Do franchises have anything to fear from parliamentary inquiry?

The parliamentary inquiry into the operation and effectiveness of the franchising code of conduct commenced on Friday, 8 June 2018, and is expected to deliver change to the sector.

Seemingly endless media stories have highlighted franchising problems including disputes between franchisors and franchisees, stories of franchisees working hard for little to no financial reward and, in some cases, ending up in extreme financial distress. There have been accusations of unfair arrangements, and underpayment of wages.

More than 100 written submissions were made since the parliamentary inquiry was announced in March 2018. A substantial number of these submissions were from franchisees complaining about lack of transparency, excessive fees and unfair arrangements with suppliers.

Some high-profile examples include Australia Post, one of the first cases discussed at the Inquiry, with franchisees reportedly complaining Australia Post misled them on growth potential. ASX-listed franchisor Mortgage Choice was in the media during the lead-up to the Inquiry after multiple franchisees complained publicly about their remuneration agreements, claiming the remuneration models were sending them to the wall.

Other franchisor entities, including 7-Eleven and Caltex, have been sanctioned by the Fair Work Ombudsman (FWO). Dominos is being investigated, and Retail Food Group (owner of Michel’s Patisserie, Gloria Jeans and Donut King, among other franchises) has been accused of numerous breaches of the Code amid worsening performance of its franchises.

Given these troubles, the Inquiry arguably comes at a good time. But do franchisors or franchisees have anything to fear from the parliamentary inquiry? They only have something to fear if they are concerned about more regulation and changes to the Franchising Code of Conduct.

A glance at the Inquiry’s Terms of Reference suggests changes to the Code are likely: the terms refer to ‘the operation and effectiveness of the Franchising Code of Conduct, including the disclosure document and information statement, and the Oil Code of Conduct, in ensuring full disclosure to potential franchisees of all information necessary to make a fully-informed decision when assessing whether to enter a franchise agreement’.

When analysing full disclosure of all information necessary for a ‘fully-informed decision’, the Inquiry will consider issues such as:

• likely financial performance of a franchise and worse-case scenarios
• the contractual rights and obligations of all parties, including termination rights and geographical exclusivity
• the leasing arrangements and any limitations of the franchisee’s ability to enforce tenants’ rights and
• the expected running costs, including cost of goods required to be purchased through prescribed suppliers.

Other big issues to be covered include dispute resolution and termination provisions in the current Code. Specifically, the Inquiry will discuss:

• the effectiveness of dispute resolution under the Franchising Code of Conduct and the Oil Code of Conduct
• the impact of the Australian consumer law unfair contract provisions on new, renewed and terminated franchise agreements entered into since 12 November 2016, including whether changes to standard franchise agreements have resulted
• whether the provisions of other mandatory industry codes of conduct, such as the Oil Code, contain advantages or disadvantages relevant to franchising relationships in comparison with terms of the Franchising Code of Conduct
• the adequacy and operation of termination provisions in the Franchising Code of Conduct and the Oil Code of Conduct
• the imposition of restraints of trade on former franchisees following the termination of a franchise agreement and
• the enforcement of breaches of the Franchising Code of Conduct and the Oil Code of Conduct and other applicable laws, such as the Competition and Consumer Act 2010, and franchisors.

While these terms of reference provide scope for substantial changes to the Code, franchisors and franchisees need not feel compelled to sit on their hands – there are things they can look into now that will put them in a good position and may even provide a head start.

Franchisors and franchisees must consider any ways to improve transparency and fairness to all parties, particularly in these key areas:

• Termination rights: Franchise agreements should provide the franchisee the right to terminate the agreement and to exit without incurring significant costs and losses where they have not breached the agreement. Conversely, franchisors should also provide themselves the ability to terminate the agreement for material breaches (such as wage fraud and underpayment of employees).
• Unfair contract terms: The unfair contracts regime in the ACL applies to franchises where the franchisee is a ‘small business’. Where this is the case, franchisors should ensure that terms in their franchise agreements do not constitute ‘unfair terms’. Particular attention should be paid to those clauses that are not necessary or appropriate to protect their interests. Examples of such clauses are restraints, liquidated damages clauses, and requirements to purchase supplies from specific (more expensive) suppliers.
• Reporting obligations: Strict reporting obligations should be included in franchisor agreements to minimise the risk of wage fraud and underpayment of employees from going unnoticed.
• Disclosure of information: Franchisors should provide franchisees with all information required for them to make informed decisions. This should include materially accurate financial information, the projected financial performance of the franchise, worst-case financial performance, details regarding leasing arrangements (including any limitations of the franchisee’s ability to enforce tenant rights) and expected operating costs.