Franchise agreements are governed by the Competition and Consumer (Industry Codes – Franchising) Regulation 2014 and the Franchising Code of Conduct (the ‘Code’).
The Code is regulated by the Australian Competition and Consumer Commission which has the power to investigate and determine alleged breaches and to issue infringement notices or apply for a Court to impose a financial penalty.
Critics of the 2015 Code suggest that it lacks the fortitude to address the power imbalance between franchisors and franchisees and is ineffective when it comes to enforcing breaches under the Code. These criticisms, together with recent scandals directing media attention towards various large franchise systems, have prompted a Parliamentary inquiry into Australia’s franchising sector.
The findings of the inquiry are anticipated in September 2018 and will look at the operation and effectiveness of the Code generally, with a focus on:
· the utility of disclosure documents and information statements;
· the effectiveness of dispute resolution mechanisms;
· the interplay between the Code and the small business unfair contract provisions under the Australian Consumer Law;
· the effectiveness for franchisees to enforce breaches under the Code and other laws such as the Competition and Consumer Act 2010 (Cth).
These findings will likely bring significant changes within the industry.
As the investigation takes place, it is timely for those in the franchise industry to revisit their obligations under the Code, particularly concerning disclosure requirements, contractual terms and the parties’ mutual obligation to act in good faith.
Acting in good faith
Parties to a franchise agreement must act in good faith throughout all aspects of the franchise arrangement, from pre-contractual negotiations, for the duration of the agreement and after its termination. This duty does not prevent a party from pursuing its own legitimate commercial interests. Rather, acting in good faith means that the parties should act reasonably, honestly and not arbitrarily, with a common goal of achieving the purposes of the agreement.
Conduct that may fall short of this obligation includes behaviour that is strategically aimed at putting a franchisee out of business, for example, purporting to terminate an agreement for an insignificant or technical ‘breach’ which is not the actual motive for ending it, or the unilateral or arbitrary exercise of a contractual discretion.
Fair and reasonable franchise agreements
From a franchisor’s perspective, the obligation to act in good faith should be reflected in the franchise agreement which must be fair and reasonable. An unbalanced agreement with unfair provisions could well be the subject of scrutiny should a dispute arise.
Franchisors should take the time now to review their disclosure documents and agreements to ensure compliance with the Code and to flag potential issues, particularly with the pending inquiry.
Disclosure documentation must be provided to a proposed franchisee before a franchise agreement is entered or a non-refundable payment is made. The disclosure document must give the prospective franchisee the key information necessary to make an informed decision regarding the franchised business.
Unfair contract terms
If the franchise business is a ‘small business’, the franchise agreement may be caught by the unfair contract provisions under the Competition and Consumer Act 2010 (Cth). The legislation enables a Court to declare void certain unfair terms of a standard form small business contract. A contract term may be considered unfair if it:
· would cause a significant imbalance in the parties’ rights and obligations;
· is not reasonably necessary to protect the legitimate interests of the party who would be advantaged by the term; and
· would cause detriment (financial or otherwise) to a party if it were to be applied.
Examples include provisions that allow one party to unilaterally vary, renew or terminate the contract, liquidated damages clauses or terms allowing one party to unilaterally determine whether the contract has been breached.
Termination rights for both the franchisor and the franchisee should be clearly set out in the agreement as well as any continuing obligations after the agreement ends such as restraint of trade clauses, confidentiality requirements and use/protection of intellectual property.