The Federal Government has issued an Exposure Draft
of the proposed changes to the Franchising Code. However there is
no need for immediate action, as the proposed commencement date is
1 January 2015, and further changes are likely as a result of
franchise industry consultation. Submissions on the drafting and
implementation of the Exposure Draft are due by April 30,
On April 2 the Federal Government issued an Exposure Draft of
the Competition and Consumer (Industry Codes – Franchising)
Regulation 2014, accompanied by a statement from the Small Business
Minister Bruce Billson entitled The Future of Franchising. The
Exposure Draft has been issued for public comment, with submissions
closing 30 April 2014. Submissions are invited "only on the
technical aspects of implementing the law", with the policy
direction settled and indeed summarised in The Future of
Franchising statement. The statement and Exposure Draft are the
Government's formal response to the report by Alan Wein
following his review of the Code in 2013.
The Franchise Council of Australia has been working
collaboratively with the Government to endeavour to give effect to
the Wein Report recommendations in a manner that is practical, and
reduces compliance costs. The FCA has had further constructive
discussions with the Government since the Exposure Draft was
issued, and is preparing a detailed submission on the Exposure
Draft that expands upon the issues raised during discussions. The
Government seems sensitive to the issues, and keen to ensure that
the Franchising Code of Conduct has broad industry support.
The franchise industry will find no real surprises in the
Minister's statement, as the policy is largely in line with
industry expectations. Many of the suggestions by the franchise
sector are reflected in the Exposure Draft, and with further fine
tuning the Exposure Draft should deliver the promised improvements
and reduced compliance costs. It should however be noted that in
its current form the Exposure Draft does not fully reflect either
the Minister's comments in the release that accompanied the
exposure draft, or the extensive industry input provided to the
Department of Treasury. It does not currently deliver on many of
the red tape savings flagged by the Minister. Indeed if no changes
are made to the Exposure Draft compliance costs will increase in
some areas, and possibly overall.
Other specific areas that will require attention are the
proposed new good faith obligation, penalties and the enforcement
of post-termination restraints. It had been expected that the
Department would simply follow the recommendations of the Wein
Report and the industry submissions and introduce into the Code the
current common law duty of good faith. Not only has this not
occurred, but the wording used in the Exposure Draft is extremely
problematic and also introduces a financial penalty for breach of
the new good faith obligation. Industry cannot support the current
drafting, as it will create substantial legal uncertainty and
increase disputation, contrary to the intent expressed by the
The Exposure Draft has also taken the proposed new penalty
regime much further than is warranted. Rather than provide
penalties for a fundamental breach of the Code, the Exposure Draft
imposes penalties of 300 penalty units ($51,000) for a wide range
of specific breaches. There is no distinction between fundamental
breaches, and trivial breaches, and some of penalties have been
introduced in areas such as mediation, where they are totally
The FCA has also raised problems with the wording of the
provisions that seek to prevent franchisors from enforcing
post-termination non-compete provisions where the franchisee does
not secure an extension of the franchise term.
There are also serious implementation concerns, with the new
Code only applying to franchise agreements entered into or renewed
on or after 1 January 2015. This will create a duplicate regulatory
regime, as the old Code will apply to all agreements entered into
before January 1, 2015. The FCA had suggested an alternative that
essentially created a single regulatory regime that would apply to
all franchise agreements.
Although the changes required to the Exposure Draft are
significant, there do not appear to be any policy concerns.
Accordingly we anticipate that significant further changes will be
made to the Exposure Draft prior to the enactment of the
Regulations and the consequential amendments to the Code. At this
stage, we are advising clients to hold fire on making any
amendments to their franchise agreements or disclosure documents.
Given the likelihood of changes and the lead time of 1 January
2015, there is no immediate need to act.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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We discuss whether certain clauses commonly found in ordinary commercial contracts could be considered to be penalties.
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