Tough penalties to better regulate the franchise sector

The Australian Competition and Consumer Commission will be given more scope to punish fly-by-night franchise operations under new changes proposed by the government.

An exposure draft of amendments to the Franchising Code of Conduct, released last week, seeks to ensure that breaches to the code will incur civil pecuniary penalties for the first time.

The changes would allow the competition watchdog to issue $8,500 infringement notices without seeking a court order and serious breaches of the code may cost a franchisor as much as $51,000.

The government says the changes build upon the review of the franchise sector conducted last year by Alan Wein and the tougher penalty regime will protect small business owners.

Generally, franchisors are in a more powerful economic position than the franchisee. Poor conduct by the franchisor can therefore have a “disproportionate impact” on franchisees.

By contrast, poor conduct by franchisees has the ability to cause reputational damage to the franchise.

Small business minister Bruce Billson says the introduction of a new obligation in the code of conduct requiring both the franchisor and franchisee to act in “good faith” will improve behaviour in the sector.

“The proposed changes strike the right balance between the needs of franchisors and franchisees and the unique nature of the relationship between the two,” he said.

However, Franchise Council of Australia Deputy Chairman, Stephen Giles, has warned this new provision may lead to increased legal disputation and uncertainty between franchisees and franchisors.

“Of particular concern is a new statutory definition of good faith, which seems to fly in the face of the Wein Report recommendation that the Code simply be amended to incorporate the current common law duty. The FCA supported that position, but does not support the new wording, which will create unnecessary legal uncertainty, disputation and compliance cost,” Mr Giles said

Others have also expressed concern about the new civil penalties and warned that multiple breaches of the code could cost franchisors a lot of money over time.

Bruce McFarlane, Partner at Hall & Wilcox legal firm, said that franchisors “should be aware that the civil penalties and fines could be applied ‘per contravention’ in certain scenarios.

“This makes the fines potentially more severe than they may seem at face value, with franchisors risking being fined multiples of the publicised amounts,” he said.

“For example, if a franchisor is found to have breached the Code on 10 separate occasions, then it could be penalised for 10 Code breaches. With each breach attracting a fine it has the potential for massive financial hurt.”

Until now, franchisors have not been at risk of incurring a financial cost for breaching the code, which was introduced in 1998 to regulate behaviour in the sector.

Michael Hannah, 65, is the owner of the well known pie shop Harry’s Café de Wheels which began life in Sydney’s harbour-side suburb of Woolloomooloo over 70 years ago.

Mr Hannah bought the business in 1988 and has since turned it into a successful franchise boasting ten retail outlets. He says the code of conduct is essential to protect the branding of the franchise and the franchisor’s intellectual property and was relaxed about the introduction of new civil penalties.

“If somebody decides to break ranks and go out and march under their own banner then there should be a very quick process to pull them back into the ranks and give them a slap on the wrist,” he said.  “The code of conduct is essential.

“I’ve had Harry’s since 1988. And I’m particular as a franchisor. It’s coming up to 27 years that I’ve owned Harry’s. You don’t find that very often.”

Mr Hannah said a degree of common sense did need to be exercised in dealing with breaches of the code, depending on how serious they were.

Research conducted by Griffith University shows that the franchising sector has about 73,000 franchisees and 1,180 franchisors employing about 407,000 people.

The government’s proposals are currently subject to feedback from stakeholders until April this year with the changes currently scheduled to take effect from next January.

Other changes to the code include new obligations requiring franchisors to provide franchisees with short, easy to understand information regarding the “risks and rewards” of franchising. Unnecessary elements of the code that add to red tape costs will also be removed.

 

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