Retail and Franchising Update

RETAIL AND FRANCHISING
Monday, 20 May 2013
HWL Ebsworth

Introduction

The full report of the review of the Franchising Code of Conduct (Code) was released last Friday, 17 May 2013, by Federal Small Business Minister Gary Gray AO, and Parliamentary Secretary for Small Business Bernie Ripoll. The purpose of the review was to consider the efficiency of amendments to the Code in 2008 and 2010. The full report of the review sets out 18 recommendations to the government on how the Code should be changed to meet the needs of the various stakeholders, including franchisors and franchisees, in the current Australian franchising environment. Mr Alan Wein, who conducted the review, has indicated that the recommendations have been put forward in an effort to “simplify” and “improve clarity” around the industry’s regulation.

Key Recommendations

There are several significant recommendations in the report:

• Not unexpectedly, that the Code be amended to require that franchisors and franchisees act in good faith. It is proposed to extend that obligation to prospective franchisees as well as their “agents”. The obligation extends to acting in good faith during the negotiation and performance of a franchise agreement, the performance of obligations under the Code, and the resolution of any disputes as to whether or not there is a valid franchise agreement at the time of the dispute. Interestingly, it is recommended that the term “good faith” not be defined and that the common law meaning of that word be used (recommendation 9);
• The Code be amended to provide further controls on marketing funds, including an obligation upon franchisors that operate company-owned units to contribute to marketing funds, the requirement that the marketing fund only be used for clearly defined activities that are disclosed in the disclosure document (and which are legitimate marketing expenses), and the obligation of franchisors to separately account for and hold marketing funds on trust for franchisees (recommendation 8);
• For the first time, that the Code provide franchisees with a right to terminate the franchise agreement in certain circumstances, in particular, where the franchisor business goes into administration and the franchisor is not able to turn the business around, or find a buyer for the franchisor’s business, within in a reasonable period of time (for example, 60 days) after the appointment of the administrator. This right is reciprocated in favour of the franchisor where the franchisee’s business goes into administration. Notably, it has also been recommended that franchisees can become 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 a default of the franchisor). These recommendations will no doubt need some careful review and consultation (recommendation 6);
• Welcome amendments to the Code dealing with disclosure obligations of foreign or master franchisors when disclosing to master franchisees (providing for a reduced form of the disclosure document rather than the full disclosure document in Annexure 1 of the Code) (recommendation 2);
• Wording changes to deal with historical drafting issues / errors in the Code (which changes should remove a significant number of ambiguities in the Code, for example clarifying the meaning of financial year) (recommendation 18);
• Amendments to strengthen the enforcement regime under the Code, in particular financial penalties of up to $50,000 for Code breaches and broad rights for the ACCC to issue infringement notices and conduct wider random audits on compliance with all aspects of the Code (recommendation 15); and
• Revising Specific changes to existing provisions in the Code dealing with the transfer, renewal or end of a franchise agreement (including clarifying the 42 day deemed consent provision so that a franchisee must provide all information reasonably required by the franchisor under the franchise agreement when making the request for consent before that time period starts) As a consequence franchisors will not be deemed to have consented until 42 days after receiving all information reasonably required by the franchisor under the franchise agreement to enable it to properly evaluate the request) (recommendation 11).

Other Recommendations

In addition to the above, a further 12 recommendations have been proposed:

• Amendments to the Code requiring franchisors to provide a disclosure document to franchisees at the time the franchisee is provided with a notice under section 20A of the Code (relating to the franchisors intention to renew the franchise agreement) (recommendation 1);

New provisions dealing with the requirement for franchisors to disclose the rights of the franchisor and franchisee to conduct and benefit from online sales, including any ability of the franchisor to conduct online sales (recommendation 3);

• Removal of the short form disclosure document for franchisees or prospective franchisees contained in Annexure 2 of the Code (recommendation 4);
• Amendments to the Code so that franchisors must provide prospective franchisees with a short summary of the key risks and matters about the franchise arrangement (recommendation 5);
• Changes to the Code that would prohibit franchisors from imposing unreasonable significant unforeseen capital expenditure on franchisees (recommendation 7);
• Amendments to the Code giving greater protection to franchisees in respect of the disclosure of their information (recommendation 10);
• Additional provisions which prevent a franchisor from being able to enforce a restraint of trade provision where the franchisor has refused to renew the franchise agreement against the franchisee’s wishes (so long as all of 5 specified conditions are met, including that the franchisee is not in breach of the franchise agreement) (recommendation 12);
• Amendments to section 29(8) of the Code (which section relates to dispute resolution procedures between franchisors and franchisees) so that section applies to participation in any alternative dispute resolution process rather than just mediation (recommendation 13); and
• Changes to the Code so that franchisors are prohibited from attributing the legal costs of dispute resolution to franchisees (unless ordered by a court) or requiring franchisees to litigate outside the jurisdiction in which the franchisee’s business primarily operates (recommendation 14).

Interestingly, the report does not make any recommendation for mandatory extension of franchise agreements or for compensation at end of the franchise term as was anticipated, however recommendation 12 may cause concern to franchisors if they wish to enforce a restraint clause and refuse to renew a franchisee’s franchise agreement. They may be required to allow a franchisee to make a “claim for compensation”.

It is expected that the report and the recommendations will result in some positive changes to the Code. The review was the most comprehensive since the Code’s introduction in 1998. It is also a recommendation that the Code not be reviewed again for 5 years (as generally reviews take place every 3 years).

The government has issued a media release in respect of the full report and recommendations and is expected to provide its comments on the full report and the recommendations soon. A copy of the media release and the full report can be found at http://www.innovation.gov.au/smallbusiness/codesofconduct/pages/2013-review-of-the-franchising-code-of-conduct.aspx.

HWL Ebsworth will be providing a detailed review of the report and recommendations on its website shortly.