"Fairness in Franchising" report – Key recommendations for reform

The Parliamentary Joint Committee on Corporations and Financial Services (Committee) tabled its Report referred to as the “Fairness in Franchising” Report (Report) on 14 March 2019.

The Report is extensive and contains a total of 71 recommendations that range across a wide variety of proposed reforms. The Report is 369 pages long and has 22 chapters with key themes, including chapters that:

1. Talk to the need for greater transparency and accountability of franchisors;
2. Indicate the need for greater fairness and protections for franchisees and to prevent exploitation by franchisors; and
3. Point to a need to increase franchisee awareness in relation to the risks and obligations in entering a franchise agreement and to provide franchisees with independent sources of information and advice.

The Committee undertook a total of 9 public hearings to take evidence from stakeholders who lodged submissions including one public hearing dedicated to key former executives of Retail Food Group. Derek Sutherland from our Brisbane office gave evidence at the Brisbane public hearing.

The Committee received a total of 406 submissions of which 190 were confidential and not made publicly available.

Recommendations

Set out below are the key recommendations made in the Report:

Establish an Inter-agency franchising taskforce

1. That the Australian Government move to establish an inter-agency franchising taskforce (Taskforce) comprised of representatives from Department of Treasury, the Department of Jobs and the ACCC to examine the feasibility and implementation of a number of specific recommendations (Rec 1.1);
2. The Taskforce be empowered and directed to consider 26 of the Committee’s specific recommendations including:
   1. to examine how future consulting processes associated with franchising policy can be done to achieve an appropriate level of franchisee input (Rec 5.1);
   2. to examine how the Government could be provided with regular reports and updates on the effectiveness of regulatory settings (including the extent to which sector participants were seeking to avoid them) (Rec 5.2);
   3. to review the use of third party brokers in franchise sales and the continued appropriateness of using ‘no agency’ and ‘entire agreement’ clauses in franchise agreements and whether some disclosure of the meaning and effect of those clauses be given in the disclosure document (Rec 6.6);
   4. to investigate options for a public franchise register requiring franchisors to register a copy of their disclosure document and franchise agreement annually (Rec 6.14) – including:
      1. the appropriateness of the ACCC or another agency to operate the register;
      2. the information that should be available online including a disclaimer that the ACCC or the other agency does not endorse those systems listed; and
      3. civil penalties for non compliance.
   5. to examine how to amend the Franchising Code of Conduct (Code) so that a disclosure document must contain at least 2 years information about the following:
      1. if the maximum retail sale price of a product has been below the cost price of the product;
      2. the margin between the cost price of the product and the maximum price (or recommended resale price) of the product for the top 5 by volume goods and services supplied by the franchisee; and
      3. if data is not available for that particular franchise then date of a comparative franchisee would need to be provided (Rec 7.1).
   6. to consider whether to prevent exploitative behaviour around over-ordering, the ACCC should conduct an inquiry into the terms of franchise agreements that give a franchisor a discretion to decided the volume and frequency of supply orders of the goods or services to be sold (Rec 7.2);
   7. to consider amendments to item 10 of the Annexure 1 disclosure document so a franchisor must disclose details in percentage terms of how a rebate will be retained by the franchisor or directly or indirectly provided to the franchisees in a specified number of ways (Rec 8.2);
   8. to conduct an investigation to examine conflicts of interest associated with supplier rebates and third line forcing for a specified list things and to make recommendations for policy or regulatory change to address any problems identified (Rec 8.3);
   9. to consider amendments to clauses 7 and 10 of the Code to require disclosure of whether the master franchisor controls and or receives rebates from suppliers (Rec 8.4);
   10. to examine the appropriateness of amending s23 of the Australian Consumer Law (ACL) to:
       1. prohibit (or make it illegal to include) unfair contract terms in small business contracts and franchise agreements (Rec 9.1); or
       2. apply civil pecuniary penalties and infringement notices if a standard form small business contract or franchise agreement contains an unfair contract term (Rec 9.1).
