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Wednesday, June 26, 2013

Changes may be on their way to the franchise industry

By Lawyer Nadia Guadagno

A comprehensive review of the Franchising Code of Conduct has recently been completed and publicly released. The Review of the Franchising Code of Conduct makes 18 recommendations covering a wide range of matters and which, if implemented, will result in significant changes to franchising parties' rights and obligations, as well as the Code's enforcement.  Three of the more significant recommendations are discussed below. 

On 17 June, the government released an Industry Consultation paper which discusses the recommendations, puts forward options in relation to each of them and seeks further information from stakeholders, franchisors and franchisees. The due date for responses is 9 July 2013.


Good faith


Good faith in franchising was a focus of the report. Submissions revealed concern about a wide range of opportunistic conduct by franchisors. The report concluded that such conduct could be addressed by the introduction of an express obligation to act in good faith. 

Currently the Code does not contain such an obligation. Clause 23A of the Code provides that nothing in the Code limits any obligation imposed by the common law on the parties to a franchise agreement to act in good faith. The utility of this clause is questionable. It does little more than remind franchising parties that the obligation exists under the common law. As it is not actually a duty under the Code, no action can be taken by the ACCC to enforce it. 

Enforcement


The Code is enforced through the Competition and Consumer Act 2010. Presently, a breach of the Code entitles a court to order compensation, grant an injunction, make remedial orders (such as an order declaring a contract void) and make non-punitive orders (such as an order requiring corrective advertising). However, the following remedies which are available for other breaches of the Act, are not available for a breach of the Code: (i) civil pecuniary penalties, (ii) infringement notices and (iii) an order disqualifying a person from managing corporations.

A number of submissions to the Code contended that stronger deterrence was required to improve compliance with the Code. The report makes a number of recommendations to strengthen enforcement of breaches of the Code, including making amendments to the Act to:
  • allow the Court to order civil pecuniary penalties of up to $50,000 for a breach of the Code;
  • allow the ACCC to issue an infringement notice for a breach of the Code; and 
  • permit the court to make an order disqualifying a person from managing corporations for a breach of the Code. 

Franchisor failure


The impact of franchise failure (such a franchisor becoming insolvent) was another concern raised by the report. Currently there are no provisions of the Code which address this issue. The prescribed franchisor disclosure documents set out in Annexures 1 and 2 to the Code state: 'Franchising is a business and, like any business, the franchise (or franchisor) could fail during the franchise term. This could have consequences for the franchisee.' This provision was added following similar concerns being raised in the 2008 Code review.  Unsurprisingly, submissions to the current inquiry contended that this amendment did little to address the concerns raised.

The Report made two significant recommendations:
  • provide franchisees and franchisors with a right to terminate the franchise agreement in the event that any administrator of the other party does not turn the business around, or a new buyer is not found for the franchise system, within a reasonable time after the appointment of an administrator; and
  • provide that franchisees can be made 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 the franchisor’s failure.

While there is merit in considering options to protect franchisees in the event of a franchisor's insolvency, these proposed amendments may have potentially significant consequences on the operation of Chapter 5 of the Corporations Act 2001.  The Industry Consultation paper does not consider these consequences in any detail.  We consider that the recommendations and their consequences should be investigated in more detail, having regard to the statutory and commercial context in which they will operate.

What next?


Anyone wishing to make submissions must submit their responses to the government by 9 July 2013.

The Industry Consultation paper does not indicate when any changes to the Code and its enforcement will be implemented. However, given the report recommends a number of significant changes to franchising law, it would be prudent for franchisors and franchisees to keep up to date with government announcements to ensure that they will be in a position to be Code compliant when changes to the Code take effect.

A more detailed analysis of the review of the Code is provided in our Focus.

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