Changes Recommended to Australian Franchising Legislation

The process of revisions to the Code began at the start of the year and proceeded quickly until the change in government. On Jan. 14, 2013, the federal government announced the review of the Code by Alan Wein, an experienced franchising practitioner and mediator. The government issued a consultation paper giving background for the review and seeking submissions. After reviewing submissions and engaging in extensive consultation with key stakeholders, the Wein Report was presented to the government on April 30. See, http://bit.ly/17EONpK. Consultations with key stakeholders followed.

New Minister for Small Business Billson has signaled his support, in principle, for the Wein Report recommendations. The recommendations also have general support from the Australian Competition and Consumer Commission (ACCC), which is the regulator charged with enforcing the Code, and the peak industry body, the Franchise Council of Australia (FCA).

The recommendations are somewhat broad in nature, and implementation will require careful drafting to avoid increased compliance costs and unintended consequences. The FCA is discussing the implementation of the Wein Report recommendations with the relevant government department, and has even produced a revised version of the Code incorporating the recommendations and some additional improvements. See, http://bit.ly/HbAYZQ. The FCA has also approached Billson seeking an exemption from the unfair contracts legislation for franchise agreements that are covered by the Code. Those discussions are likely to continue throughout 2013, and possibly beyond.

Wein Report Recommendations

If implemented, the Wein Report recommendations will significantly strengthen the Code and give the ACCC enhanced enforcement powers. The recommendations are also designed to improve disclosure and reduce compliance costs, including compliance costs for foreign franchise systems.

The Wein Report makes 18 recommendations, which are summarized below:

1. A franchisor must provide a disclosure document with the franchisor's notice of intention to renew at least six months prior to the end of the franchise term. This is in addition to the normal disclosure obligation prior to signing a franchise agreement.
2. A foreign franchisor would have reduced disclosure obligations in certain circumstances. It is proposed that a foreign franchisor be relieved of its obligation to update its disclosure document annually, but perhaps be required to provide written responses to any queries in relation to a franchise agreement to which it is a party on matters that would be contained in a disclosure document.
3. A franchisor must disclose its right to conduct online sales.
4. The short form disclosure document in Annexure 2 of the Code is to be removed.
5. Franchisors are to provide a generic risk statement to prospective franchisees. The statement is not intended to address specific risks related to that particular franchise.
6. Franchisees have a right to terminate a franchise agreement in the event of insolvency, and franchisees become secured creditors in any liquidation for an amount calculated as the unexpired portion of the initial franchise fee.
7. Franchisors are prohibited from imposing unreasonable capital expenditure requirements on franchisees.
8. The requirements for administration of marketing funds are to be strengthened.
9. The common law duty of good faith is to be expressly included in all franchise agreements and in relation to the franchise relationship.
10. A franchisee must initiate any request that the franchisee's details be excluded from a disclosure document.
11. A franchisee must provide all reasonable information to a franchisor before triggering the 42-day notice period.
12. If a franchisor does not grant a franchisee an extension of a franchise agreement on expiry, and the franchisee is not in breach, and other conditions are satisfied, any post-term non-compete provisions shall not apply to the franchisee.
13. The Code mediation process applies to all mediations, including court mediations.
14. A franchisor cannot pass on to a franchisee the costs of dispute resolution and cannot require to litigation outside the Australian state where the franchise is located. (This recommendation is contentious, and it is contrary to the generally accepted principle that the parties to a business contract should be free to choose the law and jurisdiction that are to apply to the contract.)
15. The ACCC would be given stronger enforcement powers, including the ability to issue infringement notices and levy new pecuniary penalties for breach of the Code, conduct random audits, disqualify individuals from managing a company, and request a court to order royalty-free periods and payment of money into marketing funds.
16. Minimum term agreements and standard term contracts in the motor vehicle sector should be subject to further scrutiny and analysis.
17. There should be no further review of the Code for at least five years.
18. Various drafting improvements set out in the annexure to the Wein Report should be made in consultation with representatives of the franchise sector.

