On 2 September 2020, the Federal Opposition announced its position (Opposition Response) on the Joint Committee on Corporations and Financial Services Inquiry (Inquiry) into the operation and effectiveness of the Franchising Code of Conduct report: Fairness in Franchising (Report).
In a surprising move, the Honourable Senator Deborah O’Neill introduced into the Senate on 2 September 2020 the ‘Franchising Laws Amendment (Fairness in Franchising) Bill 2020‘ (Bill) as a private members bill in a move to introduce legislation to implement the Opposition Response.
The Australian Government recently released its response (Government Response) on 20 August 2020 to the Joint Committee on Corporations and Financial Services inquiry (Inquiry) into the operation and effectiveness of the Franchising Code of Conduct Report: Fairness in Franchising (Report).
A link to our recent newsletter outlining the key features of the Government Response is available here.
Key aspects of the Opposition Response
The key aspects include:
- Introduction of the Franchising Laws Amendment (Fairness in Franchising) Bill 2020 into the Senate on 2 September 2020; and
- The Opposition preference is to:
- increase penalties in line with those in the Australian Consumer Law of up to $10million if a franchisor engages in exploitative behaviour towards its franchisees. This was a reform recommended in the Report that the Government indicated it would not pursue. The Government Response was limited to doubling the existing civil penalty provisions of the Franchising Code to 600 penalty units or $133,200 (based on the current $222 per penalty unit);
- prohibit behaviour that may prevent class actions proceeding. The Franchising Code was amended in June 2020 to expressly allow for dealers with a similar dispute to request that their dispute be heard together as a multi-franchise dispute. This only applied for new motor vehicle dealership agreements. This change would be extended to allow multi-franchise disputes under any franchise agreement to be heard together which is consistent with the Government Response that they would extend that to all franchise agreements;
- empower the Australia Small Business and Family Enterprise Ombudsman (ASBFEO) to recommend arbitration as an alternative to franchisees having to incur the expense of having their disputes dragged through the Courts. The Government Response already indicated the proposed introduction of voluntary arbitration, similar to the dispute resolution provisions contained in the Dairy Code; and
- level the power imbalance, particularly in relation to the imbalance seen in the recent dispute between General Motors and Australian Holden Car Dealers. The majority of the dispute resolution changes adapt the existing dispute resolution provisions of the existing Dairy Code that relate to arbitration and expand dispute resolution to cover a voluntary arbitration process.
The key aspects of the Bill
The Bill seeks to implement the Opposition Response in several distinct parts.
- Firstly, it contains amendments to the Franchising Code to include arbitration provisions into the dispute resolution processes and make changes to the role of the mediation adviser to cover arbitration as well;
- Secondly, it also contains amendments to:
- Section 51AE of the Competition and Consumer Act 2010 to significantly increase the amount of penalties applicable for contravention of a civil penalty provision of the Franchising Code; and
- The Australian Small Business and Family Enterprise Ombudsman Act 2015 (ASBFEO Act) to allow their role to include a concierge service for arbitration as an alternative dispute resolution process.
- The vast majority of the amendments relate to dispute resolution and not to other recommendations made in the Report. It is not entirely clear why this narrow approach was taken; and
- The Bill does not seek to address many of the other changes that the Government Response indicated it would make to the Franchising Code.
Proposed changes to the Franchising Code covered by the Bill:
The changes would commence immediately if the Bill became an Act on the day it receives Royal Assent.
Dispute resolution process
References to the ‘mediation adviser’ in the Franchising Code would be changed to ‘mediation and arbitration adviser’ to reflect the expanded role of the Australian Small Business and Family Enterprise Ombudsman (ASBFEO).
New mediation and arbitration adviser
It would revoke the appointment of the current mediation adviser and replace that role with the new mediation and arbitration advisor (Adviser) who will be the person holding, occupying or performing the duties of the position of the Deputy Ombudsman (or an equivalent position) in the ASBFEO.
