Fairness in Franchising – Franchising Taskforce Releases Regulation Impact Statement

Following on from the Issues Paper issued by the Franchising Taskforce in August, the Franchising Taskforce released a Regulation Impact Statement (RIS) on 11 November, which will assist the Franchising Taskforce in making recommendations to Government regarding reforms to the franchising sector. The Taskforce and is inviting submissions by 6 December 2019.

The Franchising Taskforce was established by the Government in April 2019, following on from the publishing of the Fairness in Franchising Report (Report) by the Parliamentary Joint Committee on Corporations and Financial Services (Committee). The Committee made 71 recommendations, many of which required the Franchising Taskforce to examine their feasibility.

The RIS identifies seven key principles under which the Franchising Taskforce is canvassing options for reform, namely:

Entering into a Franchise Agreement

1. Prospective franchisees should be able to make reasonable assessments of a franchise business before entering into a contract
2. Franchisees should have time to consider whether the relationship is right for them before committing to an agreement

Operating a Franchise

3. Each party to a franchise agreement should be able to verify the other party is meeting its obligations and is generating value for both parties
4. A healthy franchising model fosters mutually beneficial cooperation between the franchisor and the franchisee, with shared risk and reward, free from exploitation and conflicts of interest

Exiting Franchise Agreements

5. Where disagreements turn into disputes, there is a resolution process that is fair, timely and cost effective for both parties
6. Franchisees and franchisors should be able to exit in a way that is reasonable to both parties

Regulatory framework

7. The framework for industry codes should support regulatory compliance, enforcement and appropriate consistency

For each of the principles that have been identified, the Franchising Taskforce has highlighted for stakeholder consideration underlying policy problems and options to address each issue. The options proposed by the Franchising Taskforce range from maintaining the status quo to far more interventionist options. The RIS highlights the dilemma in getting the balance right. For example:

• How much pre-contractual disclosure is appropriate before it becomes overwhelming and unhelpful for franchisees?
• How much disclosure can be expected of a franchisor, particularly in a public environment where disclosure could involve commercially sensitive information?
• How much education and advice should prospective franchisees be mandated to take before taking on a franchise?
• How much flexibility should a franchisor have to manage and innovate a franchise system, and require its franchisees to adopt changes during the life of a franchise?

Despite the Franchising Code of Conduct having been reviewed on several occasions, and material amendments taking effect most recently in 2015, it is unlikely that the outcome of the Taskforce’s process will be a recommendation to maintain the status quo in all material respects. Rather, it is likely a number of substantive changes advocated by the Committee, and being explored by the Franchising Taskforce, will be adopted. The RIS highlights that the Franchising Code of Conduct could at least benefit from clarification and elaboration on a number of points where the Code is ambiguous or silent.

As the Franchising Taskforce is comprised of Government departmental representatives, it is likely that the recommendations of the Franchising Taskforce will ultimately be adopted by the Government in response to the Committee’s Report. Franchisors, in particular, should be mindful of what the Franchising Taskforce is exploring as policy problems and whether their business models could benefit from review in the interim in anticipation of potential changes.

If you have queries about the Fairness in Franchising process or issues identified to date, or are considering making a submission on the RIS, do not hesitate to contact Gadens’ franchising team for guidance.

Authored by:

Adam Walker, Partner

Lisa Haywood, Lawyer