   11. to consider amendments to the Competition and Consumer Act (CCA) to allow the ACCC to use S155 Notices to obtain evidence about whether a standard form contract contains an unfair contract term (Rec 9.2);
   12. to consider the appropriateness of amending the Code to require compliance with the UCT regime in the ACL (Rec 9.4);
   13. to examine how to amend s23 of Schedule 2 of the ACL to make the unfair contract term protections apply to all franchise agreements irrespective of the terms of the franchise agreement or other agreements (Rec 9.5);
   14. to consider options to address unfair contract terms in perpetual franchise agreements (Rec 9.6);
   15. to consider whether the Code should place restrictions on the ability to unilaterally vary subsidiary requirements to the franchise agreement such as franchise manuals or policies (including that a variation can only be made with the approval of the majority of franchisees) (Rec 9.8);
   16. to consider how to amend the Code to allow a franchisee to have a mutual express right to terminate in special circumstances (similar to clause 29 of the Code) (Rec 11.2);
   17. to examine whether the Code should be amended to include a requirement for franchise agreements and transfer contracts to set out end of term arrangements for goodwill of a franchisee including specific information of what consideration (if any) a franchisee is entitled to in certain specified end of term situations (Rec 12.1);
   18. to examine how to implement the collection and analysis of data on franchise transfers to determine how common it is for goodwill to be included in franchise transfers and whether the new agreement attributes goodwill to franchisee (Rec 12.2);
   19. to consider the appropriateness of:
       1. merging the OFMA with the ASBFEO and that ‘franchising’ be included in any combined body;
       2. funding any combined small business and franchising ombudsman through an industry levy based on the number of complaints;
       3. making all franchisees covered by the Code fall within the jurisdiction of the combined body;
       4. enhancing the powers of the combined body; and
       5. appointing a small business and franchising ombudsman as an independent assessor with power to review the handling of disputes and to refer systemic or material matters to the regulator (Rec 15.1).
   20. to consider amendments to a Code and the CCA to implement the penalty regime recommended by the ACCC including:
       1. civil penalties for all breaches of the Code and Oil Code;
       2. increasing the quantum of penalties (to at least reflect the penalties currently available for a contravention of the ACL) to ensure they are a meaningful deterrent; and
       3. ensure that penalties for breach of the Code are prescribed in legislation (so that any limit on any penalties (under S51AE(2) does not apply) (Rec 16.1).
   21. to examine the appropriateness of amending clause 13 of the Code dealing with leases to make a number of technical amendments to the disclosure obligations relating to leases (Rec 20.1);
   22. to consider the appropriateness of adding a new Item 9.3 of the Annexure 1 disclosure document to require disclosure of issues concerning the control of the site and who owns or holds the lease of the site including details of the conditions of that occupancy right and whether term of the occupancy right and the franchise agreement align (Rec 20.2);
   23. to consider the appropriateness of amending the Code to require any money paid by a franchisee as licensee to the franchisor for the purposes of being paid to a landlord for rent is to be held on trust by the franchisor and only to be used for paying the franchisee’s rental expenses with franchisors being held liable and if the franchisor is wound up then that trust money is to be paid to the landlord (Rec 20.3).
   24. to examine how clause 30 of the Code should be amended to:
       1. include a clear definition of ‘significant capital expense’;
       2. ensure there are appropriate constraints on the ability of a franchisor to impose a significant capital expense;
       3. to enable the franchisee to make an appropriate return on its investment within the remaining term of the franchise, lease or licence;
       4. ensure that a franchisee only has to pay pro-rata portion of the capital expenditure to allow an appropriate return on the investment within that term and the franchisor to fund the balance; and
       5. to compel the franchisor to pay compensation if the franchisor subsequently terminates the franchise agreement (Rec 21.1).
   25. to consider updating item 18 of Annexure 1 disclosure document to reflect any changes to clause 30 of the Code (Rec 21.2); and
   26. to examine the extent to which franchise systems and their agreements involve sufficient co-investment and risk sharing in an enterprise such that they should be regulated in a similar manner to financial products under the Corporations Act (Rec 22.1).

