On 20 August 2020, the Government released it's response to The Parliamentary Joint Committee’s Fairness in Franchising report. The 2019 report proposed far-reaching changes to the Franchising Code of Conduct (Code) and was in places quite scathing of behaviour in certain parts of the franchising sector. We previously produced an article summarising the findings of this report. However, in its response, the Government stated that the more egregious conduct referred to in the report did not appear to be widespread. The enquiry was timely and did highlight some concerning behaviour within the sector. However, the Government appears to have taken a measured view on the findings in the report which, if fully implemented, could have swung the pendulum too far and had a detrimental impact on the viability of franchise networks as a business model for franchisors . Many of the proposed actions in the Government’s response are light on detail so the true application of these will not be known until additional information and materials are produced. However, franchisors can take some comfort that the Government’s response acknowledges the material regulatory burden that already exists on franchisors and is not looking to significantly intervene in the relationship between a franchisor and a franchisee.

The response includes action items to deal with issues raised in the report including:

• information given to and awareness of franchisees, in particular on entry into a franchise agreement
• capital expenditure requirements on franchisees and use and reporting of marketing funds
• resolution of disputes
• exit arrangements and termination rights
• enforcement of the Code and regulatory framework.

The response also refers to the range of actions the Government has already taken to deal with issues arising from the report, including strengthening the Australian Competition and Consumer Commission’s (ACCC’s) information gathering powers and changes to the Code to give additional rights to automotive sector franchisees where franchise agreements are not renewed.

Information and entry into franchise agreements

The report raised issues around inadequate or insufficient information being provided to franchisees to allow them to make informed decisions when entering into franchise agreements. To address this the Government is proposing to consult with the sector to develop:

• a public register of franchisors – although it is not yet clear what information the Government is proposing would be included on this register
• a ‘Key Disclosure Information Fact Sheet’ containing a summary of key information from the disclosure document. The Government has indicated that this will also contain financial information to assist franchisees assess the time they will need to commit to the business, including information about supplier rebates
• a franchising specific website which will contain information and support specific to the franchising sector.

The Government also proposes to amend the Code to:

• require disclosure documents and franchise agreements to be provided in both electronic and hard copy
• clarify that the Information Statement must be given prior to and separately from providing the disclosure document. This Information Statement will also be revised to include: warnings about labour costs of franchises, advice on obtaining information about employment matters and compliance with relevant laws, and additional information around the treatment of marketing funds in the event of franchisor insolvency
• make changes to increase transparency around retail leases
• require that franchisors disclose their interests (e.g. incentives received) in leasing arrangements
• require that financial information in disclosure documents include a statement on their accuracy and appropriateness
• allow a franchisee to terminate under the cooling off provisions 14 days after the last of either: the franchise agreement being signed, a payment being made, the disclosure document being received and a copy of a lease being received. Cooling off rights will also be extended to franchisees that enter a substantially new franchise agreement which will constitute a deemed transfer, but not renewals or extensions on the same terms.

The response also states that the laws will make it clear that a breach of the Competition and Consumer Act 2010 will be triggered if a supplier rebate to a franchisor results in a substantial lessening of competition (to the extent this is not already the case).

Capital expenditure and marketing funds

The Government will increase franchisees’ rights where the franchisor requires that significant capital expenditure be incurred by applying the recent changes to the Code in relation to the automotive sector to all franchises. These changes:

• prohibit franchisors from requiring franchisees to undertake significant capital expenditure, except where it has been disclosed before entering into a franchise agreement, is legally required, or is agreed to by the franchisee
• introduce an obligation to discuss expenditure prior to entering an agreement
• require disclosure of the circumstances under which the franchisee is likely to recoup the expenditure
• require franchisors to specify, as far as practical, the amount, timing and nature of the expenditure to be provided.

The Government will:

• instruct the Department of Industry, Science, Energy and Resources to write to the Australian Accounting Standards Board, asking it to consider whether guidance for auditing of marketing and cooperative funds is required
• work with the sector to emphasise the importance of developing best practice financial statements.

