Australia: Franchising reforms: Federal Government response to 2008 inquiry

In late 2009, the Federal Government published its response to the 2008 inquiry into the franchising sector, and indicated it will accept a number of the recommendations made in the 2008 inquiry.

Increase in ACCC powers

The Federal Government proposes to increase the powers of the ACCC, specifically by:

• empowering the ACCC to undertake random audits
• empowering the ACCC to seek redress on behalf of franchisees who are party to a franchise agreement
• empowering the ACCC to 'name and shame' rogue or unscrupulous franchisors
• allowing the ACCC to issue a 'substantiation notice', which will require businesses to provide the ACCC with information to substantiate claims made by them
• where a large number of franchisees are harmed by the behaviour of a franchisor in breach of the Franchising Code of Conduct (Code), allowing the ACCC to apply for orders providing redress for that breach to all franchisees in a franchise network, without requiring all franchisees to be party to the litigation.

The Federal Government has however declined to introduce specific financial penalties for breaches of the Code.

Dispute resolution

The Federal Government proposes to amend to the Code to introduce a list of necessary and desirable behaviours to be displayed by the parties to a dispute in relation to dispute resolution, including:

• attending and participating in meetings at reasonable times
• making intentions clear at the outset of the mediation (that is, if the aim is to negotiate an exit arrangement rather than a resolution to enable continued operation, this should be disclosed)
• observing confidentiality obligations during and after the mediation process
• not damaging the franchise brand during the dispute, including by providing inferior goods, services or support.

End-of-term arrangements

The Federal Government proposes that franchisors should be required to disclose to franchisees the process that will apply in determining end-of-term arrangements. This will involve, amongst other things, requiring franchisors to:

• disclose to franchisees whether or not there is some right of renewal beyond the term of the franchise agreement
• inform franchisees at least six months before the end of the franchise agreement of the franchisor's decision to either renew or not renew the franchise agreement.

It is proposed that these arrangements will not apply retrospectively, however will apply to all franchise agreements entered into after the Code is amended.

Good faith obligations

The Federal Government has declined to introduce into the Code a general obligation of good faith in relation to franchising. It proposes, however, to make clear that nothing contained within the Code should limit any common law requirement of good faith in relation to a franchise agreement.

Despite this, a further inquiry to be conducted (see below) may identify specific behaviours that are inappropriate in a franchising relationship to be included in the Code.

Unconscionable conduct

In addition to the remedies currently available under the Trade Practices Act 1974 (Cth) (TP Act), the Federal Government proposes to introduce penalties of up to $1.1 million for a corporation, or $220,000 for an individual, who has breached the unconscionable conduct provisions of the TP Act.

In addition, the Federal Government has maintained its direction to the ACCC to continue to initiate proceedings for the purpose of developing further judicial guidance on what constitutes unconscionable conduct under the TP Act.

Where to now?

The Federal Government has established a panel of experts in the area of trade practice law and policy to consider the need to include in the TP Act a list of examples or statement of principles outlining 'unconscionable conduct', and to consider the need to introduce into the Code a list of examples of specific behaviours that are inappropriate in a franchising relationship. Particular reference will be made to:

• unforeseen capital expenditure
• unilateral contract variation
• attribution of legal costs
• confidentiality agreements
• franchisor-initiated changes to franchise agreements when a franchisee is trying to sell the business.

This panel is expected to release its report some time this month.

It is expected that legislation to give effect to the Federal Government's response to the 2008 inquiry will be introduced early this year.

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