Franchise alert – state franchise reviews

South Australian and Western Australian inquiries examined the franchise environment in those states and delivered reports calling for an increase in the role and power of the ACCC and further amendments to the Franchising Code of Conduct (Code).

These inquiries take place in the context of a recent federal review of the Code in October 2006, arising from which the Commonwealth delivered a response in 2007 and amended the Code, effective March 2008. The Western Australian Inquiry delivered its report in April 2008, and the South Australian Inquiry reported in May 2008.

Recommendations of state franchise inquiries

Neither the Western Australian or South Australian inquiries recommended separate territorial franchising regimes.

Common recommendations

Both inquiries recommended that:

• the ACCC should be better funded and it should:
  • establish a mandatory federal registration scheme, with continuous disclosure of disclosure documents and review by the ACCC for Code compliance, with findings to be published. The Commonwealth rejected this proposal in 2007, commenting that registration may be seen as providing credibility or endorsement, and the compliance burden on franchisors and on the ACCC would be significant
  • provide more pre-entry education for franchisees
  • be more involved in cases concerning unconscionable conduct, and
  • establish a franchise ombudsman, tribunal or enforcement unit.
    
• the Code should be amended to:
  • require the franchisor to provide a risk statement. The Commonwealth rejected this proposal in 2007, commenting that decisions about risk of any business venture had to be the responsibility of the franchisee
  • require disclosure of the amount of or method of calculation of any rebates or other benefits received in relation to goods or services supplied to franchisees. This was also considered but not adopted by the Commonwealth in 2007, and
  • require full disclosure of franchisors’ financial situation, rather than allowing statements of good financial standing. This was considered but not adopted by the Commonwealth in 2007.

West Australian franchise inquiry recommendations

The Western Australian inquiry’s recommendations also included:

• the ACCC should:
  • develop a standard checklist of potential risks, and
  • review and if possible improve current mediation processes.
    
• the Code should be amended to:
  • require disclosure of franchisor’s franchise experience, qualifications and training
  • require disclosure of what services franchisors will provide
  • require franchise agreements to explicitly set out end of franchise arrangements, and the position in relation to goodwill if not renewed
  • require franchisors to conduct a pre-expiry review with the franchisee at least one year before the expiry of the franchise and notify franchisees in reasonable period of non renewal, and
  • make mediation compulsory and mediated agreements enforceable, with penalties for refusing to attend mediation.
    
• the Code should be reviewed by 2010.
• the Trade Practices Act 1974 (Cth) (TPA) should be amended to prescribe specific penalties for breaches of the Code.

South Australian franchise inquiry recommendations

The South Australian inquiry’s recommendations also include that:

• the Code should be amended to:
  • require disclosure of risks associated with franchisor failure
  • require disclosure of franchisors’ experience in operating a franchise business and taking leases and sub-leases
  • introduce penalties for breaches of disclosure requirements
  • prohibit ’conduct that has the effect of preventing or obstructing communication between prospective and existing franchisees’, identifying confidentiality clauses protecting information about past franchisor business operations as an example
  • include a duty to act in good faith and conduct renewal negotiations in good faith and with fair dealing by each party
  • require franchise agreements to include provisions setting out when and what exit payments for termination or goodwill will be paid, and
  • include additional alternative dispute resolution mechanisms.
    
• the TPA should be amended to include a statutory definition of unconscionable conduct into section 51AC or a list of examples. Exclusion of or inadequate determination of goodwill should constitute unconscionable conduct
• the Retail and Commercial Leases Act 1995 (SA) should be amended to protect licensees (franchisees under head leases negotiated by franchisors). It should also prohibit unconscionable conduct, and
• when business names are registered, businesses should be required to identify if a franchise and educational information be provided to registered franchisees.

This article was written by Amalia Stone, Senior Associate of the Sydney Corporate team.

For more information please contact

Name : Irene Zeitler
Title : Partner
Office : Melbourne
Phone : +61 3 9288 1581
Fax : +61 3 9288 1567
Email : irene.zeitler@freehills.com

Name : Kristin Stammer
Title : Partner
Office : Sydney
Phone : +61 2 9225 5572
Fax : +61 2 9322 4000
Email : kristin.stammer@freehills.com