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Australia Inquires into Regulating Franchising

This article provides some preliminary assessment of the submissions to the 2013 review of the regulation of the franchising sector in Australia. This review was scheduled after the last series of amendments were made to the Franchising Code of Conduct in 2010. Headed by Australia's Alan Wein, it will also be known as the Wein Review.

The 2010 amendments to the Franchising Code of Conduct were based upon a series of recommendations made by a Senate Committee Inquiry and then further refined by an invitational Expert Panel. The final form changes bore only passing resemblance to the significant reforms suggested by the Senate Committee. In particular the change made in the area of "good faith" has been condemned as 'window dressing' with the apparent purpose of stalling State based franchising legislation, which was being considered at the time, particularly in South Australia.

Having introduced the 2010 changes, the Government announced that no further amendments would be made to the Franchising Code until after a review into their effectiveness in 2013. As a result the Wein Review has been eagerly anticipated in some quarters, representing an opportunity to once again raise the issues that the Government has previously declined to introduce into the Code.

For a number of vocal and high profile participants in the sector, the 2010 changes did not go far enough. Almost immediately after the announcement of the changes efforts to introduce State based franchising laws were accelerated - with mixed success. South Australia introduced a Small Business Commissioner which clearly contemplates including franchising under its aegis. A Private Members' Bill to regulate franchising was introduced in Western Australia, but was defeated. (Both the proponent of the WA Bill and the SA Small Business Commissioner made submissions to the Wein Review.)

The Wein Review consisted of a Discussion Paper prepared by Mr Alan Wein providing the background and context of the 2010 changes. It then proposed a series of questions for interested parties to consider in submitting to the Review. No formal response was mandated.

In mid-April 2013 the Wein Review publically released on-line 60 of the 73 submissions received (the authors of the remaining 13 claiming confidentiality). The initial purpose of this commentary was to broadly determine the proportion of submitters in favour of "good faith" and a civil penalty regime being introduced into the Code. These two areas are the most polarizing topics in franchising, not least because of their potential impact on franchising operations if introduced.

However, the scope of this commentary expanded in response to some interesting patterns that emerged when the individual submissions were correlated.

The first point to note in reviewing all the submissions is that few submissions seek to answer all of the issues raised in the Discussion Paper; most limit themselves to specific issues or select questions. A second point is that many submissions dealt with issues that were not part of the questions posed by the Discussion Paper.

As this commentary was intended as a broad-brush overview of limited issues, no in-depth analysis was undertaken of the various submissions. Rather, this article seeks to summarise responses in four broad areas, namely, good faith, the possibility of a civil penalty regime, the role of the ACCC and disclosure.

Breakdown of respondents

60 submissions were available for public review by the following stakeholders or constituencies:

  • Participants in franchise businesses     16 (27%)
  • Regulator/ government agency 7 (12%)
  • Adviser/academic 21 (35%)
  • Representative bodies 12 (20%)
  • Politician 4 (6%)

The positions adopted by the various groups with respect to the four areas outlined above were not uniform – apart from the politicians who all favoured the introduction of good faith into the Code (and 3 of the 4 also supporting penalties; the fourth did not address the issue).

"Good faith"

Consideration was given to whether the submitter supported "good faith" being introduced into the Franchising Code, or not, without delving into the qualifications that many submissions appended to their comments (such as whether an exhaustive definition should be contained in the Code).

Interestingly a small, but significant number of submissions did not address the issue of good faith at all, or else declined to endorse one position or the other. As 'good faith' has been so strongly promoted – particularly in advocating State based laws – the fact that the issue does not resonate with a proportion of submitters is worthy of note.

  • Submissions in favour of introducing "good faith" into the Code: 23
  • Submissions opposed 23
  • No comment or discernable position 14
  • Total 60

Clearly this issue continues to divide the franchising community.

Both those in favour and those opposed were able to articulate arguments supporting their position (and rebutting the contrary view) however the nuance and qualification of both positions was important. For example, a number of the submissions that were opposed to the introduction of "good faith" - if that included a defined term being included in the Code - were not necessarily opposed to the introduction of a "good faith" standard if it were to be defined by common law concepts.

It is interesting to speculate whether the remaining 13 confidential submissions were also divided along similar lines.

No doubt it will be difficult for Mr Wein and the Department to settle on a firm recommendation given the disparity of views on the subject. Given the history of the 2010 changes, any significant reform of the Franchising Code to include "good faith" will require a fundamental change in the attitude and approach of the Government.

One further note - for those who like to complain about the FCA [Franchise Council of Australia] opposing reform – the FCA is included in the count as supporting the introduction of good faith into the Code.

"Penalties"

Similarly, being "in favour of a penalty regime" looks at the fundamental position without taking into account the qualifications attached (for example, some submissions, while in favour of penalties being introduced, did not want a system of strict liability to apply).

  • Submissions in favour 29
  • Submissions opposed 17
  • No comment or discernable position 14
  • Total 60

The general consensus was that penalties should act as a deterrent to inappropriate conduct and that the consequences of a breach be proportionate (in some way) to the offending conduct. That is, a minor breach (such a failing to give a document on time) was not considered as requiring a penalty to the same degree as, say, unconscionable conduct or a breach of good faith.

Generally the lawyers who made submissions expressed concerns about the ACCC overseeing a 'discretionary' regime – where the ACCC might choose to impose or not impose a penalty based upon the nature of the breach - even if the submitter otherwise endorsed the introduction of penalties. The overall preference was that the penalty should be determined by a Court.

Comments about the Role of the ACCC

The number of comments relating to the role and function of the ACCC is striking. "Adverse comments about the ACCC" ranged from remarks about the lack of resources available to the ACCC to the regulator being a "toothless tiger". What is perhaps even more fascinating than the basic numbers is the expectation placed upon the ACCC's shoulders. There clearly remains confusion about the ACCC's role in the sector.

It should be noted that a small number of comments that related to the ACCC's potential role in any penalty regime were not included in this section.

It was quickly apparent that there is a depth of feeling about the capability of the ACCC to 'properly' oversee the sector.

  • Total adverse comments regarding resources, role or effectiveness: 30

In other words, without the ACCC being in any way the subject of the review, one half of the respondents chose to comment about the ACCC's capabilities. Most of these comments involved the lack of resources the ACCC had at its command to carry out its obligations; many called for greater resources to be made available.

Whether a Government with a close eye on budgetary issues has the capacity - leaving aside any inclination – to heed the clear calls of the sector is open to conjecture. Even submissions that were opposed on every other point agreed that the ACCC needs to be better funded to achieve its aims as the sector's regulator.

Some comments were quite scathing and generally came from people who had expectations of what the ACCC could achieve on their behalf, primarily in disputes. Some of these expectations appear to fall outside the ACCC's mandate.

The ACCC's support of the Griffith University pre-entry course was noted on a number of occasions but was not met with universal approval; however, the need for the ACCC's ongoing involvement in franchise education was not questioned in any way.

Comments about the need to reform disclosure

The broad range of comments regarding the Franchise Disclosure Document also warranted closer attention. "Comments about reforming disclosure" was added because many responses canvassed issues well outside the specific questions asked in the Discussion Paper.

Particularly noteworthy were a series of comments that criticized ever finer tuning of disclosure in order to achieve an outcome that the submitters believed disclosure alone could never achieve. The logic of these arguments prompts the question whether the Government is fully invested in regulating this industry.

While the 2010 changes to disclosure was one of the main considerations of the Wein Review what became interesting was not so much the specific responses to the Discussion Paper questions but the underlying rationale of a number of submissions – in short, that the Disclosure document was too complex and needed reform.

  • Total comments on the complexity of disclosure 23

These comments are distinguished from the responses about the specific items of disclosure which were under discussion by the review.

There were a number of submissions that thought further disclosure information should be provided (in certain areas) but even these considered that other information was too 'onerous' or 'overwhelming' for the average prospective franchisee.

There was an absolute consensus that effective disclosure was essential to franchising - no one argued that disclosure should be significantly reduced; only refined. The concern was that too much information at some point becomes as bad as too little information if the overload prevents understanding, or even the reading of, the disclosure document.

There were some calls for professional advice to be made compulsory for 'unsophisticated' incoming franchisees while others preferred to focus on an increase in available education.

Other relevant observations - ongoing and unresolved

  1. There were a number of submissions seeking dispute resolution processes outside the current regime of mediation-then-litigation; a 'half way' concept such as a tribunal or ombudsman.

    There was general agreement that:
    (a) mediation should remain a front line response for dispute resolution; and
    (b) the cost of litigation is beyond the means of most franchise participants.

    The issue seems to be centered on identifying the best process to resolve disputes if mediation is unsuccessful...currently there is no satisfactory response and the status quo has been criticized for years now without any change being implemented.

    Without actually keeping track of numbers it was clear from many submissions (even if by inference) that dispute resolution remains a perennial thorn in the side of many franchise systems. However it was widely acknowledged that there is insufficient data on the issue to be conclusive (and the data that is available seems to be subject to interpretation).

  2. Many (if not all) of the legal professionals commented upon ongoing confusion about wordings and definitions currently contained in the Code, which appear to have needed attention for some time.

    The current definition of 'novation' appears to not only conflict with normal business practice but its interaction with the Code's definition of 'transfer' is problematic. Examples were given of how this drafting is causing confusion in practice.

    Similarly, the need to give the draft franchise agreement in the form in which it is to be signed seems to be creating multiple disclosures, sometimes hundreds of pages in length, simply to record a minor change to the franchise agreement.

    These, and more, drafting issues are ongoing matters that have apparently not been considered worthy of attention in previous reviews of the Code. This speaks to the level of 'ownership' that the Government has taken over the Code.

    Anyone inclined to research these drafting issues further should access Derek Sutherland's submissions as they are noteworthy for their discussion of the technical deficiencies in the Code.

    Otherwise the most comprehensive responses appear to be that of the author and Dr Elizabeth Spencer or else the Franchise Advisory Centre.

Conclusion

It was the original assumption of this commentary that should Mr Wein base his recommendations upon the preferences expressed by sector participants (one way or another), then it may be possible to anticipate those recommendations by considering the submissions made to the review. At the end of the process it became clear that not only would Mr Wein face a difficult task in making recommendations about the primary issues under review, but also that the sector was strongly indicating that these were not the only issues in need of attention.

The primary opposition to the introduction of "good faith" is not because there is no need for a change in certain conduct, but rather that there are doubts whether "good faith" can achieve that outcome.

It appears that should "good faith" be introduced as the standard in the sector a significant overhaul of the Code will be necessary to ensure that interpretational problems are not created, or existing problems compounded.

Introducing civil penalties for failing to comply with the Code is less controversial, although the devil is in the detail. Concerns remain about the consequences to franchise systems for potentially significant fines for 'minor' infringements.

The role of the ACCC in the sector is unquestioned but its credibility has been tarnished by a perception that it is underfunded.

The final observation may well represent the biggest challenge of all; is it possible to modify the exiting dispute resolution regime to provide a more accessible determination process whilst preserving the contractual and legitimate business interests of participants? The call for change has been clear and ongoing.

That several major issues emerge in the submissions outside the scope of the Review raises an uncomfortable question – does the Government have a clear vision for the franchising industry or are these continuing reviews purely reactionary, with the subsequent recommendations simply viewed through the lens of political expediency?

Does Australia, in effect, have a major industry sector governed by convenience rather than engagement? It seems that the Wein Review has already raised more questions than it is likely to answer.


This article was authored by attorney Simon Young and law professor Elizabeth Spencer.

Simon Young is a solicitor in private practice in Queensland with a specialist interest in franchsing law and has authored numerous articles regarding franchise regulation.Liz Spencer's picture

Dr. Liz Spencer is Assistant Professor, Faculty of Law at Bond University in Queensland, Australia. Liz is researching the regulation of franchising in Australia for her doctorate degree. She has been a member of the State Bar of Texas since 1996. She practiced law in Dallas and served on the staff of Southern Methodist University.

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