Thinking | 11 April 2018
Government announces franchise inquiry – what does this mean for franchisors?
In response to highly publicised failings of franchisors, the Senate has resolved to commence a Parliamentary inquiry into the Australian franchising sector.
Over the past few months, there have been increasing calls for a review into the Australian franchising sector. Critics of the sector have cited the power imbalance and limited enforceability in practice of breaches of the Franchise Code of Conduct (Code).
The sector itself has been embroiled in numerous scandals in recent years. Notably, 7-Eleven, and more recently Caltex, have been sanctioned by the Fair Work Ombudsman (FWO). Investigations into Domino’s are ongoing, and Retail Food Group (owner of Michel’s Patisserie, Gloria Jeans and Donut King, amongst other franchises) has been accused of numerous breaches of the Code amidst worsening performance of its franchises.
In light of the purported non-compliance with the franchising regulatory framework by both franchisors and franchisees, there was a call for a parliamentary inquiry into the franchising sector.
On 21 March 2018, the Australian Senate resolved to commence a parliamentary inquiry into the Australian franchising sector. The inquiry is to report by 30 September 2018.
The areas that the inquiry will cover include:
- the operation and effectiveness of the Code, including the disclosure document and information statement, in properly informing franchisees of their rights and obligations (including financial performance, contractual obligations and rights, leasing arrangements and expenses)
- the effectiveness of dispute resolution under the Code
- the impact of the small business unfair contract provisions (under the Australian Consumer Law (ACL)) on franchise agreements
- adequacy of termination provisions under the Code
- the effect of restraints of trade under the Code
- the enforcement of breaches of the Code (as well as other applicable laws include the Competition and Consumer Act 2010 (Cth)).
The inquiry appears to focus on the power imbalance between franchisors and franchisees, particularly in relation to the effectiveness of the protections in the Code and the franchisee’s ability to enforce breaches. Further, it appears as though a primary focus of the inquiry will be ensuring that franchisors afford transparency to franchisees.
Critically, the inquiry also appears extensive enough to encourage a balanced review of the franchising sector and consideration of the problems faced by franchisors. Notably, franchisors have had difficulty terminating franchise agreements where the franchisee has been found to have underpaid employees. Such challenges will likely fall within the scope of the review, particularly given recent investigations and findings by the FWO.
Given the breadth of the inquiry, and the increasingly negative perception of the franchising sector, significant amendments to the Code (and the franchising regulatory framework) may result from the inquiry.
In the interim, franchisors should ensure that their franchise agreements are reasonable and fair. Some areas for franchisors to consider are:
- Termination rights: Franchise agreements should provide the franchisee the right to terminate the agreement and, where they have not breached the agreement, exit without incurring significant costs and losses. 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.
- 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 the expected costs of operating.
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