2013 Franchising Code of Conduct Review

Deloitte Motor Industry Services | 2 July 2013

The review of the Franchise Code and the potential implementation of the 18 recommendations could have a significant impact to the motor industry going forward. The recommendations reflect issues that have been a concern for many retail motor industry franchisees over a number of years.

 

Review

On 4 January 2013 the Australian Government announced the commencement of a review of the Franchising Code of Conduct (Franchising Code), to be conducted by Mr Alan Wein.

 

On17 June 2013 the Australian Government released a consultation paper to seek input on options that could be implemented in response to the review report recommendations.

The terms of reference for the review focused on 2008 and 2010 amendments to the Code, in addition to:

  • good faith in franchising
  • the rights of franchisees at the end of the term of their franchise agreements
  • provisions for enforcement of the Code.

Over the period of review, 18 recommendations have been made.

A consultation paper has been released today in response to Mr Wien’s’ report, seeking further submissions from stakeholders on the proposed amendments by 9 July 2013.

 

Summary of Key Recommendations

Key Risks

Recommendation 5: the Code be amended to require franchisors to provide prospective franchisees with a short summary of the key risks and matters they should be aware of when going into franchising.

Franchisors Failure

Recommendation 6: provide franchisees and franchisors with a right to terminate the franchise agreement in the event that any administrator of the other party does not turn the business around, or a new buyer is not found for the franchise system, within a reasonable time (for example 60 days) after the appointment of an administrator.

Unreasonable, Significant And Unforeseen Capital Expenditure

Recommendation 7: the Code be amended to prohibit franchisors from imposing unreasonable significant unforeseen capital expenditure. ‘unreasonable’ and ‘significant’ should be defined, with a view to a franchisor being able to demonstrate a business case for capital investment in the franchised business.

Marketing Funds

Recommendation 8: the Code be amended with respect to the administration of marketing funds, including set up, audit requirements, use of funds, disclosure requirements.

Express Obligation To Act In Good Faith

Recommendation 9: The Code be amended to include an express obligation to act in good faith. Such an obligation should:

  1. extend to the negotiation of a franchise agreement, the performance of a franchise agreement, the performance of obligations under the Code, and the resolution of any disputes between the parties whether or not there is a valid franchise agreement at the time of the dispute
  2. not be defined, instead the unwritten law relating to good faith should be incorporated in a manner similar to the unconscionable conduct prohibition set out in section 20 of the Australian Consumer Law
  3. apply to both the franchisor and franchisee or prospective franchisee and the agents of these parties
  4. not be able to be limited or excluded by any provision of the contract between the parties (such provisions should be declared void)
  5. be clearly stated as not preventing a party from acting in its legitimate commercial interests
  6. expressly exclude an argument that a franchisor has not acted in good faith because there is no term in a franchise agreement specifying a right of renewal.

Restraint Of Trade Clauses

Recommendation 12: The Code be amended to state that, if all of the following conditions are satisfied:

  1. the franchisee wishes to have the franchise agreement renewed on substantially the same terms
  2. the franchisee is not in breach of the agreement
  3. the agreement does not contain provisions allowing a franchisee to make a claim for compensation in the event that the franchise is not renewed
  4. the franchisee abides by all confidentiality clauses in the agreement and does not infringe the intellectual property of the franchisor
  5. the franchisor does not renew the franchise agreement.

Any restraint of trade clauses in the franchise agreement which prevent the franchisee from carrying on a similar business in competition with the franchisor are not enforceable by the franchisor against the franchisee.

Dispute Resolution

Recommendation 14: Amend the Code to ensure that franchisors cannot:

  1. attribute the legal costs of dispute resolution to a franchisee unless ordered by a court
  2. require a franchisee to litigate outside the jurisdiction in which the franchisee’s business primarily operates.

Enforcement

Recommendation 15: The Competition and Consumer Act 2010 (CCA) be amended to:

  1. allow civil pecuniary penalties to a maximum of $50 000 to be available as a remedy for a breach of the Code
  2. allow the ACCC to issue an infringement notice for a breach of the Code
  3. allow the ACCC to use its powers under section 51ADD of the CCA (its random audit powers) to assess a franchisor’s compliance with all aspects of the Code, not just to require the production of documents created under the Code.

 For a link to the Report, please click here.

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