19 April, 2019
The Australian Parliamentary Joint Committee on Corporations and Financial Services has released its long-awaited review of Australia's franchise regulation. Its "Fairness in Franchising" Report released on 14 March 2019 is the most comprehensive of many recent enquiries on franchising regulation in Australia.
The Review commenced in March 2018 and received 406 submissions, 80% of which were from franchisees. Four franchise systems were the focus of many complaints.
The Committee's recommendations were numerous and far-reaching. In many cases their feasibility is to be considered further before any question of implementation may arise. For this reason, a number of the recommended changes may not eventuate or their implementation may be delayed.
The key finding was that the primary regulatory focus on disclosure has been ineffective to address the information and power asymmetry in franchising. Examples of opportunistic and exploitative behaviour in certain franchise systems have increased and in some cases are seen as systemic. The Committee noted that its recommendations are designed to lift standards and conduct across the entire franchise sector and re-align the fairness of the relationships.
The key recommendations are summarised below:
- The government should investigate options for a public franchise register maintained by the Australian Competition and Consumer Commission (ACCC) with franchisors providing updated disclosure documents and template franchise agreements annually.
- The ACCC should be given enhanced powers and greater responsibilities.
- Penalties should apply to all breaches of the Code, not just of some provisions. Penalties should greatly increase from the current AUD 63,000 per breach to penalties similar to those under the Australian Consumer Law, which can be upwards of AUD 10 million.
- The Franchising Code should provide franchisees with a statutory right to exit franchise agreements immediately in the same "special circumstances" as currently permitted for franchisors, such as in the case of insolvency. The Code should also allow a franchisee to terminate without penalty if it is suffering financial or personal hardship or is loss-making.
- The Code provision which permits a franchisor to terminate a franchise agreement immediately if a franchisee engages in fraud should be limited to where the franchisee has been convicted of fraud. The Code provision which permits a franchisor to terminate where a franchisee has endangered public health or safety, should only apply if the relevant government agency has directed the franchisee to close its business.
- The dispute resolution scheme under the Franchising Code should be expanded to include an option of binding arbitration, to restrict legal action until the dispute process is complete and to enable a mediator or arbitrator to undertake multi-franchisee resolutions where disputes relate to similar issues.
- Further guidance should be provided on the level of detail required in marketing fund financial statements and these should be provided to franchisees within 30 days of the end of each quarter, rather than annually.
- Unilateral amendment by a franchisor of a franchise agreement should not be permitted except with the agreement of the majority of franchisees or their representatives. The government should consider further whether similar restrictions should be placed on subsidiary documents such as franchise manuals or policies.
- The cooling-off right in the Franchising Code should be extended to franchise transfers, renewals and extensions.
- No recommendations were made in relation to goodwill but the Committee suggested that the government investigate how common it is for franchise goodwill to be included in transfer contracts and whether or not franchise agreements attribute goodwill to franchisees, with a view to re-examining whether the issue requires regulatory reform.
- Franchisors should be prohibited from passing on their legal costs of preparing, negotiating or executing documents to prospective franchisees.
- The Franchising Code should include a clear definition of significant capital expenditure. The government should consider whether the Franchising Code should include appropriate constraints on the ability of franchisors to impose capital expenditure requirements on franchisees, in order to allow franchisees an appropriate return on their investment.
Increased Franchise Disclosure
- Historical financial information should be disclosed to prospective franchisees to assist them to conduct more comprehensive financial due diligence. In particular:
- for an existing outlet, the vendor franchisee or franchisor must provide specified tax filings and financial information for the prior two years and an assessment of labour costs for the particular franchise business; or
- for a greenfield franchise, the same tax and financial information for a two year period in respect of a comparable franchise.
- All financial information relating to the franchise business must be provided in or attached to the disclosure document rather than separately to ensure that it is covered by the Franchising Code requirements in respect of earnings information.
- No specific changes were recommended in respect of the ability of franchisors to mandate franchisees to acquire goods used in the franchise business from specific suppliers but the Committee recommended that the government consider how the Franchising Code might be amended to require disclosure of the margin franchisees are able to make on such goods and of any cases in which the franchisor has required franchisees to sell below cost.
- All supplier rebates, commissions and other payments in relation to goods and services supplied to the franchisee should be disclosed as a percentage of the full purchase price. The Committee also recommended that the government consider amending the Franchising Code to require the franchisor to disclose what percentage of the supplier rebate it will retain or provide, directly or indirectly, to franchisees.
- The Committee noted the possible conflicts of interest associated with supplier rebates and mandating franchisees to use particular suppliers and recommended that the government further investigate this to determine whether regulatory change is required.
- The mandatory disclosure requirements should be extended to include guidance on employment matters, to be developed by the Fair Work Ombudsman.
- The Franchising Code should require the disclosure document and franchise agreement to be made available to franchisees both electronically and in hard copy.
Other Laws
- Unfair contract terms laws currently apply to "small business" standard form contracts and render unfair contract terms void. The Committee agreed with the ACCC's suggestion that unfair contract terms in such contracts should be illegal and the subject of civil penalties. The Committee also recommended that all franchise agreements should be deemed to be "small business" contracts, so this law will apply to them if they are standard form.
- As recommended by the ACCC, the government should make it lawful for franchisees to collectively bargain with their franchisor, regardless of their size or other characteristics.
- Recently introduced laws relating to the protection of whistle blowers should be extended to franchisees.
- The Committee did not recommend a separate automotive industry code but asked the government to consider reforms which might assist motor vehicle dealers who are left with capital intensive stock after their dealer agreement is not renewed. Possible considerations raised include requiring manufacturers to give dealers at least 12 months notice of non-renewal, dealers not being compelled to upgrade their dealership after notice of non-renewal or termination and mandating franchisors to buy back vehicle parts less than 3 years old at cost price.
The Government and Opposition have yet to respond to the Committee's recommendations, but as the Committee's recommendations were unanimous, they are likely to be considered favourably and advanced by whichever party forms Government after the federal election in May this year.
For further information, please contact:
Penny Ward, Baker McKenzie
penny.ward@bakermckenzie.com
