Stronger penalties required for franchising codes and UCT laws

14 October 2018

Australia’s Franchising Code of Conduct needs strengthening to better protect franchisees, including significantly increased penalties for breaches, and requiring improved and more meaningful information disclosure to franchisees. These changes, in combination with stronger unfair contract terms (UCT) law, would help to improve the operations of franchise businesses in Australia.

ACCC Deputy Chair Mick Keogh called for these changes in a speech delivered today at the National Franchise Convention Legal Symposium in Melbourne.

“Both the Franchising and Oil Codes, which applies to service stations, are not as effective as they could be,” Mr Keogh said.

“We want to see the Franchising Code strengthened, and supported by stronger penalty provisions, to ensure franchise systems operate well for all parties involved, to encourage compliance with franchise agreements, and to keep competition on an even keel.”

“It is in the interests of all involved in the sector to have a clear understanding of what is required by law, so that businesses focus on becoming more competitive and growing market share, rather than being tempted to take shortcuts that will ultimately damage the business, but also the reputation of the franchise sector as a whole.” Mr Keogh said.

In his speech, Mick Keogh recognised the importance of franchisees doing their due diligence including by seeking independent advice before investing in a franchise.

The Franchise Council of Australia is recommending franchise systems be registered on a public register. However, Mr Keogh raised concerns this may create the perception that information provided by franchisors has been audited and verified, or ‘accredited’, and would result in fewer potential franchisees doing their due diligence. 

Mr Keogh also raised a number of concerns with the business-to-business UCT laws, which work to protect small businesses from being forced to accept overly onerous or unfair terms in standard form contracts they are offered by big businesses.

“The biggest limitation within the current legislation is that unfair contract terms are not illegal. The worst that can happen under the law is that unfair terms are subject to legal challenge, the Court declares them to be unfair and effectively strikes them out of the contract. But a business does not face a penalty for including them in the first place,” Mr Keogh said.

“So, lacking a legal impediment, and without fear of financial penalties, businesses have an incentive to include potentially unfair terms in their contracts. We want to see this changed to more adequately protect small businesses, including franchisees,” Mr Keogh said.

Mr Keogh also updated delegates at the Convention about a potential ‘class exemption’ to allow small businesses, including franchisees, to negotiate collectively without having to seek the ACCC’s authorisation.

“A collective bargaining class exemption could provide a ‘safe harbour’, so that qualifying businesses like franchisees could engage in collective bargaining with a common supplier, without the risk of breaching competition law,” Mr Keogh said.

“Normally, the process for getting ACCC approval to collectively bargain can involve paying a lodgement fee and perhaps paying a lawyer, and in complex cases it can also take up to six months to finalise. However, the class exemption mechanism can streamline this process for many small businesses and franchisees, saving them time and money.”

A full copy of the speech is available at: Franchising and the ACCC.

Background

The ACCC is responsible for regulating mandatory industry codes that are prescribed under the Competition and Consumer Act 2010, including the Franchising Code of Conduct, a mandatory national code that regulates the conduct of franchising participants towards each other.

The activities of the ACCC in franchise matters include:

  • the provision of comprehensive franchise education and guidance materials,
  • an active Franchise Code compliance program, and
  • enforcement activities, including the issuing of infringement notices and court action in cases when breaches of the law are sufficiently serious

Each year, the ACCC receives about 400 reports relating to franchising out of around 250,000 reports and enquiries. When serious breaches of the Franchising Code are identified, the ACCC also undertakes enforcement action, with recent enforcement actions against Domino’s Pizza, West Aust Couriers Pty Ltd, Pastacup franchisor Morild and Husqvarna.

The ACCC is currently involved in two separate proceedings before the Federal Court against Ultratune Australia and Geowash (a former national franchisor) and has investigations underway into several other potential Franchising Code breaches.

The ACCC also provides comprehensive franchise education which is available on our website at www.accc.gov.au/smallbusiness. Here, you can also sign up to the ACCC’s Franchise Information Network and receive regular email bulletins about current franchising issues. We also support a free online education program for prospective franchisees provided by FranchiseEd.

Release number: 
205/18
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