Of the 18 recommendations, those most relevant to foreign franchise systems are probably:

• Reduced disclosure obligations in certain circumstances.
• Franchisees have a right to terminate a franchise agreement in the event of insolvency, and franchisees become secured creditors in any liquidation for an amount calculated as the unexpired portion of the initial franchise fee.
• Franchisors are prohibited from imposing unreasonable capital expenditure requirements on franchisees.
• The common law duty of good faith is to be expressly included in all franchise agreements and in relation to the franchise relationship.
• Non-enforcement of post-term non-compete provisions under the situations described in the section above.
• A franchisee cannot be required to litigate outside the Australian state where the franchise is located. (As noted above, this is contentious.)
• The ACCC's stronger enforcement powers.

Although most of the recommendations seem relatively innocuous at first glance, there are numerous implementation challenges, and discussions are still continuing with government in relation to particular issues.

Conclusion

The FCA is currently working closely with the federal government to develop amendments to the Code that give effect to the intent of the recommendations without imposing additional compliance costs or having unintended consequences. In the background, interest groups unhappy that the Wein Report did not recommend changes such as automatic extension of franchise agreement term or compensation at end of term and a new statutory duty of good faith continue to lobby for additional changes. The South Australian State Government has not yet confirmed whether it will abandon its stated intent of enacting state-based legislation governing franchising, although the inclusion of the good faith duty and enhanced penalties for the ACCC make it hard for that State to justify further legislation.

Franchise regulation in Australia remains in a state of flux, although the core elements of the regulatory framework remain unchanged. Any changes to the regulatory framework are unlikely to occur until the middle of 2014.

Stephen Giles is a partner with Norton Rose Fulbright who specializes in franchising, competition and commercial law. He has been leading negotiations with the federal government concerning the amendments to the Franchising Code of Conduct and has drafted the various submissions on behalf of the Franchise Council of Australia. For more information, contact [email protected].

The change of federal government in Australia on Sept. 7, 2013 has created some uncertainty in relation to the changes to the Franchising Code of Conduct (the Code) that were expected to result from a recent comprehensive review of the Code.

Incoming Federal Small Business Minister Bruce Billson has indicated that no action will be taken in relation to the Code prior to the end of the year, and that he intends to consult widely before considering any changes. Minister Billson is understood to be broadly supportive of the thrust of the Code recommendations, although in some areas he may consider further reforms to be desirable. An important complicating factor is that Billson has indicated he intends to proceed with legislation to prohibit unfair contractual provisions in standard form agreements. He has refused to rule out the application of such provisions to franchise agreements. No detail has been provided about how such provisions would be enacted. Similar reforms were introduced to the Australian Consumer Law in relation to consumer transactions. It is possible the government might seek to extend the application of these provisions to business transactions, although such an initiative is likely to be widely opposed by the business community.

Comprehensive Review of the Code Completed

The process of revisions to the Code began at the start of the year and proceeded quickly until the change in government. On Jan. 14, 2013, the federal government announced the review of the Code by Alan Wein, an experienced franchising practitioner and mediator. The government issued a consultation paper giving background for the review and seeking submissions. After reviewing submissions and engaging in extensive consultation with key stakeholders, the Wein Report was presented to the government on April 30. See, http://bit.ly/17EONpK. Consultations with key stakeholders followed.

New Minister for Small Business Billson has signaled his support, in principle, for the Wein Report recommendations. The recommendations also have general support from the Australian Competition and Consumer Commission (ACCC), which is the regulator charged with enforcing the Code, and the peak industry body, the Franchise Council of Australia (FCA).

The recommendations are somewhat broad in nature, and implementation will require careful drafting to avoid increased compliance costs and unintended consequences. The FCA is discussing the implementation of the Wein Report recommendations with the relevant government department, and has even produced a revised version of the Code incorporating the recommendations and some additional improvements. See, http://bit.ly/HbAYZQ. The FCA has also approached Billson seeking an exemption from the unfair contracts legislation for franchise agreements that are covered by the Code. Those discussions are likely to continue throughout 2013, and possibly beyond.

Wein Report Recommendations

If implemented, the Wein Report recommendations will significantly strengthen the Code and give the ACCC enhanced enforcement powers. The recommendations are also designed to improve disclosure and reduce compliance costs, including compliance costs for foreign franchise systems.

