Wein’s world the sequel

The Abbott Government has announced significant changes to federal franchising law, proposed to come into effect from 1 January 2015.

The changes stem from the recommendations in relation to the Franchising Code of Conduct made in the 2013 Wein Review.  The draft exposure legislation and Code released by the Government this month incorporates the majority of those recommendations, despite the review having occurred under the previous Labor Government.

One of the key reforms is the introduction of a statutory duty of good faith on franchisors and franchisees in their dealings with each other, including when negotiating, with no ability to contract out of this duty.  A breach of the obligation will be subject to civil pecuniary penalties.

Another significant change is the introduction of penalties and infringement notices for breaches of the Code.  The ACCC will be given increased enforcement powers (similar to those under the ACL) to:

• seek civil pecuniary penalties of up to $51,000 per breach, for breaches of a number of provisions of the revised Code including failure to provide franchisees with end of term notices; and
• issue infringement notices of up to $8,500 if the ACCC has reasonable grounds to believe that a person has contravened a civil pecuniary penalty provision of the Code.

The clarification of the wholesale price exception to the definition of ‘franchise agreement’ is particularly relevant to organisations when determining whether they are entering into a franchise agreement that is governed by the Code.  Currently, payments for goods and services “at or below their usual wholesale price” are excluded from the payment limb of the definition of a “franchise agreement”.  The exception will change to exclude goods and services supplied on a “genuine wholesale basis”. The Wein Report, the Government’s response and various related papers do not make any reference to a recommendation or need to change the wholesale price exception.  It appears to be one of many drafting improvements the Office of the Parliamentary Counsel took the opportunity to make.  In practice, this change may make it easier and clearer for parties to determine whether the test is satisfied or not in a particular context because the assessment required is more subjective.

A new limit to the effect of restraint of trade clauses will be introduced, allowing such a clause to be avoided where the franchisor elects not to renew a franchise agreement, but the franchisee had sought renewal on the same terms and amongst other things, was not in breach of the agreement.

Other changes to the Franchise Code of Conduct include:

• drafting improvements and the removal of unnecessary “red tape” provisions which Small Business Minister Bruce Billson claims will save businesses up to $8.6 million a year;
• restrictions on forced capital expenditure on franchisees other than as disclosed in the franchise agreement, as agreed by the majority of franchisees or as justified in a statement by the franchisor;
• provision of an ‘information statement’ in a prescribed form as soon as it becomes apparent to the franchisor that the franchisee will or is likely to enter into a franchise agreement. This will replace other documents such as the short form disclosure document in Annexure 2, and should eliminate double disclosure burdens on master and foreign franchisors;
• significant changes to the content and form requirements for disclosure documents.  Non-compliance can attract a civil penalty; and
• the costs of dispute resolution will be borne only by franchisees, as a method of deterring franchisors from raising unnecessary disputes with franchisees.

While the Government has released the draft legislation for public feedback, it has made it very clear that comment is only sought on the technical aspects of implementing the changes and that it will not be re-opening consideration of the underlying policy basis for reform given the extensive consultation and review to date.

The changes to the law have been met with mixed reviews from organisations within the franchising sector.  The Chief Executive of the Council of Small Business of Australia (COSBOA) Peter Strong praised the new duty as an effective way of achieving bad publicity for large franchisors who treat their franchisees badly.  A Franchise Council of Australia spokesperson initially rejected the recommendation of a good faith duty on the basis of potential uncertainty and extra costs for franchise operators but has since been persuaded to support the changes on the ACCC’s assurance that the aim of the reforms is to stop unreliable and untrustworthy franchisor operations from scamming would-be franchisees. The reforms have also been criticised by a director of the Franchise Advisory Centre, who commented that they could deter international franchisors from expanding their Australian operations.

Ultimately, industry commentators are in agreement that ‘good’ franchisors and franchisees should not fear the changes.  Recent litigation has seen large corporations such as Wendy’s, Hungry Jack’s and Pie Face attract negative publicity in disputes with their franchisees, but as COSBOA Chief Executive Peter Strong commented, “there are good franchisors and bad franchisors, just like there are good and bad franchisees, and the good ones shouldn’t have anything to worry about.”