Tony Conaghan and Claire Slunecko

Fairness in Franchising Report

Tony Conaghan and Claire Slunecko

8 May 2019

Franchising

Following two further extensions by the Senate to the due date, the Fairness in Franchising report, was released on 14 March 2019 by the Parliamentary Joint Committee on Corporations and Financial Services (the Report). The full report is available here.

The Report contains 51 recommendations, with several references to an inter-agency “Franchising Taskforce”, to be established to assess, review and possibly implement many of the recommendations. Some of these recommendations are discussed in further detail below.

Overall, the Report provides a detailed analysis and has a view of ensuring that Australia continues to maintain, and encourages further growth of, a profitable and sustainable franchising industry to the benefit of all stakeholders, including franchisors.

Submissions made in inquiry

There were over 400 submissions received (190 of these were confidential), and nine (9) public hearings held. Notably, over 80% of the submissions were from franchisees,1 which has flavoured the inquiry. Additionally, and it follows, the Report in some respects, perhaps strays beyond the strict ambit of the terms of reference of the inquiry. The terms of reference can be found here.

Positive contribution by the franchising industry 

Importantly, the Report acknowledges that many franchisors have in place systems that operate to the mutual benefit of franchisors and franchisees.2 Indeed, there are numerous benefits generated by the $181 billion dollar Australian franchising industry, constituted by over 1,150 franchisors and an estimated 79,000 franchise units.3 The industry generates significant job creation and business growth and activity in Australia. It also represents a substantial part of the small business community, and plays an important role in the fabric of the Australian economy.

Key recommendations

The recommendations in the Report are in many respects general in nature, providing proposals and encouraging further analysis and review in many instances.

Some of the key recommendations are outlined in summary below.

Establishment of Franchising Taskforce

As discussed above, a key recommendation of the Report is the establishment of a Franchising Taskforce to monitor the feasibility and implementation of the recommendations in the Report.

Greater disclosure obligations

The Report recommends that the franchisor must disclose to:

  • prospective franchisees:
    • two years’ of financial information (e.g. profit and loss statements and balance sheets) as well as an assessment of labour costs of that site or those of a comparable franchisee (if the relevant site has not yet opened or operated);
    • whether the franchisor controls and/or receives a financial benefit from any supplier; and
  • current franchisees the actual financial statements for the market fund account at the end of each quarter with sufficient detail as to be prescribed.

Increased protections against third line forcing

The Report recommends in respect of ‘third line forcing’ (that is, generally where a franchisor will require that the franchisee purchases goods or services from a particular third party) that:

  • franchisors be required to disclose any additional margin to the regular retail price applied to the supply of any goods or services to the franchisee; and
  • the regulator, the Australian Competition and Consumer Commission (ACCC), be given powers to investigate third line forcing terms, including in relation to the volume and frequency of supply orders.

Greater involvement by the regulator

 The Report recommends that the ACCC be given greater powers of enforcement and investigation, including:

  • granting ACCC the power to intervene and prevent franchisors from marketing and selling franchises where they have a record of churning (repeated sale of a failed franchise to a new franchisee) or burning (continually opening new outlets which are unlikely to succeed in order to benefit from upfront fees); and
  • the Australian Government provides the ACCC with sufficient resources to appropriately investigate all complaints or whistleblower reports or complaints about illegal or unfair contract terms.

Application of Unfair Contract Terms legislation

The Report recommends that:

  • the Australian ‘unfair contract terms’ regime applies to franchise agreements and any clauses seeking to exclude the application of the regime be void;
  • consideration be given to address ‘unfair contract terms’ in existing franchise agreements; and
  • unilateral variations be disallowed and instead require agreement by the majority of the franchisees.

Leases and retail outlet arrangements

 The Report recommends that:

  • franchisors be obliged to disclose:
    • relevant lease agreements and documents;
    • the right of the franchisee to the relevant franchise site (e.g. owner, lessee, sublessee granted by the franchisor etc); and
    • whether the lease or license will expire before the expiry of the franchise agreement;
  • franchisees have the right to terminate the franchise agreement within six months if the franchisor fails to comply with its lease disclosure obligations or the lease contains false or misleading information or has other deficiencies; and
  • any rent monies collected by the franchisor must be held in trust and only used to pay rental expenses.

Effect of Report

It is important to note that the Report does not yet have any legal effect. At this stage, the Report merely provides recommendations that may, or may not, be implemented and adopted by the Australian Government at a later time.

The Australian Government may prepare a Response to the Report that outlines whether it will adopt any or all of the recommendations. Based on historical timeframes, a Response, if issued, may not be finalised until around September 2019 to April 2020.

Additionally, the Australian Government has recently called a federal election, which is to occur on  18 May 2019. The status of the Report and any Government response is therefore uncertain at this stage.

Should you have any questions, please contact us for a confidential discussion.

Tony Conaghan | Partner | +61 7 3338 7502 | tconaghan@tglaw.com.au

Claire Slunecko | Lawyer | +61 7 3338 7563 | cslunecko@tgaw.com.au

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References

1 The Report, [3.2].

2 Page xiv.

3 Franchising Council Australia, Franchising Australia 2016 Report, 10th edition.