The franchise sector breathed a collective sigh of relief when the Minister for Small Business Craig Emerson announced the Government's official response to the report of the recent Federal Parliamentary inquiry into franchising. There had been fears that the Government would succumb to intense lobbying by some franchisee activists and academics to introduce a statutory duty of good faith, require registration of franchisors, grant explicit rights of renewal or compensation for franchisees at the end of the franchise term and introduce substantial fines for breach of the Franchising Code of Conduct ("the Code").
In announcing the response the Minister noted that "the Government recognises the legitimate concerns that were raised during the Joint Committee's inquiry and understands the need for parties to a franchise agreement to behave in a reasonable manner. It also recognises that franchising by its very nature is a commercial relationship covering a diverse range of market requirements. As such, there must be flexibility in the franchising system to encourage innovation and growth, but commercial negotiations must be undertaken without blatant and unfair commercial practices."
This pragmatic and reasoned approach is a further endorsement of the fundamental effectiveness of the current regulatory regime, and has been welcomed by the peak industry body, the Franchise Council of Australia. Deacons partner Stephen Giles, who drafted the FCA's submissions to the Government, observed that the Government's response essentially mirrors the FCA's position on the key issues.
Legislation to enact the changes to the Code will be introduced in early 2010.
The Government response appears to be a vote of confidence in the enforcement effectiveness of the ACCC. The ACCC will have more powers and greater resources to enforce compliance, including the ability to conduct random audits. As a consequence franchisors will need to ensure their documentation is fully compliant at all times.
The ACCC will also have a new power to "name and shame" what the Government calls "rogue franchisors" by issuing public warnings under the Australian Consumer Law. The ACCC is already quite active in using the media to report on its enforcement action. There is also a refinement to the ACCC's enforcement powers in the context of conduct affecting multiple franchisees. Under the reforms, where a large number of franchisees are harmed by the behaviour of a franchisor in breach of the Franchising Code, the ACCC will be able to apply for an order providing redress to all the franchisees, without requiring every franchisee to be party to the legal proceedings. However the Government rejected calls for specific legislation to create a private ability to take class actions in franchising outside the normal court rules.
The ACCC will also be given the power to issue "substantiation notices" requiring businesses to provide information to substantiate claims they have made. This is intended to allow the ACCC to move quickly, and obtain information and responses easily on specific issues.
Importantly, the Government rejected the inclusion of a general obligation of good faith in the Franchising Code, accepting the FCA's submission that to do so would increase uncertainty in franchising. The Government noted that such a change might cause banks and other financiers to be more reluctant to provide credit to franchisees and franchisors, and felt the best way to proceed was to identify specific inappropriate franchising behaviours and implement policies to address those behaviours. However the Government will amend the Franchising Code to provide that nothing in the Code limits any common law requirement of good faith in relation to a franchise agreement to which the Code applies.
The Government rejected intense lobbying to introduce Code amendments to grant franchisees specific rights to extend their franchise agreements or obtain compensation at end of term. Instead, consistent with the FCA's recommendations, the Government announced it will amend the Code to require franchisors to disclose to franchisees the processes that will apply in determining end-of-term arrangements, including whether or not there is some right of renewal beyond the term of the agreement. The Government noted that "any exit arrangements should give due regard to the potential transferability of equity in the value of the business as a going concern". This is likely to be implemented via a new section in the disclosure document addressing this issue.
Franchisors will also be required to inform franchisees at least six months before the end of the franchise agreement of their decision either to renew or not to renew a franchise agreement.
The new end-of-term arrangements will apply to franchise agreements signed after the date of amendments to the Franchising Code. For agreements already in existence, the Government observed that end-of-term arrangements can be included by the voluntary agreement of both parties, but will not be obligatory.
The Government appears to have endorsed the highly effective mediation based dispute resolution process contained in the Code, and proposes to amend the Franchising Code to include a list of behaviours expected under the Code that would facilitate dispute resolution. The list will include:
- Attending and participating in meetings at reasonable times;
- Making intentions clear at the outset of the mediation (that is, if the aim is to negotiate an exit arrangement, rather than a resolution to enable continued trading);
- Observing confidentiality obligations during and after the mediation process; and
- Not damaging the franchise brand during the dispute including by providing inferior goods, services and support.
It is unclear whether the "expectations" will have any legal implications. However the requirements appear relatively benign.
An "expert panel" will be established to consider and report on the need to introduce into the Franchising Code a list of other specific behaviours that are inappropriate in a franchising arrangement, with particular reference to:
- Unforeseen capital expenditure;
- Unilateral contract variation;
- Attribution of legal costs;
- Confidentiality agreements; and
- Franchisor-initiated changes to franchise agreements when a franchisee is trying to sell the business.
Following receipt of the panel's report the Government will make any further necessary amendments to the Franchising Code. The Minister noted that the panel "will consult with franchising and retail tenancy representatives, small business organisations, the Australian Competition and Consumer Commission (ACCC) and other interested parties." As the panel is expected to report by the end of January, there would appear limited time frame for consultation.
Unconscionable conduct reforms
The unconscionable conduct provisions will be strengthened by making it clear that protection from unconscionable conduct relates not only to the process of settling a contract, but to the terms and conditions of the contract and the ongoing behaviour of the parties to the contract.
The Government chose not to introduce a statutory definition of unconscionable conduct, preferring to allow the courts to establish the boundaries of the law. However the expert panel being established by the Government will consider whether a list of examples of unconscionable conduct or a statement of principles of what constitutes unconscionable conduct should be incorporated into the Trade Practices Act. The Government has flagged to the ACCC its expectation that the ACCC "persist in its endeavours to obtain further guidance from the courts on unconscionable conduct under the Trade Practices Act".
In an important change, addition to existing remedies, breaches of the unconscionable conduct provisions of the Trade Practices Act will attract penalties of up to $1.1 million for corporations and $220,000 for individuals. The Government rejected pressure to introduce such penalties in relation to breach of the Code.
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