Australian Franchising Code of Conduct

A Critical Analysis with Current Case Law

Peter Buberis

• Publisher: Emerald Publishing Limited
• Year: 2020
• Print ISBN: 9781839091681
• eBook ISBN: 9781839091698
• Topic: Business
• Subtopic: Franchises
• Index: Business

The Franchising Code of Conduct (the Code) is a mandatory obligation for all systems operating in Australia, and takes a comprehensive approach to disclosure, relationship laws and dispute issues. Expert author and leading practitioner Peter Buberis takes a critical view of this regulatory framework, evaluating the threads that make up the Code that directs the franchising industry in Australia. 

Including chapters on the areas of disclosure, good faith, and intellectual property, Buberis takes a comprehensive approach in exploring the Code's development through its consideration and enforcement by the Regulator and the courts. Looking at recent case law, the chapters indicate continuing points of concern about the Code, and give cognisance to a recent Parliamentary review which may enhance its operation if adopted.  

For professionals in the franchising industry, and anyone looking to understand more about the Code that governs Australia's franchises, this is a comprehensive guide that engages and analyses this key piece of legislature.

Chapter 1

The Franchising Code of Conduct 2014 (the Code)

https://www.legislation.gov.au/Details/F2017C00182

1.1 Introduction

The framework of the Code is made up of six sections with four substantive parts and two supplementary annexures.

The sections provide framework as to the legislative source of power as well as transitional provisions comprising:

‘1 Name

This is the Competition and Consumer (Industry Codes – Franchising) Regulation 2014.

2 Commencement 1 January 2015 (omitted)

3 Authority

This instrument is made under section 51AE of the Competition and Consumer Act 2010.

4 Code of conduct

For section 51AE of the Competition and Consumer Act 2010, the code set out in Schedule 1:

(a) is prescribed; and

(b) is a mandatory industry code.

5 Transitional – clause 8

(1) Subclause 8(1) of the new code does not apply if a franchisor has an existing disclosure document.

(2) If a franchisor has an existing disclosure document:

(a) the existing disclosure document may be given under the new code before 1 November 2015; and

(b) the franchisor must update the existing disclosure document so that it complies with subclauses 8(3), (4) and (5) of the new code by 31 October 2015; and

(c) the requirements of subclause 8(6) of the new code apply to a financial year that begins on or after 1 January 2015.

(3) In this section:

existing disclosure document means a franchisor's disclosure document (within the meaning of the old code) that exists on 1 January 2015.

new code means the Franchising Code of Conduct set out in Schedule 1 to this instrument.

old code means the Franchising Code of Conduct set out in the Schedule to the Trade Practices (Industry Codes – Franchising) Regulations 1998 as in force immediately before 1 January 2015.

6 Transitional – continued appointment of mediation adviser

The appointment of a mediation adviser for the purposes of Part 4 of the Franchising Code of Conduct set out in the Schedule to the Trade Practices (Industry Codes – Franchising) Regulations 1998 that is in force immediately before 1 January 2015, has effect, despite the repeal of those regulations, as if it were an appointment of a mediation adviser for the purposes of Part 4 of the Franchising Code of Conduct set out in Schedule 1 to this regulation.’

The sections are followed by the substantive parts:

• Part 1: Introduction;
• Part 2: Disclosure requirements before entry into a franchise agreement;
• Part 3: Franchise agreements;
• Part 4 Resolving disputes.

The Annexures then attach;

• Annexure 1: Disclosure document for franchisee or prospective franchisee; and
• Annexure 2: Information statement for prospective franchisee.

The format of the Code is the framework for the core issues identified as likely to assist in achieving the objective of the Code described in clause 2;

‘The purpose of this code is to regulate the conduct of participants in franchising towards other participants in franchising.’

This purpose is promoted through:

• the provision of appropriate information by the franchisor to a franchisee, or prospective franchisee, to enable it to make an informed decision about the franchise opportunity;
• giving the opportunity to the prospective franchisee to seek appropriate advice within timeframes that are reasonable;
• providing temporal withdrawal rights before and after (cooling off) execution of a franchise agreement;
• regulating behaviour before and during the term of an agreement, and during any dispute period, through imposing a statutory duty of ‘good faith’;
• providing certain controls and guidance to apply to the relationship of the parties;
• mandating a mediation process as a necessary step before litigation or arbitration, but not as a restraint on the right to seek injunctive relief.

