Emerson unveils “sweeping” franchising reforms, greater disclosure for franchisors

Federal Small Business Minister Craig Emerson has announced what he has described as “the most sweeping reform of the Franchising Code of Conduct since its inception 12 years ago”, which will see franchisors forced to produce plain English disclosure guides covering controversial issues such as unilateral contract variations, unforseen capital expenditure and end-of-term arrangements.

But the Government, acting in response to a report on the Franchising Code from an expert panel, will not introduce specific good faith or unconscionable conduct provisions into the Code.

This has been welcomed by the Franchise Council of Australia, although one competition expert has accused the Government of “failing” franchisees but not going far enough with the reforms.

Emerson’s latest reforms build on changes to franchising regulation announced in November 2009, including giving the ACCC the power to conduct random audits of franchise systems and improved disclosure requirements.

At the centre of the latest changes is the requirement for the provision of a plain English disclosure document that will explain a franchisers rights and responsibilities to potential franchisees.

“Franchisors would have to make it clear to prospective franchisees that there may be unilateral contract variations, unforeseen capital expenditure, requirements to meet legal costs, and confidentiality restrictions. Furthermore, the franchisor would have to clearly spell out – at the time of entering the contract – the process for the sale of the business,” Emerson said in a statement.

“In making these reforms the Government is not throwing the baby out with the bathwater. The reforms will put franchisees in a better position to understand the risks of going into franchising by giving them clearer information up front about the terms and conditions on offer.”

In the area of unconscionable conduct, Emerson says the Government will strengthen laws by making it easier for the courts to “take strong action” against unconscionable conduct by changing the laws to include so-called interpretive principles of what unconscionable conduct is.

Franchise Council chief executive Steve Wright is pleased with the changes and particularly glad to see the Government has resisted calls for good faith and unconscionable conduct provisions to be added to the code.

“That was the really big concern from our point of view – that we would get some sort of new, separate laws on good faith and unconscionable conduct in the Code, which would mean you would get one set of laws for business and another set of laws in the FC.”

“They are changes which build on existing principles – they don’t create new ones.”

He says the plain English guide is a good idea that franchisors will be pleased with.

“The aim is that everybody, whether they can read legal documents or not, can go into franchising with eyes wide open.”

But while franchisors are pleased with the changes, one outspoken franchisee advocate is disappointed.

Frank Zumbo, associate professor and competition and consumer law expert at the University of New South Wales, says Emerson’s changes fail small business and franchisees and has described the changes to unconscionable conduct and the Franchising Code as spin.

He says there is no clear indication when the “interpretative principles” will be put in place and whether they will have legal effect.

He has also slammed the proposal for a plain English franchising disclosure document as “window dressing”.

“There is already considerable guidance on the nature of the franchising relationship. Even the disclosure document currently required under the Franchising Code of Conduct provides prospective franchisees with ample warnings and advice.

“All the “guidance” in the world will not stop rogue franchisors from behaving inappropriately. Any suggestion that a plain English guide will be effective against rogue franchisors is misplaced and naïve.”

Bruce McFarlane, franchising expert and partner at law firm Hall & Wilcox, is also sceptical about the introduction of a plain English guide as franchisees are already required to produce a number of very detailed disclosure documents.

“The devil is in the detail, and you can’t put five detailed documents in a two-page summary,” he says. “I don’t think it will make any difference at all to the number of franchisees who are disgruntled with what happens at the end of franchisee agreements.”

McFarlane would like to see more education of potential franchisees to ensure they understand the franchise business model and their rights under franchise agreements.

“Anything the Government can do to educate franchisees is a good thing, but I don’t know that requiring franchisors to produce more disclosure documents is a good thing.”

In a move that will please franchisors, Emerson called for an end to the inquires into the Franchising Code.

“We should let the reforms settle in and not keep changing the Franchising Code – let’s give it a breather for a few years.”

McFarlane hopes the changes will be made law before any Federal Election later this year.

“If they don’t, the changes could be sitting around for two years and we’ll have this uncertainty.”