The Franchising Code of Conduct (the 'Code') regulates all franchising in Australia. Importantly, it sets up standards for both franchisors and franchisees to follow. On 7 May, the government responded to the Independent Review of the Franchising Code of Conduct (the 'Review'). The Review submitted 23 recommendations for changes to the Code, and the government agreed to all of them. This article will explain some key findings from the Review and what that means for you as a franchisor or franchisee.
What Were the Key Findings of the Review?
Although the Review accepted that the Code is generally fit for purpose, it identified a number of shortfalls in the Code's operation. We explore these in more detail below.
Enforcement by the ACCC
The Review found that the Australian Competition and Consumer Commission (ACCC) had only a limited ability to take enforcement action for breaches of the Code. In particular, the ACCC is under-resourced and, therefore, not able to pursue every breach that may come to its attention.
Notably, franchisees felt that the ACCC needed to take a more proactive approach when addressing non-compliance with the Code.
When asked the question, "How effective do you think the ACCC is in regulating the franchise sector?", franchisees gave an average score of 3.9/10.
Confusion Surrounding the Code
The Review determined that franchisors and franchisees both often misunderstand the Code, including its purpose and effect.
Meaning of 'Good Faith'
The Review asserted that the Code should provide further guidance on the meaning of 'good faith'. In general, acting in good faith requires a party to act honestly and fairly in its dealings. However, there is significant nuance to this term, as demonstrated in 2022 by the Mercedes Benz case.
With a flexible definition of 'good faith', the Code can respond to unforeseen or developing circumstances. Nonetheless, a lack of further guidance also makes it more difficult to prove that a party has acted contrary to good faith.
Dispute Resolution
The Review suggested that the Code could improve its dispute resolution mechanisms to further benefit franchisees' access to justice. While most agreed that participation in mandatory dispute resolution processes was important, the Review raised awareness of the process and relevant costs as key issues.
Where mediation is unsuccessful, cost is often a significant barrier to a franchisee being able to resolve a dispute with a franchisor. In 2023, the estimated cost of going to the Federal Court was approximately $151,000. Awareness of voluntary arbitration as an option and favouring arbitration over litigation could also be a helpful tool for franchisees.
Motor Vehicle Dealerships
The Review also found that the application of the Code to motor vehicle dealerships requires clarification. Notably, it submitted that service and repair work from these dealerships should be explicitiy captured within the Code's scope.
How Does This Affect Franchisors and Franchisees?
The government will be implementing changes to the Code in stages, beginning with quick changes in the short term. More comprehensive overhauls of the regulations are planned in the long term. We set out the key impacts of these changes in the table below.
| Impact | Explanation |
|---|---|
| Fairness and Access to Justice | The changes will be targeted towards creating a fairer operating environment for franchisors and franchisees. They will also aim to simplify disclosure obligations. This includes assisting franchisees to access low-cost legal advice and limiting costs orders against them. |
| Enforcement | There will be a focus on stronger enforcement of the Code through increasing the number of breaches, which will attract financial penalties. The changes also seek to 'name and shame' franchisors that fail to participate meaningfully in the dispute resolution processes required by the Code. |
| Understanding the Code's Purpose | The Code will contain a 'statement of purpose' to clarify its intention and provide useful guidance when interpreting and applying this law. |
| Streamlining Disclosure | The information given to franchisees before entering into a franchise agreement should be streamlined. This reduces the unnecessary compliance burden for franchisors and makes key information for franchisees more concise. Further, disclosure obligations for existing franchisees will be streamlined, such as where the franchisee is renewing or extending their agreement. |
| Franchise Disclosure Register | The government will take steps to promote the visibility and use of the Franchise Disclosure Register. There are also plans to expand the scope of what it should include, such as disclosure of dispute resolution proceedings and adverse actions brought by enforcement agencies. |
| Simplifying Termination | Termination processes will aim to be simplified, especially for serious breaches. |
| Restraints | Restraints of trade and non-compete clauses will be examined. This is to ensure that uncompetitive and unfair terms in franchise agreements are less widespread. |
| Regular Reviews | The government agreed that there should be reviews of the Code every 5 years to ensure it is fit for purpose and keeping up with industry changes. |
Key Takeaways
The upcoming changes to the Franchising Code of Conduct show the government's commitment to ensuring best practice in the franchising sector. As a result, it is imperative that you understand these changes and how they will affect your business. Key changes you should note are:
- emphasising fairness and access to justice;
- focusing on enforcing the Code and its purpose;
- streamlining disclosure processes;
- promoting Franchise Disclosure Register;
- simplifying termination procedures;
- examining contractual restrains more closely; and
- conducting regular reviews of the Code.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.