Of these, the most intensively dealt with is the provision of relevant information through the disclosure process, that is, the information provision requirements. For that reason, Chapter 2 provides a standalone analysis of this core issue.

Good faith is also discussed in a separate Chapter 3. It is a concept integrally bound up with ongoing analysis by the courts under the common law. Its inclusion in the Code removes any uncertainty as to its application to the franchise relationship. The Code introduces an expansion of the core principles of the Common Law through the duty being imposed in the pre-contract stage.

1.2 Code Review Proposals

The reader is invited to consider Sections 2.2 and 2.3 which provide a chronological outline of the genesis of the Code and the review processes and amendments that have occurred since its introduction in 1998.

Parliamentary Inquiry

On 14 March 2019, the Parliamentary Joint Committee on Corporations and Financial Services released its report ¹ of the inquiry into the operation and effectiveness of the Franchise Code and the Oil Code of Conduct. The Report, entitled ‘Fairness in Franchising’ includes 71 recommendations.

The Report summarises its key findings and recommendations under the following headings:

• Franchising Taskforce – Following the release of the Report and in accordance with its first recommendation an inter-agency Franchising Taskforce has been established to examine the feasibility and implementation of a number of the other recommendations in the Report. It follows that many of the recommendations in the Report are not clear recommendations for change but rather recommendations that the Taskforce further examine the issues and potential reforms.
• Industry associations – The Report comments that the Franchise Council of Australia does not provide a balanced representation of franchisor and franchisee views. Government should remain aware of the risk of franchisors capturing the policy and regulatory debate. Franchisees are urged to form a national association.
• Disclosure and registration – Improved disclosure of financial information and marketing fund expenditure was recommended. Registration was a matter deferred to the Franchising Taskforce to consider further.
• Transparency and accountability on third line forcing and supplier rebates – Further disclosure in relation to supplier rebates was recommended.
• Whistleblower protections – The Report recommended whistleblower protections apply to franchisees reporting franchisor breaches of the Franchise Code.
• Unfair contract terms laws – It was recommended the Franchising Taskforce consider introduction of civil penalties for including unfair contract terms in franchise agreements. Cooling off period – The cooling off period should be extended to 14 days and also apply to transfers, renewals and extensions. Further, if premises are leased and the lease is not provided until after the franchise agreement is entered into, the cooling off period should not commence until a copy of the lease is provided to the franchisee.
• Fair exit rights and goodwill – The Report recommends amendment to the Franchise Code's termination provisions including by providing further notice periods and giving franchisees termination rights in special circumstances. The Franchising Taskforce is to consider changes which would recognise franchisee goodwill.
• Collective action – The Report recommends introduction of a class exemption to anticompetitive conduct laws to make it lawful for franchisees to collectively bargain with their franchisor.
• Dispute resolution and arbitration – It is recommended that the option of binding arbitration be added to the dispute resolution procedures under the Franchising Code. This would not exclude court action.
• Enhancement and alignment of Industry codes – The Franchising Taskforce is invited to consider introducing further and increased penalties for breaches of the Franchise Code. Further, consideration should be given to introducing useful provisions from other industry codes.
• No churning and burning – The Report recommends the Australian Competition and Consumer Commission (ACCC) be permitted to intervene and prevent marketing and sale of franchises by franchisors with a track record of churning (repeated sale of a single franchise unit) and burning (opening sites which are unlikely to be viable) with a view to profiting from up-front franchise fees.
• Education and advice – Further measures for educating franchisees are recommended including having the ACCC develop a FranSmart website for franchisees.
• Financing and lending – The Report criticised irresponsible lending and borrowing in the franchise industry.
• Retail lease arrangements – The Franchising Taskforce was invited to review matters including disclosure to franchisees in relation to leases.

Draft amendments to the Franchise Code are likely to follow the further consideration of these issues by the Franchising Taskforce; however, it may be some time before release and implementation of the same.

1.3 The Agreements to Which...

Table of contents

• Cover
• Title
• Copyright
• Table of Content
• Introduction
• Chapter 1 The Franchising Code of Conduct 2014 (the Code)
• Chapter 2 Disclosure Document
• Chapter 3 Good Faith
• Chapter 4 Intellectual Property
• Chapter 5 The Sale and Termination of a Franchised Business
• Conclusion
• Index