5 Key Takeaways from the Franchising Inquiry
In 2019, the Parliamentary Senate referred an inquiry into the franchising sector. Here are five key findings from the report.
If you are operating your business under a franchising structure, it is likely that you have experienced challenges. As a franchisee, you may have received empty promises of business forecasts and profits. On the other hand, as a franchisor you could have felt a lack of respect from your franchisees for how the franchising model works. However, what the recent inquiry makes clear is that franchising is an enormous industry in Australia and ultimately has a huge impact on the Australian economy. At 369 pages and with over 70 recommendations, the Parliamentary Committee’s Inquiry on Fitness in Franchising analysed these franchising issues.
This article will summarise the 5 key takeaways from the report that will apply to your franchised business.
Background to the Franchising Inquiry
Franchising in Australia is governed by the Franchising Code of Conduct (Franchising Code). The Franchising Code regulates both franchisor and franchisee conduct prior to and during the franchise relationship. The purpose of this Code is to alleviate problems arising from a power imbalance and to aid informed decision making. However, complaints from key stakeholders highlight how franchising opportunism has now become an inherent issue. Consequently, the committee undertook a comprehensive investigation into the franchising industry. Certain themes repeat throughout the inquiry, including developing greater:
• transparency and accountability;
• fairness and protection; and
• education and awareness.
Key Takeaways From the Inquiry:
1. Franchising Regulatory Changes
As we’ve just touched upon, current regulatory rules does not decrease the issue of franchisors behaving opportunistically. Does franchisors providing inaccurate numbers to gain profits or turning a blind eye to illegal behaviour sound familiar? Put simply, disclosure obligations alone are not effective. Consequently, the committee recommended that the ACCC take a more involved role in the regulation and dealings of franchises. Further, the committee recommended increasing the penalties for breaching the Franchising Code. These suggestions will lift standards across the entire industry.
2. Franchising Inquiry TaskForce
A Franchising TaskForce, established in April 2019, was created to examine the feasibility of a number of the committee’s recommendations. The committee recommended that the Franchising Taskforce investigate options for a public franchise register. On this register, franchisors would upload updated disclosure documents and template franchise agreements annually in compliance with the Franchising Code. The TaskForce has concluded their stakeholder consultation and is in the process of assessing this information before providing advice to relevant ministers.
3. Improving Pre-Contractual Disclosure
Before entering or agreeing to renew a Franchise Agreement, strict disclosure information is required. Although the report indicates that disclosure should not be the only means of regulation, it definitely recommends improvements to the disclosure process. The two common themes throughout the report included firstly, the need to improve the awareness of prospective franchisees and their access to appropriate legal representation. Secondly, there was a need to improve the accuracy and meaningfulness of the information provided to prospective franchisees. The committee makes significant recommendations around disclosure including:
- a requirement to provide the disclosure document in electronic form;
- requirements around the provision of earnings and financial information when franchises are sold or transferred;
- greater transparency and accountability in regard to marketing funds; and
- extending annual reporting to quarterly reporting.
4. Unfair Contract Terms
You may have reviewed a contract clause and felt that it favoured the franchisor over your legitimate interests as franchisee. It is evident that the abuse of contractual power can manifest in a franchise agreement. Therefore, the report recommended that the Australian Consumer Law (ACL) extends the unfair contract terms regime (the law overlooking unjust contract terms in standard form contracts) to franchises. This recommendation makes unfair terms illegal and subject to civil penalties. It is also suggested that all franchise agreements are deemed to be standard form small business contracts for the purpose of this legislation. This means that if you are a franchisor it may be a wise idea to revisit and amend your agreement if need be.
5. Fair Exit Rights
These recommendations are important to note if you are a current franchisee and are hoping to create a sustainable exit plan. Appropriate termination arrangements are essential to ensure fairness when the franchise relationship ends. The report indicated a bias for the franchisors in relation to termination rights. Consequently, the committee recommends a significant addition to the Franchising Code to give franchisees the right to exit under certain conditions, which vary according to the situation. This aids the power imbalance between franchisor and franchisee.
The biggest takeaway is that if you are a franchisee, you should become aware of your rights before signing any contract. Certain powers you may not have considered before could now change. On the other hand, if you are a franchisor, you may need to do a review of your current franchising documents and should be more aware of your obligations.
The best way to know your revised rights or to do formal documentation review is to have a chat with a franchising/commercial lawyer. However, if you expect ongoing legal assistance, have a look at our legal advice plan.
Jasmine is a legal intern at Lawpath. She is in her final year of a Bachelor of Commerce/Bachelor of Laws at Macquarie University. She has experience in the startup, franchising and legal industries. Jasmine has a strong interest in commercial law and aspires to become an admitted lawyer once she has graduated.