Update on recommended changes to Franchising Code of Conduct

What are the new Franchising Code of Conduct recommendations?

Early in December 2008, the Parliamentary Joint Committee on Corporations and Financial Services released the report of its inquiry into the operation of the Franchising Code of Conduct (code). The committee focused on the franchising industry generally making 11 recommendations.

The recommendations propose an:

• introduction of an overarching standard of ‘good faith’
• additional disclosure and administrative requirements for franchisors, and
• introduction of fines and pecuniary penalties for breach of the code.

As a general comment, the recommendations place more onerous obligations on franchisors, exposing them to greater legal risk in dealing with franchisees.

Key recommendations

Overarching standard of good faith

The committee recommended that a new overarching clause be inserted into the code in the following terms: ‘Franchisors, franchisees and prospective franchisees shall act in good faith in relation to all aspects of a franchise agreement.’

The intent behind this recommendation is to deter opportunistic conduct that the interdependent nature of the franchise contract makes the parties vulnerable to. It is envisaged that this standard will prevent franchisors from making capricious decisions and consider the reasonable rights of franchisees to the agreement.

It is intended that this standard would apply to all stages of a franchisor/franchisee relationship.

Better disclosure in the case of franchisor failure

The committee recommended that the code be amended to require that disclosure documents include a clear statement by franchisors of the liabilities and consequences applying to franchisees in their franchise network in the event of franchisor failure.

This recommendation is intended to assist franchisees but not replace due diligence on their part. The committee noted that better disclosure does not have to mean more disclosure; it means providing meaningful disclosure of information that is hard or expensive for the franchisee to attain.

Franchisors would be required to set out the specific implications for franchisees in the event that the franchise fails, rather than general business risks. This statement would include details of ongoing payments, continuing contractual obligations, and other consequences to the franchisees.

Disclosure of end of franchising term consequences and arrangements

The committee recommended that the code be amended to require franchisors to disclose to prospective franchisees the process that will apply in determining the end of franchise term arrangements, including any transfer of equity in the value of the business as a going concern.

Franchisors would be required to disclose, prior to sign-up, what the end of term exit processes are and the associated financial implications. The committee has proposed that a starting point for making an exit arrangement could be the market value of the business as a going concern.

Franchisee termination right in case of franchisor failure

The committee also recommended that the government explore avenues to balance the rights and liabilities of franchisees in the event of a franchisor failure. This may include a right for a franchisee to terminate the franchise agreement in case of franchisor failure.

Pecuniary penalties for non-compliance

The committee recommended that the powers in the Trade Practices Act 1974 (Cth) (TPA) be strengthened to include pecuniary penalties for breach of the code, section 51AC (unconscionable conduct), 52 (misleading and deceptive conduct) and 51AD (mandatory industry codes).

The committee acknowledged the prohibitive costs of legal action and encouraged the ACCC to prioritise and actively pursue franchise related complaints where there has been a breach of the code. In addition, the committee recommended that the ACCC be given power to investigate where it receives credible information indicating that a party to a franchise agreement may be in non-compliance with the code.

Online registration for franchisors

The committee recommended that a simple online registration system be introduced for franchisors. Franchisors would have to lodge an annual statement online identifying the nature and extent of their network and provide a guarantee that they are complying with their obligations under the code and the TPA. This system could be managed by the ACCC.

Next steps

It is estimated that the Federal Government will respond to these recommendations early next year. If the government accepts any or some of these recommendations, the government will proceed to introduce legislation amending the code.

The code may be subject to a further review in 2010, due to a recommendation in this report suggesting the government review the efficacy of the March 2008 amendments to the code.

This article was written by Alex Zolotarsky, Vacation Clerk, Melbourne.

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