Time for a service? ACCC secures Court enforceable undertaking from Bob Jane
Recent enforcement action by the ACCC against the large tyre retailer, Bob Jane Corporation Pty Ltd acts as a reminder to franchisor’s that even mature, sophisticated franchise systems can be tripped up by the requirement to give notice to franchisees who hold-over after the expiry of a franchise agreement’s term.
In line with its current compliance and enforcement priorities, the ACCC continues to focus on upholding the Franchising Code of Conduct (Code) and protecting franchisees. Following the ACCC’s intervention, Bob Jane Corporation Pty Ltd (Bob Jane) has given a court-enforceable undertaking to ensure future compliance.
End of term obligations under the Code
In circumstances where there is no option to renew or either party is unsure whether they should enter into a new franchise agreement, a franchisor may permit a franchise agreement to continue on foot by virtue of a holding-over arrangement. Some franchise agreements contain an express holding-over mechanism, whereas other franchise agreements do not contain a holding-over mechanism and parties instead choose to enter into an arrangement separate from the terms of the franchise agreement. Holding-over clauses are typically only designed as a stop gap measure to provide coverage for a duration of days or weeks where there is a short delay in, for example, signing a new franchise agreement.
The Code requires franchisors to discharge certain obligations to franchisees prior to extending an existing franchise agreement, or entering into a new franchise agreement:
- notify its franchisees of its intentions to extend or enter into a new franchise agreement, complying with strict time-frames
- provide mandated disclosure requirements within strict time-frames
- obtain written confirmation from the franchisee that they have received, read and had an opportunity to understand the mandatory disclosure documents, plus other obligations relating to recommendations to seek provisional advice in certain circumstances,
(collectively, the End of Term Obligations).
The Code defines ‘extend’ to include a material change to the terms and conditions of an agreement (for example, its duration), the rights of a person under the agreement and the liabilities that would be imposed on a person under or in relation to the agreement.
For most franchise agreements, the franchisor must give franchisees at least six months’ notice of their intention to either extend an existing franchise agreement, or enter into a new franchise agreement, before the end of the franchise agreement’s term. For shorter franchise agreements, at least one months’ notice must be given. The Code requires franchisors to satisfy their notice obligations to franchisees within the strict timeframes set out in the Code. If a franchisor fails to do so, then this will constitute a breach of the Code, such that the franchisor will be liable to a penalty.
ACCC’s concerns regarding Bob Jane’s conduct
The well-known Bob Jane T-Marts business is comprised of a national franchising network, consisting of 86 franchised stores and 49 company owned stores. Historically, the majority of Bob Jane’s franchisees have operated a standard form franchise agreement, with an indefinite term – not uncommon in older, established Australian franchise systems. In 2004 and 2005, the Bob Jane franchisor (Franchisor) offered new franchisees a ‘fixed term’ agreement (usually ten-years) which, unlike Bob Jane’s standard form agreement, expired at the end of that term. In 2015, many of the fixed term agreements entered in 2004-2005 expired and the Franchisor permitted each franchisee to continue operating on a ‘hold-over’ basis.
In 2017, the ACCC first raised concerns with the Franchisor that its holding-over arrangements might be in contravention of the Code. The Franchisor agreed with the ACCC to resolve the issues raised by it, but the franchisees continued to operate on a ‘holding-over’ basis. By 2019, the ACCC remained concerned that the Franchisor had not adequately addressed the matters from 2017 and similar issues had again arisen. The ACCC was primarily concerned that the Franchisor had failed to comply with the End of Term Obligations. The Franchisor acknowledged that its conduct was likely to be in contravention of the Code and the CCA and gave the ACCC a court-enforceable undertaking.
It is unclear whether the Franchisor’s fixed term franchise agreements contained an express holding-over clause, or if the holding-over had been agreed more informally between the parties. However, it is not uncommon to see franchisors permitting franchisees to enter into vague holding-over arrangements without contemplating how such arrangements interact with the Code and, in particular, whether the End of Term Obligations have been complied with before the franchisee is ‘rolled into’ the holding-over arrangement. The risk for franchisors, in doing so, is that they may breach the End of Term Obligations when commencing the hold-over period, and a raft of issues may then arise when attempting to bring the holding-over arrangement to an end. The latter issues are compounded where the holding-over arrangements have continued for an extended period, whether pursuant to a formal holding-over clause in a franchise agreement or on any other basis.
Key takeaways for Franchisors
Bob Jane’s recent run-in with the ACCC suggests that the ACCC are continuing to enforce compliance by franchisors’ with their obligations under the Code. Given the risk of fine attached to Code breaches, franchisors should seek legal advice on the structure of any holding arrangements and any resultant obligations under the Code. As should be clear from the above, long term holding-over arrangements (stretching more than a few months) can give rise to unexpected risks and are therefore inadvisable. Further, franchisors must ensure that they:
- give franchisees the minimum notice proscribed by the Code in connection with their intention to extend or enter into a new franchise agreement
- satisfy their disclosure obligations and related procedural obligations under the Code when they intend to extend or enter into a new franchise agreement
- carefully consider their 'holding-over' arrangements – whether in the franchise agreement and/or negotiated separately with franchisees.
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