Dispute resolution

To strengthen dispute resolution services and allow multi-party dispute resolution, conciliation and voluntary binding arbitration under the Code, the Government will:

• incorporate the functions of the Franchising Mediation Adviser into the Australian Small Business and Family Enterprise Ombudsman (ASBFEO), to improve the efficiency of dispute resolution assistance and make it clearer that ASBFEO can assist with franchise disputes
• ensure all franchisees can access ASBFEO’s dispute resolution services
• implement a voluntary binding arbitration model by appointing a Franchising Arbitration Adviser, utilising a model similar to that in the Dairy Industry Code
• introduce conciliation to complement existing dispute resolution provisions
• support ASBFEO’s power to write to the ACCC and other regulators notifying them of systemic or serious matters that have come to its attention
• provide best practice guidance on timeframes for the commencement and completion of dispute resolution processes
• amend the Code to clarify that, if the person conducting the dispute resolution process determines it is appropriate to conduct a multi-party process, the franchisor cannot refuse to take part in that process.

Exit and end of term

To address concerns around the inability of franchisees to exit franchises and franchisor favoured termination rights in franchise agreements, the Government will:

• consult with the sector on changes to the Code to facilitate negotiated early exits
• amend disclosure requirements to ensure end-of-term arrangements for franchisee goodwill are clearly specified
• require franchisors to clarify a franchisee’s entitlement to goodwill in the franchise agreement and include this information in the Key Disclosure Information Fact Sheet
• amend the Code to require the franchisor provide seven days’ notice of a proposed termination in special circumstances, so that a mediator or arbitrator can assist the parties to negotiate (although the comments indicate there may be carve outs for fraud or public safety – but insolvency is not mentioned)
• make some technical changes to the Code for restraint of trade clauses, as well as initiatives designed to increase awareness such as including warnings to obtain advice on restraints in the Information Statement.

Enforcement and regulatory framework

To encourage compliance, the Government will:

• double the penalties that apply for breaches of the Code from $66,600 to $133,200
• amend the Code to apply penalties for breaches of clauses that relate to the use of marketing funds as it considers this is a source of dispute between franchisors and franchisees.

The Government will work with stakeholders to develop best practice models for the process by which a franchisor makes unilateral variations to contracts and subsidiary documents and will:

• improve awareness of existing unfair contract term protections and mechanisms with which franchisees can seek redress
• consider appropriate amendments to the Code relating to retrospective variation
• amend the Information Statement to emphasise the importance of understanding Code requirements before entering a franchise agreement.

The Government declined to single out franchise agreements in the context of the review of legislation to prohibit unfair contract terms in standard form small business contracts.

The Government also proposes to:

• improve franchisees’ awareness about 'no agent' and 'entire agreement' clauses by including information about this in the Information Statement to prevent franchisors avoiding liability for misrepresentations by brokers.
• prohibit (and have pecuniary penalties for) franchisors passing on the legal costs of preparing, negotiating and executing documents to the franchisee (except where it is already incorporated into a joining fee).
• improve awareness of the issue of wastage and shrinkage payments by franchisees.
• upon finalising amendments to the Code, consider amending the Oil Code of Conduct to ensure consistency where appropriate, as part of the Oil Code of Conduct review.

In conclusion, the Government appears to have taken a considered and measured approach to the report and is not seeking to fundamentally alter the regulatory landscape of the franchising sector. A significant number of the recommendations are targeted at better equipping franchisees to understand the risks involved in running a business (which would be there whether they were part of a franchise or otherwise) and key terms in franchise agreements. However, as always, the devil will be in the detail and there are many issues which the Government is proposing to engage in further consultation on before determining what action to take.

So how should franchisors react to the Government’s response? Although the response does not say when the changes will be implemented franchisors should start to consider how the proposed changes will affect their networks to ensure they have sufficient time to prepare for them. Given the release of the Government’s response and the ACCC’s investigations into the Retail Food Group, we expect that franchising will continue to remain an area of focus of the ACCC. It would also be worthwhile for franchisors to consider adopting some of the recommendations now, to the extent they are clear and uncontroversial.