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Focus: Recommending change to the Franchising Code

26 June 2013

In brief: A recent independent review has recommended some important changes to the Franchising Code of Conduct. Partner Andrew Wiseman (view CV) and Lawyer Nadia Guadagno report on some of the significant recommendations to the Code and its enforcement.

How does it affect you?

  • A focus of the report was the introduction of an express obligation to act in good faith and additional penalties for breaches of the Franchising Code of Conduct (the Code).
  • The report also makes recommendations in relation to franchise failure. Those recommendations are directed towards increasing the protection afforded to franchisees in the event of a franchisor's insolvency.
  • Franchisors should keep abreast of future government announcements to ensure that they will be in a position to be Code-compliant when changes take effect.
  • Anyone that wishes to provide feedback in relation to the recommendations must submit their responses to the Federal Government by 9 July 2013.

Review of the Franchising Code of Conduct

Earlier this year, the Government announced the commencement of an independent review of the Code. On 30 April, the Review of the Franchising Code of Conduct (the Report) was presented to the Government and, on 17 May, the report was released publicly.

The Report makes 18 recommendations. Three of the more significant are the introduction of an obligation to act in good faith, changes to strengthen the enforcement regime, and amendments in relation to franchise failure. These are considered below.

On 17 June, the Government released an Industry Consultation paper, which discusses the recommendations, puts forward options in relation to each of them and seeks further information from stakeholders, franchisors and franchisees. The due date for responses is 9 July. In a media release, Small Business Minister Gary Gray stated that 'the consultation paper seeks to identify the regulatory impact to the franchise sector of implementing the review recommendations but does not reflect a settled government position.'

An express obligation to act in good faith

Submissions to the inquiry revealed significant and ongoing concern about the issue of good faith in franchising. The balance of the submissions supported the inclusion of an obligation to act in good faith to help address opportunistic conduct by franchisors.1

In 2010, the Government introduced clause 23A into the Code in response to a recommendation by the Joint Committee in the 2008 review that an express obligation to act in good faith be included in the Code.2 Clause 23A provides that nothing in the Code limits any obligation imposed by the common law on the parties to a franchise agreement to act in good faith. The inquiry raises concerns about the clause, including that it is possible to contract out of it and it is not enforceable by the Australian Consumer & Competition Commission (the ACCC), as it is not a duty under the Code.3

The Report concludes that all of the 'questionable behaviours' in franchising may be addressed by an obligation to act in good faith being incorporated into the Code.4 It recommends that an express obligation should be introduced which:

  • extends to the negotiation of a franchise agreement, the performance of a franchise agreement, the performance of obligations under the Code and dispute resolution;
  • is not defined in the Code, but instead incorporates the unwritten law relating to good faith; and
  • is not able to be limited or excluded by a contract between the parties (and any provision purporting to do so should be declared void).5

The Industry Consultation paper proposes five options to address the recommendations. These include amending the Code to include an express obligation to act in good faith, which is either defined by the common law or in the Code.6 Another option is to amend the Code to provide that every franchise agreement must include an obligation to act in good faith.7 If such a provision is not included in an agreement, it would amount to a breach of the Code. A breach of the obligation to act in good faith would not amount to a breach of the Code; however, it would amount to a breach of the franchise agreement.

Stronger enforcement provisions

The Code is enforced through section 51AD of the Competition and Consumer Act 2010 (Cth) (the CCA). Presently, a breach of s51AD entitles a court to order compensation, grant an injunction, make remedial orders (such as an order declaring a contract void or requiring the payment of a refund) and make non-punitive orders (such as an order requiring disclosure or corrective advertising).