It would entrench the arbitration provisions and the role of the Adviser being associated with the ASBFEO. A resolution of each house of Parliament would be required if subsequent changes were made to amend or repeal the Competition and Consumer (Industry Codes-Franchising) Regulation 2014 (Regulation) to remove arbitration as a means of dispute resolution or to appoint someone to the Adviser role who was not:
- The ASBFEO ombudsman (Ombudsman);
- A delegate of the Ombudsman; or
- A person assisting the Ombudsman under s33 of the ASBFEO Act.
Adviser to create and maintain a list of arbitrators and mediators
It would require the new Adviser to compile a list of mediators and arbitrators for the purposes of dispute resolution under the Franchising Code.
Report specified information and statistics
It would require the Annual Report of the Department administering the ASBFEO Act to include specified information in their Report including:
- The number of requests received by the Adviser for appointment of a mediator or arbitrator;
- The number of occasions where the Adviser received requests for appointment of an Arbitrator but did not appoint one;
- The number of certificates given to the Adviser stating the mediation had finished and the dispute had not been resolved and the number of arbitrations that have been terminated; and
- The number of occasions where the Adviser was notified by a mediator or arbitrator that the dispute had been resolved.
It would replace throughout various provisions of the Franchising Code references to ‘mediation’ in the Franchising Code to ‘mediation or arbitration’.
It would add a new clause 35(2) of the Franchising Code so that if 2 or more franchisees have a dispute of the same nature with their franchisor, they may ask the franchisor to deal with them jointly in the dispute process. A new Clause 52 of the Franchising Code commenced on 1 June 2020. Clause 52 is almost an identical provision to clause 35(2) but currently only applies to New Vehicle Dealership Agreements.
As a consequence it would extend the right to combine multi-franchise disputes of the same nature to any franchise agreement and not just New Motor Vehicle Dealership Agreements. The Bill could have removed clause 52 of the Code to avoid duplication but has not.
Expanded dispute resolution process
It would require Franchise agreements to include a complaint handling procedure that complies with Division 2 of Part 4 of the Code that would be expanded to include the new voluntary arbitration process.
It would expand the dispute resolution process in clause 38 of the Code to permit the parties to agree that a dispute can be resolved by arbitration (even if the franchise agreement does not contain such a provision).
It would include a provision in clause 38 that deals with arbitration so that if the parties do agree to resolve the dispute by arbitration:
- They must agree on an arbitrator from the list maintained by the Adviser; and
- If they cannot agree on who should be the arbitrator from that list, to request the Adviser to appoint one for the Dispute.
Mediator to document terms of agreement
It would add a new clause 39(7) of the Franchising Code so that if as a consequence of mediation an agreement is reached, the mediator must within 14 days of that agreement being reached:
- Set out in writing the terms of the agreement;
- Give a copy of the terms of the agreement to each of the parties; and
- Notify the Adviser that an agreement has been reached.
Adopting framework of Dairy Code arbitration provisions
It would add a new clause 39A of the Franchising Code which significantly incorporates the existing provisions of the Dairy Code relating to the Adviser’s role in appointing an arbitrator within 14 days after receiving the request, unless the Adviser is satisfied that the complaint giving rise to the dispute:
- Is frivolous or vexatious;
- Has previously been the subject of another arbitration; or
- Was not made in good faith.
The Adviser would be obliged to give notice in writing of the arbitrator appointed.
It would expand Division 2 of Part 4 of the Franchising Code to include a practical framework for how arbitration process would work which is consistent with the way in which the existing dispute resolution provisions for mediation occurs.
Arbitrator to determine process of arbitration
Under the arbitration framework the arbitrator would be able to decide:
- How the arbitration is to be conducted;
- The time and place of arbitration; and
- The day arbitration is to commence.
Like the current mediation provisions, the arbitration process has to be conducted in Australia and the parties would have to be represented by someone who has the authority to enter into an agreement to settle the dispute.
