BDC’s take on the Independent Review of the Franchising Code of Conduct

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As highlighted in our preliminary report summary published on our blog earlier this week, the
Independent Review of the Franchising Code of Code of Conduct (“Review’) was released on the 8
February 2024. For those who missed our first brief summary of the Review, you can access our blog
here:

Preliminary Summary Of The Independent Review Of The Franchising Code Of Conduct (“Review”) |
BDC Law (bdcpartners.com.au)

As promised, we have dug a little deeper into the Review and have provided a more comprehensive
take on the Review. In particular, we have focused on observations and trending concerns raised by
stakeholders in the franchising world.

As mentioned in the executive summary of the Review, the Australian franchise industry comprises
of 1,144 franchise systems, 70,735 franchisees, employs 522,877 and generated an estimated $135.2
billion in 2023. As raised by the Review, due to the lack of statistics and data relating to franchising
in Australia, the Review had to predominately rely on participation by stakeholders in the systems,
therefore much of what is discussed in the Review stems from real experiences of players in the
franchising game.

The Review is broken down into the following key sections:

  1. The scope and structure of the Franchising Code of Conduct (“Code”);
  2. Entering into a franchise agreement;
  3. What happens during a franchise relationship;
  4. Ending a franchise relationship; and
  5. Regulatory Oversight and dispute resolution.

SCOPE AND STRCUTURE OF THE CODE

Purpose of the Code

An observation based on the submissions from the stakeholders was that there are conflicting views
as to whether the Code is effective in achieving its overriding purpose. Currently, clause 2 of the
Code stipulates ‘The purpose of this Code is to regulate the conduct of participants in franchising
towards other participants in franchising.’ It was noted that the current purpose statement
contained in the Code is too narrow to enable all parties to assess the efficiency and effectiveness of
the Code and the overall consensus by stakeholders is that the purpose statement needs to be more
clearly articulated with respect to its overarching objective.

The ACCC submitted that the current purpose fails to recognise that the Code exists because
franchisors have enjoyed a persistent superior bargaining positions in relation to franchise
relationships and the Code, in substance, is an attempt to protect franchisees and prospective
franchisees, whereas franchisors supported the view that the Code was fit for purpose but required
some area of improvement.

Given the mixed views, the Review suggested in its recommendation to amend the purpose
statement so that the statement explicitly mentions why it exists and what it seeks to achieve. For
example, the Code should be ‘intended to improve the standards of conduct and ensure access to
information and dispute resolution, rather than eliminate all misconduct or risk…’. Such purpose mirrors the Explanatory Statement of for the original 1998 Franchising Code of Conduct and it is put
by the Review that a statement of this nature would clarify the level of protections which
franchisees could expect under the Code.

Impact of persistent review of the Franchising Sector:

It almost sounds contradictory, but the Review acknowledges that the various changes to and
reviews of the Code over recent years has created a feeling of instability with respect to the
regulatory framework in franchising. Therefore, it is acknowledged that most stakeholders in the
industry the sector need a respite from the ‘constant process of review’. Thus, the Review
recommended a 5 yearly review cycles to be implemented.

Ultimately, despite the conflicting views about the effectiveness of the Code, it was found in the
Review that the Code is generally fit for purpose and should be remade, largely in its current form.

ENTERING INTO A FRANCHISE AGREEMENT

The role and limits of disclosure

Naturally, most stakeholders agreed that there was a need to have a pre-entry disclosure process in
franchising. However, the resounding criticism from both sides of the fence is that the current
requirements for disclosure are counterproductive. From the perspective of the franchisees, the
volume of information disclosed and the manner in which the information is presented hinders their
capacity to understand and assess the information provided, whilst also creating the appearance
that the sector is highly regulated, consequently creating the perception that entering a franchise is
a low risk venture.

The survey of franchisees conducted under the Review in relation to the disclosure information
found that 18% said too little information was provided, 38% said too much information was
provided, 29% said the level of information was appropriate and 15% said that the wrong
information was being disclosed.

It appears that the recent implementation of the key facts sheet has proven to be ineffective, as it
was raised by many stakeholders that the information contained in the disclosure documents, key
facts sheet and franchise disclosure register is a regurgitation of the same information. In light of this
feedback, the Review recommended that disclosure information provided to franchisees should be
consolidated and simplified. It highlights that the information in the disclosure document should not
be shortened or removed, however that there needs to be a consideration on how to streamline all
the disclosed information provided to franchisees.

Based on the suggestions made in the Review, it would not be a surprise if the requirement for the
key facts sheet is scrapped, however it is possible and, as recommended by the Review, that the
level of information required for the franchise disclosure register may be increased, especially with
respect to information regarding actions taken or sanctions that have been imposed on franchisors
by courts or regulatory bodies.

Disclosure and cooling off on renewal of existing franchises

The Review recommends that that scope of disclosure on renewals should be simplified considering
the costs associated with preparing disclosure materials on renewal. The suggestion is that
franchisees renewing should have an option regarding disclosure and the availability of cooling off
rights.

We are of the view that this is an appropriate and practical recommendation, because realistically
existing franchisees when renewing, already have developed a clear understanding of the operation
of the franchise and the franchise system as a whole and the need for full disclosure could at times be excessive and not practical for both parties.

That being said, it should be noted that this would not displace franchisors’ existing obligations
under the Code to provide disclosure document on request and also in the event of any material
change to the disclosure document.