Whistle blower protections

3. That the whistleblower protection regime recommended in the Committees 2017 report “Whistleblower Protections” apply to franchisees, their employees and that breaches of the Code and the Oil Code be included in the definition of ‘disclosable conduct”. The Committee also recommended that the Government respond to that report (Rec 3.1).

Increased powers and resources to the ACCC and matters for the ACCC to investigate

4. That the ACCC:
   1. be given the power to intervene and prevent a franchisor marketing and selling franchises where it has a track record of churning and/or burning (Rec 4.1);
   2. together with other agencies including ASIC and the ATO investigate the operations and dealings of Retail Food Group and its former and current directors, officers, senior executives and companies and trusts they own, direct, manage or have a beneficial interest including in respect to a variety of specified matters (Rec 4.2);
   3. be resourced to enable it to appropriately investigate all complaints or whistleblower reports about unfair contract terms (Rec 9.3);
   4. commission a review of clause 23 of the Code to determine whether it is fit for purpose and whether amendments are required (Rec 13.1);
   5. conduct an investigation into whether franchisors have taken action to impede franchisees who have attempted to pursue issues collectively and to take action based on these findings of this investigation as appropriate (Rec 14.2); and
   6. develop a FranchiseSmart type website with a similar design and purpose to the ASIC MoneySmart website to address issues that franchisees may encounter within the sector including examples of detrimental outcomes and information on Australian Fair Work rights, minimum wage laws and awards and provisions that apply to migrant workers (Rec 18.2).

Matters to be considered by the Department of Treasury and the Department of Jobs

5. That the Department of Treasury and the Department of Jobs:
   1. give consideration to identifying reforms that would support the fair handling of capital intensive stock when new car dealership agreements are not renewed including:
      1. increasing the minimum end of term notice period to at least 12 months;
      2. that dealers not be required to upgrade the dealership facilities after a non renewal notice has been given; and
      3. in the event of non renewal of the lease having a mandatory buy back of vehicle parts up to 3 years old (with any independent valuation costs to be split evenly between the parties) (Rec 17.1).
   2. ensure that multiple codes are aligned over time noting that options may include having a core franchising code that applies generally and schedules or sub-codes that will also specifically apply for particular industries (Rec 17.2).