There does not appear to be any formal definition of who an arbitrator can be or the qualifications or memberships they must hold to be eligible to be on the list.
The parties to the dispute would be required to sign an arbitration agreement prepared by the arbitrator to govern the arbitration.
It would add a new Subdivision C to Part 4 of the Franchising Code (being new clauses 43A, 43B and 43C) which are almost an identical copy of the drafting of the arbitration provisions of clauses 51, 52 and 53 of the Dairy Code.
It would amend clauses 44 and 45 to cover both mediation and arbitration and the role of the new Adviser.
Amending the ASBFEO Act
The Bill seeks to amend the ASBFEO Act to add arbitration to the definition of alternative dispute resolution processes and make it clear that the concierge services offered by the ASBFEO would cover arbitration.
Increasing the maximum penalties for contravention of an Industry Code
The Bill seeks to amend S51AE of the Competition and Consumer Act 2010 to add a new S51AE(2) that relates to the maximum penalties applicable for contravention of a mandatory industry code (including the Franchising Code).
If the Bill passes, it would increase the maximum penalty amount for a contravention by a body corporate of a civil penalty provision of the Franchising Code (or other industry code including Oil Code) from the existing 300 penalty units to the greater of:
- $10M; or
- If a Court can determine the value of the benefit that the body corporate, and any body corporate related to the body corporate, have obtained directly or indirectly and that is reasonably attributable to the contravention – 3 times the value of that benefit; or
- If a Court cannot determine the value of that benefit – 10% of the annual turnover of the body corporate during the 12 month period ending at the end of the month in which the contravention happened or began.
What happens next
It is important to remember that this is a private member’s Bill introduced into the Senate by Senator O’Neill. Like many private member’s Bills, it can take a substantial period of time before it comes up for a second reading and debate. Timing will depend on the current priority of the business of the Senate.
The Bill would need to pass the Senate before moving to the House of Representatives, a process different to the normal way Government legislation operates. At this stage it is too early to determine whether any measures of the Opposition Response will occur.
- Much of the operative framework for dispute resolution in the Bill mirrors the existing framework of the Dairy Code. It adapts the existing Part 4 Franchising Code obligations to include arbitration. It does not expressly deal with conciliation;
- The Bill has a focus on amendments to dispute resolution processes, empowering the ASBFEO and increasing penalties for contraventions of the Franchising Code (and other industry codes including Oil Code);
- The timing, focus and thrust of these reforms in the private members Bill is instructive. The Bill focusses completely on dispute resolution and penalties and little else;
- Whilst it includes a comprehensive framework to extend the dispute resolution provisions to arbitration, it does not try to make other substantive reforms recommended in the Report, including those that the Government indicated it would not adopt or pursue;
- There is no doubt that some of the provisions of this Bill (dealing with dispute resolution and the ASBFEO) could still form part of the Government reforms. The Government already indicated that as part of its package of reforms it would seek to adapt and adopt the arbitration provisions of the Dairy Code; and
- The process of changing a legislative instrument such as the Regulation containing the Franchising Code normally occurs when the Government tables the amending regulation and makes it subject to a disallowance motion. The Opposition Response is seeking to amend the Franchising Code and their other reforms in a different way.
Since announcing the Government Response, the Government has released their Regulatory Impact Statement to outline the impact and costs of their proposed reforms.
The Government has not yet announced a timetable for introducing its proposed amendments to the Franchising Code. However it is widely expected to occur later this year or early next year.
The introduction of this Bill may force the Government to alter the timing of their proposed reforms. The introduction by the Opposition of the Bill has just made the process of implementing the Government Response measures more complicated than it could have been.
A copy of the Government Response is available here.
A copy of the media release outlining the Opposition Response is available here.
A copy of the Bill and the Explanatory Memorandum for the Bill is available here.
If you require any advice on these proposed reforms speak to a member of our National Franchising and Automotive teams.
This article was written by Derek Sutherland, Special Counsel and Sean O’Donnell, Partner.