Allens

Intellectual Property

Increase text sizeDecrease text sizeDefault text size

Focus: Green light for Franchising Code reform

29 July 2013

In brief: Changes to the Franchising Code of Conduct and its enforcement may soon take effect, with the Federal Government accepting most of the recommendations in the recent independent review. Partner Andrew Wiseman (view CV) and Lawyer Nadia Guadagno report on some of the significant changes.

How does it affect you?

  • The Government has backed the introduction of an express obligation to act in good faith into the Franchising Code of Conduct (the Code). It has also accepted a number of recommendations to strengthen the Code's enforcement regime, including the availability of civil pecuniary penalties and infringement notices for breaches of the Code.
  • While the recommendations in relation to franchise failure have been accepted in principle, the Government has acknowledged that they raise complex issues that warrant further investigation and consideration prior to being implemented. 
  • The Government stated that it will implement the changes as soon as practically possible. As such, franchisors should continue to keep up to date with developments in this area, to ensure that they will be in a position to be Code compliant when changes take effect.  

Review of the Franchising Code of Conduct

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. On 17 June, the Government released an Industry Consultation paper that discussed the recommendations, put forward options in relation to each of them, and sought further information from stakeholders, franchisors and franchisees. On 24 July, the Government released its official response to the Report. Most of the recommendations were accepted or accepted in principle.

Our previous Focus described three of the more significant recommendations in the Report, the concerns they sought to address and the options the Government put forward in the Industry Consultation paper. In this Focus, we consider the Government's official response to each of these recommendations.

Express obligation to act in good faith

The Government accepted, in part, the recommendation that an express obligation to act in good faith should be introduced into the Code.1 The Report recommended that the obligation should not be defined, but instead incorporate the unwritten law relating to good faith. The Government, however, expressed concern that merely referring to the unwritten law will not assist parties without legal representation to understand what is required of them.2 It wants to ensure that parties actually understand what is required to fulfil the obligation and, as such, it proposes, without limiting the common law, to provide guidance on the application of the duty.3 The Government also expressed concern in relation to the recommendation that the duty apply to the negotiation of the franchise agreement, as this would extend the scope of the duty, given that the common law does not recognise a duty to negotiate in good faith.4 The Government will further consider these aspects.

Stronger enforcement provisions

The Report recommended a number of changes to the Competition and Consumer Act 2010 (Cth) (the CCA) to act as a deterrent to Code breaches and strengthen the Code's enforcement.

The Government accepted in principle the recommendation to introduce civil pecuniary penalties as an available remedy for a breach of the Code.5 However, it did not concede that the recommended maximum penalty of $50,000 was appropriate; instead, it will undertake further consideration of the appropriate maximum penalty and whether different maximum penalties should be prescribed for different breaches of the Code in line with their seriousness.6 

It likewise accepted that the Australian Consumer & Competition Commission (the ACCC) should be granted the power to issue an infringement notice for a breach of the Code, and will undertake further consideration of the appropriate amount. Approval was also given to expanding the ACCC's random audit powers under section 51ADD of the CAA, to allow the ACCC to assess a franchisor's compliance with all aspects of the Code.7  

Two recommendations were, however, rejected. The Government did not consider that it was appropriate for the court to have the power to make an order disqualifying a person from managing corporations for a breach of the Code.8 However, it flagged the possibility of the availability of an order banning a person from being a franchisor or participating in the franchise sector.9 It was also not considered necessary to amend s87 of the CCA to specify that the court can make franchising-specific orders, given that the provision already confers a wide power on the court to make orders tailored to the circumstances of a case.10  

Franchisor failure

The Government accepted, in principle, the recommendation 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 after the appointment of an administrator.11 It recognised, however, that this recommendation raises complex issues and may have unintended adverse consequences, including in relation to franchisors' and franchisees' access to credit and on the ability of the franchise business to be sold as a going concern.12

It likewise supported the policy intent of the recommendation to amend the Code to 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.13 However, again it recognised that this recommendation raises complex issues involving insolvency, taxation, contract and franchising law, and accounting practice.14  

Sensibly, it has committed to undertaking further consultation with the industry and relevant experts on the implications of these recommendations.

Next steps

Gary Gray, Minister for Small Business, announced that the Government will move to implement its response through Parliament as soon as practically possible.15 The next step is for the Government to prepare a regulatory impact statement containing a detailed consideration of the impact of the options on business and the community.16  

With the exception of changes to the enforcement regime, it is intended that the proposed amendments will only apply to franchise agreements entered into after the legislation is passed. Changes to the enforcement regime will take effect and apply to all franchising parties from a nominated date.17  

Conclusion

The Government has backed a number of significant changes to the Code and its enforcement. Depending on how the amending Bill travels through Parliament, reform to the franchise sector may soon be on its way. Franchisors should continue to monitor government activity in this area.

Footnotes
  1. Commonwealth Government response to the Review of the Franchising Code of Conduct, (July 2013) at 13.
  2. Ibid.
  3. Ibid.
  4. Ibid.
  5. Ibid at 16.
  6. Ibid.
  7. Ibid at 17.
  8. Ibid at 17-18.
  9. Ibid.
  10. Ibid at 18.
  11. Ibid at 10.
  12. Ibid.
  13. Ibid 10-11.
  14. Ibid.
  15. Media Release by the Hon Gary Gray MP, Government to strengthen $130 billion franchising sector, (24 July 2013).
  16. Commonwealth Government response to the Review of the Franchising Code of Conduct, op. cit, 4.
  17. Ibid.

For further information, please contact:

Share or Save for later

What are these?

 

To save this publication on your smartphone or
tablet for off-line reading (eg on a plane flight),
we recommend Pocket.

 

 

You can leave a comment on this publication below. Please note, we are not able to provide specific legal advice in this forum. If you would like advice relating to this topic, contact one of the authors directly. Please do not include links to websites or your comment may not be published.

Comment Box is loading comments...