Australia: Federal Government releases report in relation to unconscionable conduct and the Franchising Code
Franchising Update

On 3 March 2010, the Federal Government released an expert panel report commissioned by the Minister for Small Business, Independent Contractors and the Service Economy and the Minister for Competition Policy and Consumer Affairs. The report is in part in response to the 2008 inquiry into the franchising sector issued in November 2009 (see our previous update here ).

The Panel's report deals with certain areas of the Trade Practices Act 1974 (Cth) (TP Act) and the Franchising Code of Conduct (Code) to protect against unconscionable conduct and undesirable behaviours between franchisors and franchisees. These recommendations include:

1. inserting a list of examples that all parties agree constitute unconscionable conduct, or incorporating a statement of principles concerning unconscionable conduct, into the Act.
2. introducing into the Code a list of examples of specific behaviours that may be inappropriate in a franchising arrangement, with particular reference to:
   1. unilateral contract variation;
   2. unforeseen capital expenditure;
   3. franchisor-initiated changes to franchise agreements when a franchisee is trying to sell the business;
   4. attribution of legal costs; and
   5. confidentiality agreements.

A full copy of the panels report is available here , however we provide a summary of the key findings of the report below.

Unconscionable conduct

In relation to preventing unconscionable conduct, there already exists a body of equitable and common law principles which provide an avenue of relief for a party who has been the victim of unconscionable conduct. In addition to these principles, there are statutory unconscionable conduct provisions contained within the TP Act.

There is however, a view that the unconscionable conduct provisions of the TP Act lack clarity and are out of reach of small businesses, leading to uncertainty and a lack of confidence. Accordingly, a number of suggestions were put forward to the panel to assist in the development, application and understanding of the unconscionable conduct provisions of the TP Act.

The panel has:

1. rejected the proposal that a list of examples of what constitutes unconscionable conduct be included in the TP Act. This is due to the broad range of industries to which the unconscionable conduct provisions of the TP Act apply.
2. accepted the proposal that a statement of interpretative principles would assist the courts in interpreting the unconscionable conduct provisions of the TP Act, assist stakeholders to understand them, and assist regulators to enforce them.
3. stated that the principles should recognise that the unconscionable conduct provisions of the TP Act are intended to go beyond the scope of the equitable and common law principles (such as by not requiring an individual relying on them to be suffering from a 'special disadvantage').
4. recommended that the ACCC, ASIC and the relevant state and territory regulators work together to provide more guidance and educative material concerning the law of unconscionable conduct. This is especially true given the future 'one law, multiple regulators' model which is a feature of the incoming Australian Consumer Law.
5. recommended that the Federal Government consider harmonising the two separate provisions of the TP Act dealing with unconscionable conduct, or alternatively unifying them into one provision.

Franchising reforms

The Panel was commissioned to address five specific franchising behaviours. These are:

1. Unilateral contract variation

   The Panel has:

   • rejected the proposal for prohibitions on unilateral variations to a franchise agreement by a franchisor – that is allowing franchisors to make changes;
   • rejected the proposal for a prohibition of franchisors varying their operations manual (effectively varying the franchise agreement in many respects);
   • rejected the idea that variations be conditional on some external event (such as, for example, a regulatory change), or that franchisees receive compensation in relation to costs incurred; and
   • acknowledged that often there are legitimate needs for a franchisor to vary its franchise agreement and operations manual to respond to market and regulatory demands, however they indicated that greater disclosure to prospective franchisees could assist in addressing the concerns of various parties.
2. >strong>Unforeseen capital expenditure

   The Panel has:

   • rejected the proposal to deal with concerns that franchisees may be required to undertake capital expenditure without sufficient periods of time to recoup this expense;
   • acknowledged that franchisors need to ensure that they remain competitive and respond to market demands and regulatory changes; and
   • indicated that greater disclosure to prospective franchisees could assist to address the concerns of various parties, similarly to unilateral contract variations.
3. Franchisor-initiated changes to franchise agreements

   In a similar vein to unilateral contract variations discussed above, the Panel has:

   • rejected calls to restrict the ability of a franchisor to vary the terms of a franchise agreement which are offered to a prospective franchisee when an existing franchisee is seeking to sell its business; and
   • noted the Federal Government's proposed further disclosure in relation to end of term arrangements (see our previous update).
4. Attribution of legal costs

   Despite the Panel's acknowledgement that clauses under a franchise agreement requiring one party to pay the other parties legal costs may act as a disincentive to a franchisee or franchisor initiating dispute resolution processes, the Panel has:

   • rejected the proposal that the attribution of legal costs be more heavily regulated; and
   • acknowledged that under the Code, parties are equally liable for their own costs associated with attending mediation under the Code.
5. Confidentiality agreements

   Although the Panel's report acknowledged the view contained in some submissions that confidentiality clauses (including at the end of a franchise agreement or resulting from a dispute) may prevent franchisees and prospective franchisees from identifying problems with a franchise system, the Panel has:

   • found there was little empirical evidence as to the extent this causes a problem;
   • acknowledged that confidentiality agreements may have a legitimate purpose, such as to protect the franchisor's intellectual property; and
   • rejected a prohibition on the use of confidentiality agreements in the franchising sector.

Additional recommendation with respect to Code

In addition to the Panel's findings outlined above, the Panel has also recommended that a franchisor provide a simple plain English disclosure document. This is in addition to the current disclosure document provided to prospective franchisees. This recommendation has been warmly received by the Federal Government.

Where to from here?

The Panel's report will come as a relief to franchisors as proposed statutory restrictions on their conduct do not go beyond those proposed by the Federal Government in its response to the 2008 inquiry into the franchising sector. While the recommendations of the Panel will by no means be a simple exercise for franchisors to introduce (much like the reforms to the Code in 2008), given the indications of the Federal Government that the changes be allowed to operate for a period of three to five years, there will soon be regulatory certainty in the sector moving forward.

The Federal Government had previously indicated that it intended to introduce changes to the Code as a result of its response to the 2008 inquiry early this year. It is reasonable to expect that these further measures will be introduced at the same time.

Please contact a member of the gadens lawyers' franchising group if you would like further information in relation to the changes to the Code and unconscionable conduct.