Franchisors under fire from Federal Parliamentary inquiry

A Federal Parliamentary inquiry into the operation of the franchising sector has come down squarely on the side of franchisees, recommending the introduction of a statutory obligation to force franchisors to negotiate in “good faith” with franchisees, and

A Federal Parliamentary inquiry into the operation of the franchising sector has come down squarely on the side of franchisees, recommending the introduction of a statutory obligation to force franchisors to negotiate in “good faith” with franchisees, and fines for breaches of the franchising code of conduct.

The 125 page report contains 11 recommendations “consistent with its overall aim of raising the standard of conduct in Australian franchising”, focusing particularly on improving disclosure and rebalancing the rights of franchisees and franchisors in the event of franchisor failure or the termination of a franchise agreement.

The key recommendations include:

• The introduction of a “good faith” clause in the franchising code. The inquiry found that the interdependent nature of franchise contracts leaves franchisees “vulnerable to opportunistic conduct” and argues a simple good faith clause would deter such behaviour. The suggested working of the clause is: “Franchisors, franchisees and prospective franchisees shall act in good faith in relation to all aspects of a franchise agreement.”
• That the Government explores avenues to better balance the rights and liabilities of franchisees and franchisors in the event of franchisor failure. In the wake of large franchise collapses such as the failure of Kleins, the inquiry has made a number of recommendations around franchisor failure, including recommending amending the franchise code so that franchisors must provide a clear statement of the liabilities and consequences of franchisees in the event of franchisor collapse.
• Forcing franchisors to disclose to franchisees, before the franchise agreement is entered into, the process that will apply in determining the end of franchise arrangements. This recommendation follows a number of complaints from former franchisees about the way their franchise agreements were terminated and their franchises sold to new franchisees – a process known as churning. The Parliamentary inquiry specifically recommends that franchisors need to outline the way equity in a franchise would be transferred at the end of an arrangement.
• The amendment of the Trade Practices Act to include pecuniary penalties for breaches of the franchising code. The committee believes the introduction of these penalties would help the ACCC in its enforcement role “by providing a greater deterrent for conduct that contravenes the code”.
• The ACCC being given power to investigate when it receives credible information about breaches of the franchising code. This is clear response to the concerns of critics such as Federal MP Joanna Gash, who has slammed the ACCC’s investigation powers in the past. But franchising and competition expert Frank Zumbo from the University of New South Wales points out the ACCC already has these powers. “Ultimately they’ve let the ACCC off lightly,” he argues.
• The Government investigate the development of a simple online registration system for franchisors. This would require them to annually lodge a statement confirming the nature and extent of their franchising network and providing a guarantee that they are meeting their obligations under the franchising code and the Trade Practices Act. This has been a key recommendation of franchise activists such as South Australian MP Tony Piccolo. The Franchise Council says the move would increase disclosure costs for franchisees.
• The Government directs the Australian Bureau of Statistics to collect better data on the sector.

Tony Piccolo has hailed the report, saying franchisees will get better protection from franchisors that bully and intimidate.

“The proposed changes will attract and help protect legitimate investors to the franchise industry and make it tougher for opportunists to rip off hard working mum and dad franchisees.”

Franchise Council concerns

But the Franchise Council of Australia has a number of concerns with the recommendations. While director Stephen Giles describes the report as a “thoughtful and constructive response” to the submissions received, it will be seeking further talks with the Government to clarify several points.

The FCA’s biggest concern is with the introduction of the good faith clause in the franchise code.

“We are concerned that this may create additional uncertainty,” Giles says. “As soon as you come up with a new legal term, people seek to litigate to see what that means. In the current economic circumstances, it’s not really an additional cost that the franchise sector is that keen on seeing occur.

“We’d like to continue our discussions with the Government on this because we don’t think it’s necessary.”

Giles says the FCA is broadly conformable of the inquiry’s recommendations around increased disclosure, although it is keen to ensure that these new disclosure requirements to not lead to increased compliance costs for franchisors.

Giles does have concerns about the introduction of an electronic register for franchise documents, saying this is likely to be extremely expensive to establish and could provide franchisees with false comfort if the disclosure documents are not properly vetted by an appropriate regulator

Giles is particularly sceptical about the introduction of fines for breaches of the franchising code, particularly when there are no such fines for breaches of the Trade Practices Act such as misleading and deceptive conduct.

“We would certainly resist franchising alone. It would be ridiculous to have pecuniary penalties for breaches of the code and not have pecuniary penalties for misleading and deceptive conduct.

“I think that this issue needs to be carefully thought through.”

Other concerns

Zumbo says the FCA’s opposition is predictable and disappointing.

“These recommendations are ultimately pro-franchising. They are in the best interests of the sector.”

While he is pleased with the recommendations for the creation of a good faith clause and fines for breaches of the code, he believes the report does not go far enough.

“Overall, there are disappointing aspects of the report and they do fail to provide leadership in several areas. In some ways it is a missed opportunity.”

He would have liked more clarity around improved dispute resolution processes, and more clarity around the rights of franchisees when a franchisor fails.

“The additional disclosure around franchisor failure is a good thing, but unfortunately it doesn’t provide the leadership required on the issue. They’ve left it for another day but this was the time to look at it.

“We are likely to see a number of franchise systems come under pressure if not fail in the next few years. The pressures will build and the issues will not go away.”

What do you think of the report recommendations? Has the committee come down too hard on franchisors or do franchisees need more protection? Send your views to feedback@smartcompany.com.au.