The Wein Report makes 18 recommendations, which are summarized below:

1. A franchisor must provide a disclosure document with the franchisor's notice of intention to renew at least six months prior to the end of the franchise term. This is in addition to the normal disclosure obligation prior to signing a franchise agreement.
2. A foreign franchisor would have reduced disclosure obligations in certain circumstances. It is proposed that a foreign franchisor be relieved of its obligation to update its disclosure document annually, but perhaps be required to provide written responses to any queries in relation to a franchise agreement to which it is a party on matters that would be contained in a disclosure document.
3. A franchisor must disclose its right to conduct online sales.
4. The short form disclosure document in Annexure 2 of the Code is to be removed.
5. Franchisors are to provide a generic risk statement to prospective franchisees. The statement is not intended to address specific risks related to that particular franchise.
6. Franchisees have a right to terminate a franchise agreement in the event of insolvency, and franchisees become secured creditors in any liquidation for an amount calculated as the unexpired portion of the initial franchise fee.
7. Franchisors are prohibited from imposing unreasonable capital expenditure requirements on franchisees.
8. The requirements for administration of marketing funds are to be strengthened.
9. The common law duty of good faith is to be expressly included in all franchise agreements and in relation to the franchise relationship.
10. A franchisee must initiate any request that the franchisee's details be excluded from a disclosure document.
11. A franchisee must provide all reasonable information to a franchisor before triggering the 42-day notice period.
12. If a franchisor does not grant a franchisee an extension of a franchise agreement on expiry, and the franchisee is not in breach, and other conditions are satisfied, any post-term non-compete provisions shall not apply to the franchisee.
13. The Code mediation process applies to all mediations, including court mediations.
14. A franchisor cannot pass on to a franchisee the costs of dispute resolution and cannot require to litigation outside the Australian state where the franchise is located. (This recommendation is contentious, and it is contrary to the generally accepted principle that the parties to a business contract should be free to choose the law and jurisdiction that are to apply to the contract.)
15. The ACCC would be given stronger enforcement powers, including the ability to issue infringement notices and levy new pecuniary penalties for breach of the Code, conduct random audits, disqualify individuals from managing a company, and request a court to order royalty-free periods and payment of money into marketing funds.
16. Minimum term agreements and standard term contracts in the motor vehicle sector should be subject to further scrutiny and analysis.
17. There should be no further review of the Code for at least five years.
18. Various drafting improvements set out in the annexure to the Wein Report should be made in consultation with representatives of the franchise sector.

Of the 18 recommendations, those most relevant to foreign franchise systems are probably:

• Reduced disclosure obligations in certain circumstances.
• Franchisees have a right to terminate a franchise agreement in the event of insolvency, and franchisees become secured creditors in any liquidation for an amount calculated as the unexpired portion of the initial franchise fee.
• Franchisors are prohibited from imposing unreasonable capital expenditure requirements on franchisees.
• The common law duty of good faith is to be expressly included in all franchise agreements and in relation to the franchise relationship.
• Non-enforcement of post-term non-compete provisions under the situations described in the section above.
• A franchisee cannot be required to litigate outside the Australian state where the franchise is located. (As noted above, this is contentious.)
• The ACCC's stronger enforcement powers.

Although most of the recommendations seem relatively innocuous at first glance, there are numerous implementation challenges, and discussions are still continuing with government in relation to particular issues.

Conclusion

The FCA is currently working closely with the federal government to develop amendments to the Code that give effect to the intent of the recommendations without imposing additional compliance costs or having unintended consequences. In the background, interest groups unhappy that the Wein Report did not recommend changes such as automatic extension of franchise agreement term or compensation at end of term and a new statutory duty of good faith continue to lobby for additional changes. The South Australian State Government has not yet confirmed whether it will abandon its stated intent of enacting state-based legislation governing franchising, although the inclusion of the good faith duty and enhanced penalties for the ACCC make it hard for that State to justify further legislation.

Franchise regulation in Australia remains in a state of flux, although the core elements of the regulatory framework remain unchanged. Any changes to the regulatory framework are unlikely to occur until the middle of 2014.

Stephen Giles is a partner with Norton Rose Fulbright who specializes in franchising, competition and commercial law. He has been leading negotiations with the federal government concerning the amendments to the Franchising Code of Conduct and has drafted the various submissions on behalf of the Franchise Council of Australia. For more information, contact [email protected].