Extending application of clauses 46A and 46B to all franchise systems

Currently, the Code in relation to new vehicle dealerships, requires that such franchise agreements
should only be entered into if there is reasonable opportunity to make a return on investment
during the term of the agreement. Secondly, it provides that in the event of early termination by the
franchisor for reasons such as withdrawing from the Australian market, rationalising its networks in
Australia or changing its distribution models in Australia, the franchisees should be compensated for
such early termination.

The Review suggests that these protections should be extended and apply to all franchise
agreements, especially due to the misconception held by the franchisees in relation to rights in
benefitting from goodwill of a franchised business. Such changes would have significant impact and
would force franchisors to have greater consideration on assessing profitability of prospective
franchises and to adequately take into account the financial position and level of investment
required by franchisees and how that ties in with franchisees’ financial obligations offered under a
franchise agreement.

DURING A FRANCHISE AGREEMENT

Good faith

Everyone in the franchise sector has heard the term ‘good faith’ get thrown around. So what is it?
Speaking generally, acting in good faith with respect to a contract is the expectation that the parties
are to act honestly, to cooperate in achieving the contractual benefits and acting reasonably and
fairly when considering the other parties’ interests. Critically, the requirement to act in good faith
does not prohibit one party from enforcing its rights to protect its legitimate interests under the
contract.

Clause 6 of the Code extends this duty to act in good faith with respect to any dealing, or dispute of
a franchise agreement, the negotiation of the franchise agreement and the Code. In assessing
conduct of good faith, the Code identifies what factors that can be taken into account, such as
whether a party has acted honestly and not arbitrarily and whether a party cooperated to achieve
the purpose of the agreement.

The Review has highlighted that there is still uncertainty as to what is meant by good faith from the
perspective of the franchisees. It is therefore not surprising, as mentioned in the Review and as
raised by the ACCC, that one of the most common complaints by franchisees is that franchisors are
not acting in good faith. However, most franchisors feel that they constrained to act in good faith
when trying to exercise their rights under franchise agreements.

The Review brings to light this confusion, drawing on the Mercedes Benz and the 2017 Pizza Hut
cases and reiterates that the position is clear, in that the franchisors are not required to subordinate their commercial interests or relinquish their advantageous negotiating position for the purpose of
complying with the duty to act in good faith.

Therefore, to address this confusion, the Review recommends that regulators or government
agencies should use these recent decisions from the courts to develop a franchise focused
educational framework and provide tailored guidelines on these issues, allowing to better promote
and inform participants in the franchising sector regarding how parties should conduct themselves
during the franchise relationship.

ENDING A FRANCHISE AGREEMENT

In 2021 the Code was amended to require franchisors to give 7 days written notice to terminate
franchise agreements based on special circumstances. Prior to this, the franchisors could
immediately terminate. At the same time, these changes included giving franchisees the ability to
rapidly refer the purported termination dispute to an alternative dispute resolution practitioner.
The Review comments that these changes have made it unacceptably difficult for franchisors to act
swiftly with respect to serious breaches by franchisees.

The Code was also amended to grant franchisees to opportunity to propose and negotiate an early
termination. However, the finding from the Review is that there is a lack of awareness by franchisees
of this process.

The take from the Review is that the changes made in 2021 need to be reassessed to strike an
‘appropriate balance’ on early termination mechanisms available to the franchisor as assessed
against the interests of franchisees, as well as improving the accessibility of resources for franchisees
with respect to negotiating an early exit.

REGULATORY OVERSIGHT AND DISPUTE RESOLUTION

Access to dispute resolution information

It was observed that the expectation regarding the ACCC’s enforcement of the Code exceeds the
current capacity of the ACCC, the awareness of the ACCC’s regulatory role in franchising was low and
the overall access to information to assist parties contemplating alternative dispute resolution
processes is not optimal.

To deal with these barriers, the Review proposed the need to have ‘one-stop-shop’ government
resource with respect to the roles of ACCC and ASBFEO in order to provide user friendly information
with respect to dispute resolution.

Penalties and proposed franchisor licencing regime

What has caught a lot of people’s attention since the ACCC’s submission for the Review in
September 2023, was the prospect of the introduction of civil penalties under the Code and also the
implementation of a licencing regime.

As mentioned earlier in this article, the ACCC has been critical in the effectiveness of the Code being
able to deal with the power imbalances between franchisors and franchisees. You can review our
previous summary on the ACCC’s submissions here: ACCC Recommends Franchisors Licensing
Regime (bdcpartners.com.au).


The Review has considered these submissions and has found that the imposition of civil penalties for
all obligations under the Code would enhance compliance by franchisors, and therefore, has
recommended such change. It should be noted that recently franchisors have had to undertake significant reviews of their franchise agreements with respect to the penalty provision scheme regarding unfair contract terms. If this recommendation was to be implemented, then this would trigger the need for franchisors to not only review their agreements again, but also review their overall processes. As non-compliance an obligation of the Code, which is of ‘conduct nature’ could attract a monetary fine.

If a licensing regime was implemented then this would mean that a regulatory framework would be
introduced which would enable a regulator to suspend, cancel or impose conditions on franchisors
being able to grant franchises. The recommendation from the Review at this stage is that all
stakeholders should investigate and examine the feasibility of such regime. It is too early to gauge
whether this will be implemented anytime soon.

WAIT AND SEE:

The Review has been anticipated by many in the franchising world, now we will be following closely
as to how the government acts on the results of the Review. This article has not covered all of the
findings and recommendations contained in the Review, so if you have the appetite to read the
Review in full, it can be accessed here: Preliminary Summary Of The Independent Review Of The
Franchising Code Of Conduct (“Review”) | BDC Law (bdcpartners.com.au)

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