Franchising Reforms on the Horizon?

In Australia we have one of the most advanced franchising systems in the world, but the franchising industry has been criticised recently, because of numerous complaints by franchisees regarding several high-profile businesses where the viability and structure of their business models were questioned.

This resulted in a parliamentary inquiry into the operation and effectiveness of the Franchising Code of Conduct and on 11 May 2018, the ACCC released its submission to the inquiry, which included:

• Increased disclosure requirements for franchisors. Currently a franchisor has to provide a comprehensive disclosure document to a potential franchisee, which includes the establishment costs of the franchised business, as well as anticipated recurring and one-off costs to the franchisee. As franchisors are able to provide a range of those costs, in practice the cost disclosure in many disclosure documents is almost meaningless. It was recommended that more “meaningful information” be provided. The submission also recommended that information regarding profitability be provided where an existing or previously franchised business is being purchased.
• Prohibition on recovering franchisors legal costs. Many franchisors require franchisees to reimburse franchisors for the cost of preparing a franchise agreement. The ACCC believes this may discourage potential franchisees from taking legal advice or trying to negotiate amendments to franchise agreements and have recommended that the practice be prohibited.
• Penalties for non-compliance with the ACCC’s audit power. Section 51ADD of the Code enables the ACCC to call upon a franchisor to give information to produce a document that the franchisor is required to keep, generate or publish under an applicable industry code. However, the only current remedy for non-compliance is to approach a court and to avoid this expensive and inefficient process, the ACCC has recommended that the Competition and Consumer Act be amended to allow for civil pecuniary penalties to be applied.
• Penalties for including unfair terms in standard form contracts. The ACCC has recommended that not only should unfair terms be prohibited in standard form contracts, but civil pecuniary penalties and infringement notices be available to deal with such breaches.
• Increased penalties for all breaches of the Code. Perhaps the most significant recommendation is that civil pecuniary penalties and infringement notices be applicable for all breaches of the Code, and that the amount of such penalties be increased significantly. Currently, the maximum penalty available is 300 penalty units (presently $63,000) and the ACCC has recommended that civil pecuniary penalties should be increased to the same penalties as under the Australian Consumer Law. The maximum penalty is currently $1.1 million for companies breaching a civil penalty provision, but a bill is currently before Parliament which would increase this to the greater of $10 million, three times the value of the benefit obtained from the offence, or if the court cannot determine the benefit, 10% of the annual turnover of the business.

It will be interesting to see the extent to which the Joint Parliamentary Committee follows the ACCC’s recommendations when it issues its report on 30 September 2018 and whether the government then adopts its recommendations. In the meantime, franchisors should be aware of the potential changes and in particular review their standard form contracts to ensure that any unfair contract terms are removed.