The Report recommends that the CCA be amended to:

  • allow the court to order civil pecuniary penalties of up to $50,000 for a breach of the Code;
  • allow the ACCC to issue an infringement notice for a breach of the Code;
  • expand the ACCC's random audit powers under s51ADD to allow it to assess a franchisor's compliance with all aspects of the Code;
  • permit the court to make an order disqualifying a person from managing corporations under s86E of the CCA for a breach of the Code; and
  • specify that the court can make franchising-specific orders under s87, including orders requiring a franchisor to:
    • give a royalty free period to a franchisee affected by a breach of the Code; and
    • pay a sum of money specified by the court into any marketing or cooperative fund applicable to that franchise system.8

There was widespread industry support for the introduction of civil pecuniary penalties for breaches of the Code.9 It is anticipated that pecuniary penalties will be only used for serious breaches (such as a failure to provide a disclosure document or breaches relating to the management of a marketing fund).10

The ACCC supported the introduction of infringement notices for breaches of the Code. It submitted that this would allow the ACCC to quickly and efficiently address certain types of breaches, such as where the franchisor has provided an inaccurate or incomplete disclosure document, which usually would not warrant the expense of instituting court proceedings.11 At present, the ACCC can issue infringement notices for certain breaches of the Australian Consumer Law (ACL). If the recipient pays the fine, the ACCC cannot take any further action in relation to the same conduct. Payment is not an admission of breach.

The Industry Consultation paper proposed a number of options to address each of the recommendations. In relation to the first two recommendations (pecuniary penalties and infringement notices), the proposed options include amending the CCA to allow the ACCC to issue infringement notices or seek civil penalties for any breaches of the Code (ie the recommendations) or for breaches of specified provisions of the Code.12 Alternatively, the Government proposed a separate review of the industry codes framework to determine whether civil pecuniary penalties and infringements notices are appropriate.13 In relation to the proposed amendments to s87 of the CCA, the Government noted that, as s87 is a broad provision, the court can already make the recommended orders if it considers that they will compensate the franchisee for the franchisor's breach.14 The proposed amendments would, however, draw the court's and parties' attention to the specific types of remedies available for franchising breaches.

Franchisor failure

The review raised concerns about the impact of a franchisor failure on franchisees, such as insolvency, voluntary administration, receiver management and bankruptcy. Clause 23 of the Code exempts a franchisor from the procedures that they must otherwise follow to validly terminate a franchise agreement in certain circumstances, including where the franchisee becomes bankrupt, insolvent or externally administered. There are no provisions which deal with what happens when a franchisor becomes insolvent.

The Report recommended that the Code be amended to:

  • provide franchisees and franchisors with a right to terminate the franchise agreement in the event that any administrator of the other party does not turn the business around, or a new buyer is not found for the franchise system, within a reasonable time (for example 60 days) after the appointment of an administrator; and
  • provide that franchisees can be made unsecured creditors of the franchisor by notionally apportioning the franchise fee across the term of the franchise agreement, so that any amount referrable to the unexpired portion of the franchise agreement would become a debt in the event the franchise agreement ended due to the franchisor's failure.15

While there is merit in considering options to protect franchisees in the event of a franchisor's insolvency, these proposed amendments may have potentially significant consequences on the operation of Chapter 5 of the Corporations Act 2001. The Industry Consultation paper does not consider these consequences in any detail. We consider that the recommendations and their consequences should be investigated in more detail, having regard to the statutory and commercial context in which they will operate.

Conclusion

The Report makes a number of recommendations to amend the Code and strengthen its enforcement. Franchisors should monitor Government activity in this area to ensure that they are prepared if and when the recommended changes come into effect.

Footnotes
  1. Wein, A. Review of the Franchising Code of Conduct (30 April 2013), 67-71.
  2. Ibid 63; Parliamentary Joint Committee on Corporations and Financial Services, 'Opportunity not opportunism: improving conduct in Australian franchising' (December 2008).
  3. Wein, A. Review of the Franchising Code of Conduct (30 April 2013), 67.
  4. Ibid 80.
  5. Ibid 82.
  6. Industry Consultation: Review of the Franchising Code of Conduct recommendations (17 June 2013), 19.
  7. Ibid 20.
  8. Wein, A. Review of the Franchising Code of Conduct (30 April 2013), 151.
  9. Ibid 128-130, 145-146.
  10. Ibid 150.
  11. Ibid 137; ACCC submission to the 2013 Franchising Code review, 6.
  12. Industry Consultation: Review of the Franchising Code of Conduct recommendations (17 June 2013), 30-31.
  13. Ibid 30-31.
  14. Ibid 34.
  15. Wein, A. Review of the Franchising Code of Conduct (30 April 2013), 48.

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