Code crackdown: ACCC recommends big reforms to Franchising Code of Conduct

On 11 May 2018, the ACCC released a submission to the current parliamentary inquiry into the operation and effectiveness of the Franchising Code of Conduct. The ACCC's submission proposes a number of significant reforms, including increased disclosure requirements for franchisors and higher penalties for breaching the Code, which could have implications for franchisors and franchisees.

State of discontent in the franchising sector

The franchising sector has received some criticism of late as a result of sustained media coverage of a few high-profile businesses where there has been widespread franchisee discontent with how those businesses are being operated, and indeed whether the operating business models are even viable for the franchisees in those systems. As a result of this public discontent, the Commonwealth Parliamentary Joint Committee on Corporations and Financial Services launched an inquiry into the operation and effectiveness of the Code and issued a public call for submissions.

One of the submissions which was lodged was by the ACCC, which has responsibility for regulating the franchise sector. The ACCC's voice is very influential when it comes to law reform in the areas it regulates. For that reason, both franchisors and franchisees should carefully consider the potential implications that the proposed reforms would have on their franchise system.

Increased penalties for all breaches of the Franchising Code of Conduct

As the law currently stands, civil pecuniary penalties and infringement notices only apply to a limited number of Code provisions. The ACCC has recommended that civil pecuniary penalties and infringement notices be applicable for all breaches of the Code.

The ACCC also recommends that the quantum of penalties for breaching the Code be increased significantly. Currently, the maximum penalty available for breach of a civil pecuniary penalty provision of the Code is 300 penalty units (currently $63,000). The ACCC considers that this does not provide a sufficient deterrent.

If the ACCC's recommendations are adopted, the potential penalties for breaching the Code could increase very significantly from their current levels. Civil pecuniary penalties would be raised to at least reflect the corresponding penalties under the Australian Consumer Law (ACL). Currently those maximum penalties are $1.1 million for companies for breaching a civil penalty provision, but a Bill before Parliament would increase this to the greater of $10 million, three times the value of the benefit obtained from the offence (if the court can determine this), or 10% of the annual turnover of the business.

Increased disclosure requirements for franchisors

Under the Code, a franchisor has to provide prospective franchisees with a disclosure document. This disclosure document must set out (among other things) the establishment costs of the franchise business, as well as the anticipated recurring and one-off costs to the franchisee. Franchisors are able to provide a costs range where the costs cannot be calculated easily. The ACCC considers that some franchisors provide very large ranges thereby providing "almost meaningless" information.

Accordingly, the ACCC has recommended that the Code be amended to ensure that "meaningful information" is disclosed about these costs. The ACCC notes that this could include the facts and assumptions behind the cost range and the average costs based on other franchisees' experiences.

A further recommendation regarding disclosure is where a franchisee is contemplating purchasing an existing or previously franchised business. Currently, the franchisor has to provide a prospective franchisee with information regarding the circumstances in which the previous franchisee ceased to operate, but is not required to provide information about their profitability. The ACCC recommends that the franchisor be required to disclose information about the profitability of the business and any limitations on the basis and reliability of the profitability calculation. Of course, this would require franchisors to keep track of such information.

Penalties for franchisors' non-compliance with the ACCC's audit power

Under section 51ADD of the Competition and Consumer Act (CCA), the ACCC can issue a notice requiring a franchisor to give information or produce a document that the franchisor is required to keep, generate or publish under an applicable industry code.

Currently, if a franchisor does not comply with a section 51ADD notice, the only recourse the ACCC has is to bring the matter before the courts. The ACCC considers this to be unnecessarily expensive and inefficient and that it does not incentivise franchisors to comply with the section 51ADD notice.

The ACCC has recommended that the CCA be amended so that civil pecuniary penalties and infringement notice can be applied / issued for failing to comply with a section 51ADD notice.

Prohibition against the inclusion of unfair terms in standard form contracts

Under section 24 of the ACL, if a court determines that a term in a standard form contract is "unfair", it can declare that term to be void. However, the inclusion of unfair contract terms (UCTs) in a standard form contract is not currently illegal. In other words, a court can declare that a UCT is unenforceable, but there is otherwise no penalty for including a UCT in a standard form contract.

A term of standard form contract is "unfair" if:

• the term causes a significant imbalance in the parties' rights and obligations;
• the term is not reasonably necessary to protect the legitimate interests of the party who would be advantaged by the term; and
• the term would cause detriment to a party if applied or relied on.

The ACCC has recommended that the ACL be amended to prohibit the inclusion of UCTs in standard form contracts and to provide that civil pecuniary penalties and infringement notices be applicable for the inclusion of UCTs in standard form contracts. The ACCC considers that this will provide franchisors (and indeed other business operators, as the UCT regime is not limited to the franchise sector) with a more meaningful incentive to avoid including UCTs in their standard form contracts.

Passing on franchisors' legal costs

Many franchise agreements include a term requiring franchisees to reimburse franchisors for the cost of preparing (and, in some instances, negotiating) the agreement.

The ACCC considers that this may dissuade franchisees from seeking to negotiate amendments to proposed franchise agreements, or seeking their own independent legal advice. Accordingly, the ACCC has recommended that the Code prohibit the inclusion of such terms in franchise agreements.

Potential significance of the ACCC's recommendations for your franchise system

The Joint Committee is due to report its findings by 30 September 2018. Franchisors and franchisees will be keenly awaiting the outcome of the inquiry – and keeping a close eye on the extent to which the Government adopts the recommendations which are made. In the meantime, it would be advisable for any business which has not already reviewed its standard form contracts to audit all such contracts to ensure that they do not contain terms which are unfair.