Proposed amendments to the Franchising Code of Conduct

6. That the Franchising Code of Conduct be amended:
   1. to require a franchisor to provide a disclosure document in both hard copy and electronic form (Rec 6.1);
   2. to require a franchisor to provide the information statement (set out in Annexure 2 of the Code) as a separate document subject to disclosure and cooling off provisions and not simply as an attachment to the Code (Rec 6.2);
   3. to require a vendor franchisee to give the prior 2 years financial information about the franchise business including BAS statements, Profit & Loss statements and balance sheets and an assessment of labour costs to the prospective transferee or to the franchisor if it is buying it back so that they are attached to the disclosure document (Rec 6.3);
   4. to require the franchisor if it is offering a greenfield franchise to give the prospective franchisee BAS statements, Profit & Loss statements and balance sheets for the 2 year period of a comparable franchise and to ensure they are attached to the disclosure document (Rec 6.3);
   5. to require all financial information to be given to a prospective franchisee to be in or attached to the disclosure document and not to be given separately (Rec 6.4);
   6. to include a specified  statement in the item dealing with financial statements that warrants the accuracy of the earnings and other financial information (Rec 6.5);
   7. to provide that both clauses 15 and 31 apply where a franchisee is required to make regular payments to the franchisor to cover advertising and marketing and to make the language consistent (Rec 6.7);
   8. to make clause 31 a civil penalty provision to which a civil penalty for contravention applies (Rec 6.8);
   9. to amend clause 15 to require financial statements to be given within 30 days after the end of each quarter with sufficient detail as prescribed in the Code or by the standards set by the Australian Accounting Standards Board (Rec 6.9);
   10. to amend clause 12 to require a master franchisor to comply with clauses 15 and 31 where a sub-franchisee is directly or indirectly required to contribute to a marketing or cooperative fund administered by the master franchisor (Rec 6.10);
   11. to require as part of mandatory disclosure guidance on employment matters especially awards, minimum wages and overseas workforce issues to be developed by the FWO (Rec 6.16);
   12. so that all supplier rebates, commissions and other payments in relation to the supply of goods or services to franchisees by the franchisor or suppliers mandated by the franchisor be disclosed as a percentage of the full purchase price on each transaction (Rec 8.1);
   13. to require that where a franchise agreement allows for unilateral variation by a franchisor then restrictions be imposed such that any unilateral variation can only be made with the agreement of the majority of franchisees within the same system or representatives elected by the majority of franchisees within the same system (Rec 9.7);
   14. to amend the cooling off period to clarify that the cooling off period and disclosure periods are measured in calendar days (Rec 10.1);
   15. to amend the cooling off period in the Code to extend it to 14 days after the occurrence of the latest to occur of:
       1. signing the agreement;
       2. a payment being made to the franchisor;
       3. the disclosure documents required having been given to the franchisee; and
       4. a copy of the lease being provided to the franchisee (Rec 10.2).
   16. to amend the cooling off period in the Code to clarify in clause 9 that the 14 days disclosure period must begin at least 14 days before the signing of a franchise agreement (Rec 10.3);
   17. to amend the cooling off period in the Code to apply to transfers, renewals and extensions (including decisions to renew or not to renew) together with longer notice periods for renewals and extensions (including decisions to renew or not to renew) (Rec 10.4);
   18. to include provisions to provide for franchisee triggered exit from franchise agreements as set out in scenarios 2, 3 and 4 set out in Chapter 11 Exit arrangements. Those scenarios relate to hardship, exploitation and business failure (Rec 11.1);
   19. to amend the special circumstance termination rights under the Franchising Code of Conduct (and Oil Code) to require a franchisor to give at least 7 days notice of termination and that the process of termination would be suspended if the franchisee served a notice of dispute (whether for mediation, arbitration or court process), until the dispute was resolved. If the franchisor continued to act under a non compliant notice (with insufficient notice) it should face a civil penalty similar in amount to other penalties (Rec 11.4);
   20. to amend the special circumstance termination provisions under the Franchising Code of Conduct (and Oil Code) so that:
       1. termination in relation to fraud can only occur if the franchisee is convicted of fraud in connection with the operation of the franchise; and
       2. termination in relation to public health and safety can only occur if the franchisee is served with a ‘permanent closure direction’ for the franchise by a relevant government body or failure to remedy WHS orders or notices (Rec 11.5).
   21. to incorporate in the disclosure document an explanation that clauses (or part thereof) that are not in compliance with clause 23 of the Code are of no effect and unenforceable by the franchisor (Rec 13.2);
   22. to clarify what constitutes a breach for the purposes of clause 23(1)(b) with particular regard to the concepts of a related agreement within this clause and to insert “at the time of expiry’ at the beginning of paragraph 23(1)(b) (Rec 13.3);
   23. to ensure that the dispute resolution scheme under the Code remains mandatory and to enhance that scheme to include:
       1. the option of binding arbitration with the capacity to award remedies, compensation, interest and costs if mediation is unsuccessful (does not exclude court action);
       2. require that mediation and then arbitration commence within a specified time period once a mediator or arbitrator has been appointed;
       3. restrictions on taking legal action until an alternative dispute resolution is complete (along similar lines to those used by the Australian Financial Complaints Authority);
       4. immunity from liability for the dispute resolution body;
       5. to include a requirement that if a franchisor takes a matter straight to court, the franchisor must demonstrate to the Court’s satisfaction that the matter cannot be resolved though mediation and if not the court should order the parties to mediation; and
       6. the capacity for a mediator or arbitrator to undertake multi- franchisee resolutions when disputes relating to similar issues arise (as determined by the mediator or arbitrator) (Rec 15.2).
   24. to include provisions which:
       1. prohibit a franchisor requiring a franchisee to pay its legal costs for preparation of franchise documentation;
       2. ban unilateral variations of a franchise agreement;
       3. ban retrospective variations to a franchise agreement;
       4. a ban on franchisor’s charging wastage and shrinkage payments; and
       5. a duty for franchisors to provide franchisees with training on the Code (Rec 16.2).
   25. to oblige the franchisor to provide to a prospective franchisee the ACCC Franchisee manual at the time the franchisor provides the disclosure document (Rec 18.1);
   26. to require the mandatory disclosure of a reasonable estimate of the personal workload to be undertaken by the franchisee (or their manager or nominee) in running and operating the business (Rec 18.3); and
   27. to amend Schedule 2 of the Code to explain the effect of an amended clause 30 and any interaction with the law of unconscionability and unfair contract terms (Rec 21.3)¹.

