Federal Small Business Minister Craig Emerson has upgraded protection of franchisees by toughening the Franchising Code and strengthening the “unconscionable conduct” regulations under the Trade Practices Act.
But in a move that will disappoint many in the franchise sector, the Government will not introduce a ‘good faith’ provision into the Code, claiming that to do so would increase uncertainty in franchising.
The reforms are designed to crackdown on perceived imbalances between franchisors and franchisees and any perceived bullying by franchisors. The Government will amend the Trade Practices Act to allow the Australian Competition and Consumer Commission (ACCC) to conduct random audits of franchisors to check for breaches of the Code and the ACCC will have the ability to publicly name and shame rouge franchisors by issuing public warnings.
“The reforms are designed to crackdown on perceived imbalances between franchisors and franchisees and any perceived bullying by franchisors.”
The Franchising Code will be changed to require franchisors to disclose to franchisees the processes that will apply in determining end-of-term arrangements, including whether or not there is some right of renewal beyond the term of the agreement.
Franchisors will also be required to inform franchisees at least six months before the end of the franchise agreement of their decision either to renew or not to renew a franchise agreement and where breaches of the Code occur, the ACCC will be able to automatically apply for orders providing compensation for all franchisees, rather than the current circumstance where the ACCC needs to get every franchisee to become a party to legal action. Penalties of up to AUD$1.1 million for corporations and AUD$220,000 for individuals will apply to anyone engaging in unconscionable conduct or making false or misleading representations. However, there will not be pecuniary penalties for breaches of the Code.
Mr. Emerson says in order to improve dispute resolution, the Government will amend the Franchising Code to include a list of behaviours expected under the Code that would improve the dispute resolution process, including attending and participating in meetings at reasonable times; making intentions clear at the outset of the mediation (that is, if the aim is to negotiate an exit arrangement, rather than a resolution to enable continued trading); observing confidentiality obligations; and not damaging the franchise brand during the dispute by tactics such as providing inferior goods, services and support.
He says he will also establish an expert panel to examine the need to introduce further provisions into the Franchising Code to crackdown on specific behaviour that could be considered unconscionable.
“We have determined from the Government’s report that they have put their faith in franchising and rejected calls for the introduction of an explicit ‘good faith negotiations’ clause in the Code,” chief executive of the Franchise Council, Steve Wright said in a statement.
“This is a very good result. In my view, the overwhelming balance of the initiatives is positive. Only those attempting to sail too close to the wind need be worried.”
But franchising advocate Frank Zumbo, an associate professor at the University of New South Wales, says the Government has missed a golden opportunity to completely crackdown on rogue franchisees.
“The danger is that the rogues will exclude this implied duty of good faith – it should have been imbedded into the code,” Mr Zumbo says.
He is also concerned about the idea that a list of specific examples of unconscionable conduct could be inserted into the Code.
“The reality is that the ACCC has necessary power to investigate franchisors at the moment. What we really need is for the ACCC to use its existing powers in a better way.”
According to Mark Overton, Managing Director of Ideology Consulting, who has worked with independent optometrists for more than 10 years (working as a business consultant with ProVision practices for eight years then with Eyecare Partners) he believes the changes to the Code are a “positive step” for franchisees.
“Franchise decisions are complex,” he says. “There are many areas that could be developed in the Code to better protect franchisees but these changes are a positive step. Anything that adds clarity can only be of value. I would strongly advise anyone considering a franchise business opportunity that the best way to avoid risk, and cover all the issues, is to get expert legal advice from someone experienced in franchise agreements.”