Government set to create fairer franchise code

CAR companies in Australia will no longer be able to demand dealers make heavy investments in their dealerships without justifying the need first, under changes the federal government is about to make to the Franchising Code of Conduct.

In addition, the Australian Competition and Consumer Commission (ACCC) will become a more powerful watchdog in the franchising sector, able to audit a franchisor’s compliance with the revised code, issue infringement notices and even levy fines.

In addition, there will be an express obligation for franchisors to act in good faith, extending the unwritten common law requirement for good faith behaviour.

The proposed changes to the franchising code of conduct have been formulated in response to an independent review of the code by Alan Wein, a co-founder of the House homewares franchise, formerly an adjunct professor at the RMIT School of Business Management and now principal at Wein Mediation, which works in the commercial and contractual areas including franchising and trade practices.

The review was commissioned by federal minister for small business Gary Gray and parliamentary secretary for small business Bernie Ripoll.

The insistence on major dealership upgrades by franchisors has been a bone of contention for dealers in recent years as car-makers have sought to improve their image by demanding expensive upgrades of dealer premises.

An assessment of the government’s position drawn up by lawyers HWL Ebsworth indicates franchisors will have to demonstrate that the required “significant” expenditure is reasonable when it has not been included in the initial franchise agreement.

The term “significant” is yet to be defined, but in the government’s response to the Wein review, Mr Gray said it would likely be defined as either a percentage of turnover or profit.

In order to give the code some real teeth, Mr Gray said the ACCC would be given the power to conduct audits of a franchisor’s books to ensure it is adhering to the code of conduct.

If a breach is discovered, the ACCC will have the power to issue an infringement notice, and to fine franchisors.

“The government accepts that infringement notices will act as a deterrent to breaches of the code,” Mr Gray said, adding that the notices will be backed up by fines for any breaches.

Mr Wein suggested fines of up to $50,000 but Mr Gray will consider a more nuanced regime that would include different penalties for different breaches of the code.

The proposed clause obliging all parties to act in good faith will apply to all aspects of franchising, Mr Gray said. The current unwritten duty of good faith embodied in the common law does not apply to all aspects of franchising.

However, as the common law duty to act in good faith is unwritten, when the government extends this duty to all aspects of the franchising area, there will need to be some education.

Mr Gray said the government would ask the ACCC to prepare educational activities and materials to explain what is understood by the phrase “duty to act in good faith”.

The dealers failed to persuade Mr Wein on the issue of being able to sell their dealership or receive compensation if the franchisor terminates.

Instead, Mr Wein recommended that if the franchisee had met all the obligations in the franchise agreement and wanted to continue but the franchisor wanted to terminate, any restraint of trade clauses in the franchise agreement should become unenforceable. This would allow the franchisee to set up in competition.

Mr Gray said the government believed this was a sensible way to balance the rights of the franchisor and the franchisee.

In addition to forcing franchisors to justify requests for heavy investment by franchisees, franchisors will have to give potential franchisees some examples of the sort of potential unforeseen capital expenses that might arise.

These examples would be included in a generic risk statement, an innovation suggested by Mr Wein. The risk statement must be a separate document to the franchise disclosure document and must not be longer than two pages.

In the government’s response, Mr Gray notes that research by the Griffith University indicates that “a significant proportion” of franchisees take up a franchise regardless of the information provided to them.

He says that, as a result, people thinking about purchasing a franchise need to be given a risk statement at the earliest opportunity, “before they are psychologically and emotionally committed to entering into a franchising relationship”.

Mr Gray said the risk statement would have to be provided to people taking up their first franchise and to people buying an established franchise.