Proposed amendments to the Oil Code

7. That the Oil Code be amended:
   1. so that Oil code contain the same provisions as the Code in relation to marketing funds and fees (Rec 6.13);
   2. so that the cooling off provisions contained in the Oil Code are consistent with the Franchising Code of Conduct (Rec 10.5);
   3. to make the disclosure provisions consistent with the Franchising Code of Conduct and that it be made explicit that the disclosure provisions also apply to transfers (Rec 10.6);
   4. so that the termination for special circumstance clause 36 is aligned to be consistent with clause 29 of the Franchising Code of Conduct (Rec 11.3); and
   5. subject to changes made to the Code arising out of the Report, to align the Oil Code with the Franchising Code of Conduct (Rec 16.3).

Other government reforms

8. That the Government:
   1. through legislation, clarify the distribution of unused marketing fund money in the event of a winding up of the franchisor (Rec 6.12);
   2. amend clause 51ADD of the CCA to provide civil pecuniary penalties for non compliance with a S51ADD notice (Rec 6.15); and
   3. implement the proposal for a class exemption for franchisees to collectively bargain regardless of their size or characteristics and include specific provisions (Rec 14.1).

Auditing and Assurance Board (AASB) guidance statement

9. That the AASB prepare and issue an audit guidance statement and standard chart of accounts for marketing and cooperative fund audits to:
   1. assist accountants and franchisors to prepare financial statements for a marketing or cooperative fund; and
   2. assist auditors to prepare audit reports for marketing and cooperative funds, (Rec 6.11).

What happens next?

Now that the Report has been tabled it can be relied upon by any future Government in shaping reforms to the sector. The next step would be for the Government to respond in detail to the Report. The Minister for Small and Family Business, Senator Michaelia Cash has already indicated that she will consider the report before responding. Normally the Government takes time (typically up to 3 months) to consider the recommendations and then publicly respond, outlining which recommendations they intend to adopt and act on and those that they reject or will not act on.

With an election expected to take place in May 2019 it is unlikely that the current Government would be able to act on these recommendations before the election. It is possible that they will issue a response to the Report and take a position on what they are likely to do in terms of the recommendations to the election. Time will tell about how a future government will approach its response to the Report whether all or any of the recommendations will be adopted.

Client briefings

In April 2019 we will hold in our Sydney, Melbourne and Brisbane offices an information briefing for our clients to discuss the recommendations and how we think those likely reforms will affect them.

If you or members of your franchise team would like to attend one of these events or have any questions about the Report or its affect on you please contact a member of our Franchising Team.

This article was written by Sean O’Donnell, Partner and Derek Sutherland, Special Counsel.

¹ There is no Schedule 2 of the Code however there is an Annexure 2 which is the form of Information Statement. If they are referring to amending the information statement.