The Franchising Code of Conduct might be under review, but don’t hold your breath

The federal government has now appointed a Franchising Taskforce “to examine the feasibility and implementation of a number of the committee’s recommendations”.

So, how is the taskforce going about its task with respect to the dispute resolution recommendations in chapter 15 of the committee’s report?

I thought I would adopt an ‘evidence-based’ approach to this question.

This new evidence-based method is all the go in medical reviews, like the recent announcement by the Heart Foundation that Australians can now eat full-fat milk, cheese and yoghurt. Studies have shown eating full-fat milk and cheese (contrary to the former pronouncements) does not increase the risk of heart disease or stroke. Such an approach to developing policy, based on science and verifiable data, however, has not been popular with governments.

Take, for example, the role of the Australian Competition and Consumer Commission (ACCC). It is the ‘manager’ for the Competition and Consumer Act 2010 and the Franchising Code of Conduct (FCC) made under it. Most franchisees assume that, as the key regulator, the ACCC is there to assist them when they have difficulties by taking action against a franchisor who they claim has breached the act or the code.

However, according to statistics presented by the Law Council of Australia: “The ACCC’s level of activity in investigating and taking enforcement action in relation to breaches of the FCC, and other mandatory codes, remains low.” The information taken from the ACCC’s own website shows the ACCC took enforcement action on only 15 occasions over the last eight years to 2017 — less than twice a year. There is said to be 80,000 franchisees operating in Australia, and 600 disputes were referred to mediation by me in the two years 2017 and 2018, as the then-franchising mediation adviser.

This level of activity is not unusual. Take the Horticulture Code of Conduct, also managed by the ACCC, which was revised and relaunched on April 1, 2017. It applied a new regime to the estimated 12 million transactions that occur each year between horticulture produce suppliers and traders. How many disputes requested a referral to the dispute resolution regime from the relaunch to the end of 2018. Zero? How do I know that? Well, I was the horticulture mediation adviser during that period.

Or the Food and Grocery Code of Conduct. Managed through the industry in 2015 by then-minister Bruce Billson, it was a bold attempt to fashion a modern code with the full range of dispute resolution processes — negotiation, mediation and arbitration — to assist suppliers to the major supermarket chains. How did it fare after its recent (September 2018) review by Graeme Samuel, a former head of the ACCC? Not well.

The reviewer observed: “The Review is not aware that any disputes have undergone mediation or arbitration since the introduction of the Grocery Code.” Not a single one, in three years.

The Reviewer went on to say: “The Review also heard there is a general lack of awareness by suppliers about the availability of mediation or arbitration as a dispute resolution option.” This is a common complaint.

Government is not without expert advice and assistance from knowledgeable and experienced commentators and researchers. Whether they choose to follow it, however, is another matter.

A report from the Horticulture Code of Conduct Committee, way back in August 2009, stated: “The implementation of further education initiatives regarding the Horticulture Code and its dispute resolution procedures received unanimous support from all industry sectors. This was considered to be essential in achieving acceptance of the Code and an understanding of the benefits of compliance.” Sadly, it did not occur.

Similarly, the independent expert panel review of the Horticulture Code of Conduct in 2015 observed: “The current Horticulture Code dispute resolution process has become irrelevant, inappropriate and is largely not adopted by the parties in the wholesale horticulture sector. The current process is too cumbersome and does not address the immediate concerns of the primary dispute issues that arise in the wholesale horticulture sector.”

This panel review recommended “the Horticulture Code be amended to abolish the existing dispute resolution process and that it be replaced with an improved system which recognises the need for independent, fast, accessible, expert on site conciliation”. But the dispute resolution process remained unchanged when the horticulture code was relaunched in 2017.

Where does that leave the state of the present recommendations for reform of the franchising code? The committee made only two recommendations. One was about improving dispute resolution processes. The other was about increased regulation policy. I like to describe this as a tension between better resolution process and increased regulation policy.

In over 36 paragraphs of discussion in the report, the committee considered the various submissions and came to a consensus view “the absence of a determinative mechanism as another constituent part of the dispute resolution process is a serious shortcoming”. The committee also found “the overwhelming bulk of the evidence from a range of stakeholders strongly argued the Franchising Code be amended to include provision for binding arbitration”.

This recommendation was supported by the Office of the Franchising Mediation Adviser (OFMA), the ACCC and the Australian Small Business and Family Enterprise Ombudsman (ASBFEO). It was reduced in the taskforce paper to one recommendation: “Strengthening the dispute resolution processes under the Code, including expressly allowing multi-party dispute resolution under the Code and binding arbitration.”

Is the taskforce adopting this change? Rather than recognising the overwhelming support for this recommendation, the taskforce has signalled that it intends to review the situation all over again, and asks in its paper: “Is there is a role for mandatory arbitration when mediation does not resolve a dispute?”

With respect to changes in policy, the taskforce summarised the recommendations as:

• “Allowing one body (a merger of ASBFEO and OFMA) to manage the dispute resolution process, potentially creating efficiencies and increased awareness about dispute resolution under the Code;
• Having that body funded by an industry levy (or payment) paid by franchisors based on the numbers of complaints against them, a change from the present situation where the parties share the costs of mediation.”

What was the support for these proposals?

Well although it appeared as a ‘recommendation’, the committee never proposed the ASBFEO and OFMA be merged. As it stated in the penultimate paragraph of the dispute resolution chapter, which appeared right before this recommendation: “While the committee notes the evidence it received that proposed OFMA be merged into ASBFEO, the committee does not have a firm view on what the best outcome would be.”

An independent expert report commissioned by Treasury (in June 2017) recommended against the amalgamation on the basis that combining the dispute resolution referral services of the ASBFEO and the OFMA would require both legislative change and a fundamental change in the ASBFEO’s role. In particular, the ASBFEO can only recommend a group of dispute resolution providers whereas the OFMA must nominate a specific provider which the parties must use. As well, the ASBFEO is limited to assisting small businesses, whereas the OFMA can assist all businesses, small or large, as well as consumers.

Finally there is the recommendation for an industry-wide levy to pay for the provision of dispute resolution services. Not only is it not required, but the proposal was not even discussed by the committee. The use of the word ‘levy’ to indicate general revenue-raising is not used in the entire 369 pages of the committee’s report or any of the 217 published submissions. The only place the word appears is in the recommendation itself!

There is no need for franchisors to be taxed to fund the existing dispute resolution services.

The statistics I provided to the committee as the franchising mediation adviser showed over 80% franchisors have no disputes that are referred to outside resolution agencies like OFMA (and by implication the ASBFEO which previously referred all of its disputes to the OFMA). Only 1.5% of franchisors had more than four disputes over two years but those franchisors generated half of the franchising disputes dealt with by the OFMA. More importantly, it is generally with this group of franchisors that disputes remained unresolved at mediation and need to go on to a determinative solution. That is why the committee found there is a need for, in particular, these franchisees to have access to a mandatory arbitration service that could provide a final determination of the dispute quickly and inexpensively.

What is the likely outcome from the taskforce’s ‘Regulation Impact Statement’? Based on a history of the effectiveness of all of the code dispute resolution processes that have so far been legislated, it is likely the Franchising Code of Conduct will be no more effective, as a result of the extensive inquiry that led to its review.

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