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Wednesday, July 31, 2013

Government backs franchising reform

By Lawyer Nadia Guadagno

The Federal Government has recently accepted most of the recommendations proposed by the recent independent Review of the Franchising Code of Conduct (the Code). Our previous post described three of the more significant recommendations made by the review and the concerns that they sought to address. In this post, we consider the Government's official response to each of these recommendations.

Good faith

The Government accepted, in part, the recommendation that an express obligation to act in good faith should be introduced into the Code. However, it expressed concerns about some aspects of the recommendation.  Reasonably, it considers that defining the obligation by reference to the common law will make it difficult for parties without legal representation to understand what is required of them. As such it proposes, without limiting the common law, to provide guidance on the application of the duty. It also recognises that the recommendation that the duty apply to the performance of the franchise agreement, as well as its negotiation, will extend the application of the common law (as there is no implied duty to negotiate in good faith under the common law). Accordingly, it will further consider this aspect.


Three of the five recommended changes to the Competition and Consumer Act 2010 (Cth) (the CCA) were accepted.

The Government supported the introduction of civil pecuniary penalties and infringement notices as available remedies for breaches of the Code, noting that they will act as a deterrent and thus promote effective compliance with the Code. It will further consider the appropriate maximum amounts for each.

It also approved expanding the ACCC's random audit powers under s51ADD of the CCA to allow the ACCC to assess a franchisor’s compliance with all aspects of the Code.

It did not, however, consider that it was appropriate for the court to have the power to make an order disqualifying a person from managing corporations for a breach of the Code. Nor did it deem it necessary to amend s87 of the CCA to specify that the court can make franchising specific orders, given that the provision already confers a wide power on the court which would enable to make such orders if appropriate.

Franchisor failure

The Government accepted in principle the recommendations to amend the Code to provide: a) 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 b) 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 referable 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. It recognised, however, that both of these recommendations raise complex issues and may have unintended consequences; for example, in relation to the former, it may impact franchisors' and franchisees' access to credit and the ability of the franchise business to be sold as a going concern. The Government has committed to undertaking further consultation with the industry and relevant experts on the implications of these recommendations.

What next?

Minister for Small Business Gary Gray announced that the Government will move to implement the relevant amendments to the Code and the CCA as soon as practically possible. The next step is for the Government to prepare a regulatory impact statement.

With the exception of changes to the enforcement regime, it is intended that the proposed amendments will only apply to franchise agreements entered into after the legislation is passed. Changes to the enforcement regime will take effect and apply to all franchising parties from a nominated date.

A more detailed analysis of the proposed changes to the Code is provided in our Focus.

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