Parliamentary Inquiry into Franchising: What's Wrong Within the Sector?

Peter Stewart

Over the last few months, we have witnessed an unprecedented number of franchise systems being embroiled in scandals, from the poor treatment of franchisees, systematic underpayments, visa fraud and numerous breaches of the Franchising Code of Conduct.  

In light of this, there was a call for a parliamentary inquiry into the franchising sector and the effectiveness of the Code.  This Inquiry is currently well underway, with hearings being conducted with a view to getting a report to the Parliamentary Joint Committee on Corporations and Financial Services by 30 September 2018.

The inquiry will look into franchising as a whole, with a focus on:

a) The operation and effectiveness of the Franchising Code (including the disclosure document and information statement) in ensuring full disclosure to potential franchisees of all information necessary in making a fully informed decision when assessing whether to enter a franchise agreement, including information on the:
        i.    likely financial performance of a franchise, as well as worse-case scenarios;
        ii.    contractual rights and obligations of all parties (including termination rights and geographical exclusivity);
        iii.    leasing arrangements, and any limitations of the franchisee's ability to enforce tenant's rights; and
        iv.    expected running costs, including costs of goods required to be purchased through prescribed suppliers.

b) The effectiveness of dispute resolution under the Franchising Code;

c) The impact of the Australian Consumer Law unfair contract provisions on new, renewed and terminated franchise agreements entered into since 12 November 2016, including whether changes to standard franchise agreements have come about;

d) Whether the provisions of other mandatory industry codes contain advantages or disadvantages relevant to franchising relationships in comparison with the terms of the Franchising Code;

e) The adequacy and operation of termination provisions in the Franchising Code;

f) The imposition of restraints of trade on former franchisees following the termination of a franchise agreement;

g) The enforcement of breaches of the Franchising Code and other applicable laws (such as the Competition and Consumer Act) by franchisors; and

h) Any related matters.

As with anything, there are two sides to every story, and whilst the inquiry appears to have placed a particular focus on the power imbalance between franchisors and franchisees, it appears to be extensive enough to encourage a balanced review of the sector.  This in itself is a challenge, as the public's current perception of franchising is heavily influenced by the media, which appears to lack objectivity.  

The fact that franchising is under the spotlight is not new to those of us paying attention, in fact it was only some 3 years ago that amendments to the Code were made following the Wein report into both the Code and the franchising model.  Given the breadth of the inquiry, it is indeed likely that it may result in significant amendments to the Code, as well as the regulatory framework.

What those changes may entail, no one yet knows - however it is important for franchisors to continuously review the business model and agreements, with a particular focus on being reasonable and fair.  

If you would like to speak with one of our franchising lawyers regarding the parliamentary inquiry, or would simply like some advice with regard to your personal franchising situation, please don't hesitate to get in touch with: