Franchisee rights

Franchises can be a dependable port of call in a crowded marketplace - but many Australians have paid dearly for signing on the franchisee dotted line.
 
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02.Where's the regulation?

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Following three government investigations, a voluntary Franchising Code of Conduct (FCC) was enacted for the franchise industry in 1990. And after the latest government investigation in 1997, adherence to the code became mandatory. The code is currently being reviewed with the aim of improving protections for franchisees, but it’s not clear who’s supposed to enforce it. 

ACCC chairperson Rod Sims has acknowledged that much of what goes on in the franchising industry is “outside our jurisdiction”, and industry experts as well as ex-franchisees told us that, despite the ACCC’s concerns about unethical conduct, it hasn’t been willing to help franchisees in their disputes with franchisors. Our sources say the same thing about the Franchising Council of Australia (FCA), an industry group they claim focuses exclusively on the interests of franchisors. The FCA states on its website that “the franchise sector has been regulated by the ACCC since 1998” and, in stark contrast to what we’ve heard from franchisees, FCA deputy chair Stephen Giles told us “the ACCC will investigate any breach of the code of conduct at no cost to the franchisee and will not tolerate any deceptive or unconscionable activity”. 

WA on the case 

West Australian MP Peter Abetz in 2010 introduced a state bill to better protect WA franchisees that was narrowly defeated. He has also drawn attention to the ACCC’s unwillingness to become involved. Abetz referred in his February 2013 submission to the FCC review to numerous “stories of woe” from WA franchisees about franchisors who violated the code with impunity. 

Some franchisees had been restricted to buying goods and services exclusively from the franchisor at inflated prices, an impost that contributed to the demise of their businesses. “Under these circumstances, the franchisor then terminates the franchise, resells it to a new franchisee and collects another substantial franchise fee,” Abetz wrote. “The process is then repeated, resulting in a churn-out of franchise agreements, which only benefit the franchisor.” 

And because franchisors are under no obligation to renew agreements, regardless of how well the franchise has been performing, they can leverage the franchisee’s effort and investment to their own ends, Abetz concluded. “There is nothing in the current FCC that prevents a franchisor not renewing an agreement, and simply taking over the thriving business that the franchisee has established through his [sic] own hard work and investment.” 

Code review

The official FCC review, released in April this year, found plenty of room for improvement. Some of the recommendations suggest that a lack of good faith between franchisors and franchisees has been a longstanding issue – to the extent that the review explicitly calls for a “good faith” clause that would prohibit unconscionable conduct by either party. 

For instance, the code review recommends franchisors not be allowed to falsely claim that ex-franchisees have requested not to be contacted by prospective franchisees. Other proposed changes are also telling, such as: the call for better disclosure of the risks to franchisees before agreements are signed; a prohibition on the imposition of unexpected costs by the franchisor after agreements are signed; the end of franchisees being contractually prevented from opening a similar business after agreements expire; and for franchisors to let franchisees know whether or not an agreement will be renewed in a timely manner (within 42 days of an enquiry). 

However, the FCA has questioned or opposed many of the recommendations aimed at improving franchisee rights, including: the amendment prohibiting franchisors from imposing “unreasonable significant unforeseen capital expenditure” on franchisees; stronger rights for franchisees to end agreements in midstream if the business isn’t working; a recommendation that franchisees be allowed to stretch out franchise payments across the agreement term; and a way to ensure marketing costs imposed by the franchisor are actually being used for marketing.

 

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