade secrets and aspects of individual agreements;

5. Changes at franchise resale – The panel concluded that it is not appropriate to prohibit franchisors making changes to franchise agreements when franchisees are seeking to sell their businesses, but that transfer provisions of the Code be extended to cover novation of a franchise agreement, and that greater up front disclosure about the possibility of changes be made.

Click here to see the Expert Panel’s full report.

More research and dispute resolution recommend by Panel:

In addition to its recommendations on the five franchising behaviours above, the expert panel further recommended the following:

A. Plain English document – A plain English document be provided to potential franchisees before they are psychologically, financially and legally committed to a franchise agreement as a ready reference to the nature of the franchise relationship;

B. Additional education – The ACCC is encouraged to increase education activities for potential franchisees around the five franchising behaviours noted above;

C. Early intervention dispute resolution services – Federal and state governments are encouraged to improve and harmonise early intervention dispute resolution services for small businesses. This may be an indirect reference to the work of the Small Business Commissioner in Victoria, which provides low-cost mediation services;

D. More research – Research into the proposed changes to the Code be conducted in three to five years following their introduction to evaluate their effectiveness, including research on disclosure.

Click here to see the Expert Panel’s full report.

Previously announced changes to the Franchising Code of Conduct

While a new version of the Franchising Code of Conduct is yet to be drafted, changes previously announced by Federal Business Minister Craig Emerson in November last year include:

1. The introduction of fines and penalties for unconscionable conduct and false and misleading representations;
2. Random audits of franchise systems to be conducted by the Australian Competition and Consumer Commission (ACCC);
3. Public warnings about rogue franchisors;
4. An acknowledgement (but not specific legislation) of good faith in relation to franchise agreements;
5. A requirement to clarify end of term arrangements, including a six-month mandatory period of notice of renewal;
6. Provision to include all affected franchisees of a group in ACCC actions.

Following the Government’s acceptance of the Expert Panel’s recommendations, will also include additional up front disclosure about certain franchising behaviours including unforeseen capital expenditure and unilateral contract variations during the term of the franchise.

Read the Government’s November 2009 response to the Code Inquiry here.

“Step in the right direction”: Code review chairman

The chairman of the 2008 Franchising Code Review whose report led to the announcement, says that the Expert Panel’s recommendations are a “step in the right direction” for franchise reform in Australia.

Bernie Ripoll, the chairman of the Parliamentary Joint Committee on Corporations and Financial Services which reviewed the Code and which reported 11 key recommendations for change, says that the changes will raise the overall standard of franchising.

“This announcement follows through on parts of the report which is pleasing given our aims of ensuring a strong partnership between both the franchisee and franchisor,” said Ripoll.

Code changes and election cast doubt on South Australian franchise bill

Changes announced to the Franchising Code of Conduct, as well as a state election in South Australia, have cast doubt over the future of proposed South Australian legislation for the franchise sector in that state.

South Australian Labor MP Tony Piccolo tabled draft legislation in the South Australian Parliament on December 3 – its final sitting day before the Christmas recess. State elections will be held in South Australia on March 20. Legislative bills proposed in the lead-up to the election will need to be resubmitted after a new government is formed, with early indications predicting a swing away from the Rann Labor government.

The Franchising (South Australia) Bill 2009 proposed to subsume the Franchising Code of Conduct – such that the Code becomes a South Australian mandated law – and add additional regulations such as the requirement to act in good faith, the establishment of a Commissioner of Franchising, compulsory inspection of documents, and the introduction of fines and penalties for franchisors who fail to comply with the state franchise laws.

Click here to see the proposed South Australian franchise bill.

Jason Gehrke is a director of the Franchise Advisory Centre and has been involved in franchising for 18 years at franchisee, franchisor and advisor level. He provides consulting services to both franchisors and franchisees, and conducts franchise education programs throughout Australia. He has been awarded for his franchise achievements, and publishes Franchise News & Events, Australia’s only fortnightly electronic news bulletin on franchising issues.