The Parliamentary Joint Committee on Corporations and Financial Services inquired into the operation of Australia’s Franchising Code of Conduct (the code) with a view to identifying justifiable improvements to the code. The committee has made eleven recommendations which are consistent with its overall aim of raising the standard of conduct in Australian franchising.

Franchising is an ongoing relationship between two separate commercial parties, a franchisor and a franchisee. The franchising relationship is based on a prescribed business model which is offered by the franchisor and carried out under their guidance and oversight by franchise owners (franchisees). The nature of franchising dictates that each party’s obligations are ongoing and variable, forming an interdependent contract that is fundamentally based on an ongoing relationship.

Variable contracts underpinning the franchising relationship can impair the viability and success of individual franchise agreements for the following reasons:

• differing expectations about the obligations of each party to the agreement; and
• an asymmetric power dynamic within franchise agreements, with potential to lead to abuse of power.

The time during which a prospective franchisee is considering entering into a franchise agreement represents the best opportunity for both franchisee and franchisor to make an accurate and informed assessment about whether this is the right agreement for them. Undertaking unbiased pre-agreement education is important, but even more critical is obtaining sound legal and business advice before entering into a franchise agreement.

Although many franchise agreements result in successful and profitable ongoing business relationships, issues arising during the term of the agreement can cause tensions with the potential to escalate into disputes.

Franchisee expectations about renewal need to be better managed, and the financial implications of non-renewal better understood, before fixed term franchise agreements are initially signed. Franchise agreements should clearly stipulate what the end of term arrangements and processes are, and these arrangements should be fully and transparently disclosed to prospective franchisees. To specifically reduce disputation around end of term arrangements, the committee also recommends that disclosure provisions in the code be amended to increase transparency before the start of a franchise agreement about what processes will apply at the end.

To assist the Australian Competition & Consumer Commission in its enforcement role, the committee recommends the introduction of pecuniary penalties for code breaches. Such penalties would act as a deterrent to unacceptable conduct. The committee also recommends enhancing the ACCC’s proactive investigative powers in relation to potential breaches of the code.

Due to a lack of sound data, the true extent of disputation in the franchising sector is difficult to determine. When disputes do occur and cannot be resolved through internal processes, parties may choose to enter into formal mediation. If mediation fails, litigation is an alternative (but generally expensive) avenue for pursuing settlement.

Suggestions for improving dispute resolution outcomes included: an increased focus on pre-mediation strategies; the creation of a tribunal to make determinations; or the introduction of a franchising ombudsman. But inserting another layer into the resolution process between mediation and the courts would most likely add another layer of complexity and expense to the process without achieving materially improved outcomes.

Instead, many of the issues which lead to franchising disputes, and hence the need for mediation or other alternative dispute resolution mechanisms, may be mitigated by the introduction of an explicit obligation into the code for all parties to a franchise agreement to act in good faith.

The committee is of the opinion that the optimal way to provide a deterrent against opportunistic conduct in the franchising sector is to explicitly incorporate, in its simplest form, the existing and widely accepted implied duty of parties to a franchise agreement to act in good faith.