Franchising Code changes lead to increase in disclosure, but critic slams “window dressing”

Small Business Minister Craig Emerson’s long-awaited changes to the Franchising Code have been introduced into Parliament, with a focus on increasing the level of disclosure franchisors need to make to franchisees and prospective franchisees.

But while Emerson says the changes will help provide “certainty” for the sector, outspoken franchisee advocate Frank Zumbo has described the amendments to the Franchising Code as “window dressing”.

At the heart of the reforms is a change aimed at tackling one of the biggest sources of conflict in the sector – what happens when a franchise agreement ends.

Under the new provisions of the Code, a franchisor will be required to give franchisees six months notice of their decision to either renew or not renew the franchise agreement.

Emerson says this change will make it clear to franchisees that their agreements are not necessarily on going, and provide “more information that franchisees need to make decisions about their businesses”.

Other major changes include:

• Franchisors will need to disclose all payments a franchisee may be required to make to third parties, where the expenditure is within the knowledge or control of, or is reasonably foreseeable by, the franchisor. Bruce McFarlane at law firm Hall Wilcox says franchisors are currently only required to disclose payments to, or collected by, the franchisor or an associate.
• Franchisors must disclose whether they will require the franchisee to undertake any unforeseen significant capital expenditure that was not disclosed by the franchisor before the franchisee entered into the agreement.
• Franchisors must disclose the circumstances in which the franchise has unilaterally varied a franchise agreement in the last three financial years and the circumstances in which the agreement may be unilaterally varied in the future.
• Franchisors must disclose details of the process that will apply in determining arrangements at the end of the franchise agreement.
• A franchisor will be required to disclose whether the franchisor will amend the franchise agreement on or before transfer of the franchise
• Increased disclosure of confidentiality requirements.

As foreshadowed earlier this year, Emerson has not included a new statutory obligation of good faith, as had been recommended by a Senate inquiry into the sector held in 2009. Instead, the Government has clarified that nothing in the Code limits any common law obligation to act in good faith.

Emerson says the new rules will improve certainty in the sector and give prospective franchisees a better understanding of their rights.

“By requiring disclosure upfront, potential franchisees have the information they need to decide whether the franchise is the right business for them,” he said.

Steve Wright, executive director of the Franchise Council of Australia, is pleased with the changes, which were foreshadowed by the Minster in March.

He says that for most franchisors, there should not be an extra compliance burden as many of the disclosures required under the new laws are already made in franchise agreements.

“Most agreements that are in the mature franchise sector would cover most of these issues, which is consistent with what the Government has said – it’s not trying to intervene in that part of the sector that is operating pretty smoothly.”

“It’s trying to mandate those good elements of those good systems for those franchise systems are smaller and less mature. It’s essentially adopting best practise and mandating it across the sector.”

However, franchisee advocate Frank Zumbo, a competition and consumer law expert of the University of New South Wales, has slammed the changes as being of a “procedural nature” and says disclosure alone will not be enough to prevent rogue franchisors abusing their power.

“For example, just telling people that the franchisor can unilaterally vary a franchisee agreement doesn’t fix the problem.”

“A statutory declaration of good faith would ensure that any unilaterally variation would be done for a proper purpose, and not abused.”

He is particularly dismissive of the requirement that franchisors give franchisees six months notice if their agreement will not be renewed, saying this does nothing to improve the options of these franchisees.

For example, a franchisee who learns their agreement is not to be renewed is unlikely to be able to sell their franchise with just six months left on the agreement.

“My reaction to that is: So what? You tell a franchisee you are not going to renew, what does that mean practically to the franchisee? What can the franchisee do now? It doesn’t change the fact that the franchisee has got no rights.”

Bruce McFarlane says that while the changes will mean many franchisors are simply reproducing information they already make available to franchisees in their franchise agreements, the changes should help make franchisees better informed.

However, he would still like to see more work done on Government-support for pre-franchise education to help reduce the potential for mis-matched expectations that lead to disputes.

“You can require the franchisor to make as many additional disclosures as you want, but if the franchisee doesn’t understand or doesn’t read them, it won’t matter.”