In mid-June Alan Wein’s report of the latest Federal Government review of the Franchising Code of Conduct was published containing 18 recommendations for Government with respect to changes to regulation of the franchising industry.

Two major issues, which have been the subject of much debate in the sector, are the calls for a good faith obligation in franchising and the rights and obligations at the end of the franchise term.

The report’s recommendation is to incorporate the common law duty of good faith into the Code, rather than inserting a specific definition of good faith. This reflects the shift in attitude of the Franchise Council of Australia – a key stakeholder – to the concept of the duty of good faith being incorporated into the Code. Such a duty would apply to both parties, but would not prevent a party from acting in its legitimate commercial interests.In contrast, the demands by some that franchisees be compensated for their perceived loss of goodwill if a franchise is not renewed at the end of term or for the right of mandatory or automatic extension of franchise agreements have not been met. The report rejects these concepts as interference with the fundamental principles of contract and property law.

In its examination of issues around end of term arrangements, the review looked at the problem of restraint of trade or non-compete clauses and the increasing difficulty in enforcement against franchisees. While the report recommends that franchisors continue to be able to refuse renewal of a franchise without compensation to a franchisee, in such cases a restraint of trade clause is likely not to be enforceable against the former franchisee.

In addition to a number of other recommended changes, which address ‘specific problematic areas’, the report recommends the introduction of civil pecuniary penalties for breaches of the Code.

The recommended penalty would be to a maximum of $50,000 but any penalty would need to be ordered by a court. In addition, the ACCC would be permitted to issue infringement notices without the involvement of the courts. These are usually a lesser amount, depending on the severity of the breach, but, in most cases, it is $6600 for a corporation ($66000 for a listed company) and $1320 for an individual for each alleged contravention. Importantly, payment of an infringement notice is not an admission of guilt, but prevents the ACCC from taking further action.

Some additional problem areas given specific attention by the report were master franchise disclosure, online selling, franchisor failure and marketing fund administration.

The ongoing issue of too much and irrelevant disclosure to sub-franchisees (where there is a foreign or master franchisor) has been addressed by the recommendation of a short form disclosure document. This appears to be a sensible middle ground that largely reflects the approach of many franchising lawyers who act for, or in relation to, foreign franchise systems operating in Australia.

The review looked at requests for further disclosure on some issues, but considered that these were not sufficiently warranted. One exception is online sales, an area many franchisors have moved into in recent years, in some instances competing with their franchisees. The traditional concepts of territory and customer catchment areas have become largely obsolete for many businesses in this digital world. Accordingly, the report recommends additional disclosure of the rights of the parties to conduct online sales.

The issue of franchisor failure was addressed in the review. There have been several high profile franchise system failures over recent years (Darrell Lea, Angus & Robertson) but, despite apparently not receiving any submissions on this issue from any affected franchisees or creditors, the report recommends that parties be given a right to terminate the agreement within a reasonable period if a franchisor goes into administration and no buyer or other solution is found. It also recommends elevating franchisees to the status of unsecured creditors.

The report recommends tightening up on the administration of marketing funds by franchisors after noting that this is a common area of complaint and dispute in the industry. Marketing contributions (from both corporate and franchised outlets) should be held in a separate account (on trust for franchisees), audited annually and the funds spent only on legitimate marketing and advertising expenses. The recommendations reflect what is largely seen as best practice in the industry, in any event, and should not adversely affect most reputable franchisors.

In general Mr Wein found that the Code of Conduct ‘generally operates effectively within a very dynamic and difficult economic environment.’ The changes are intended to ensure the industry continues to have a strong regulatory framework which mandates best practice where required.

The recommendations have, in the most part, been welcomed by the industry and are likely to be supported by both sides of parliament.  While we wait for the legislation and the necessary detail, it is hoped that these changes deliver an element of certainty to the industry, which will in turn promote confidence and business growth.

Update: Franchising Code of Conduct Consultation Paper Released June 17

Just one month from the publication of the report of Mr Alan Wein with respect to his review of the Franchising Code of Conduct, the Government’s consultation paper has been released to industry for comment.

The original report contained 18 recommendations for government with respect to proposed changes to regulation of the franchising industry.

The Government is now seeking industry response with respect to each of the recommendations and whether to implement these recommendations or to select another option, including leaving the Code unchanged.

The Consultation Paper does not provide extensive draft legislation or go much beyond summarising what was stated in Mr Wein’s report.

A Template Response Submissions Form is available for anyone interested in lodging a response with respect to each of the recommendations (E.g. keep existing Code provision, implement recommendation or prefer another option). Provision has been made for any extended comments and a number of discussion questions listed for each recommendation.

Respondents are generally asked to consider whether the identified problem would be best addressed by a change in the Code or further education, what costs may be incurred if an option is implemented, whether there are any specific advantages or disadvantages to one option or another and if they can see any unintended consequences that would arise from implementing an option. Respondents are also asked to advise if they can suggest another option to achieve the policy intent behind the recommendation.

It would seem therefore that we have some time to wait before we see any changes to the Code. Any draft amendments that arise could be further delayed or even scrapped due to the Federal election which seems, at this stage, likely to lead to a change in Government.

Click here to read the original report,  the latest consultation paper and the template response.

It is possible to send an anonymous submission. The closing date for submissions is Tuesday 9 July 2013.