Fairness in Franchising

Corporate & Commercial 16 September 2019

Franchising is big business in Australia. It dominates around 9% of Australia’s Gross Domestic Product which accounts to around $180 billion.  Why then is there such a disparity between rights and interests of franchisees and franchisors? The Fairness in Franchising Report which was released in March 2019 attempts to address this issue.

The nature of the franchise relationship inherently results in a power imbalance between the franchisor and franchisee.  The 2008 franchise inquiry found that whilst some franchisors took advantage of this imbalance, behaving opportunistically, this was not systematic or widespread.  Unfortunately the 2019 franchise inquiry has found this is no longer the case.  The final report of the Parliamentary Joint Committee on Corporations and Financial Services identified widespread problems in the franchise industry, poor conduct by franchisors and in some franchises, systematic exploitation of franchisees.

Some franchise groups and franchisors have been identified in the report, being criticised for using an unethical business model, opening and closing numerous stores annually (being a possible case of ‘churning and burning’) and taking a high risk approach where strict cost requirements are imposed on the franchise business model, affecting franchisees negatively.

Commonly, the franchise agreement to be entered into by a franchisee will be drafted in favour of the franchisor, placing onerous obligations on franchisees, whilst limiting the obligations of the franchisor.   These agreements are designed to protect the rights and interests of the franchisor and attempt to shield the franchisor from the commercial risks of the franchise business, with the risk falling on the franchisee.  Franchise agreements are often a one sided document, where the franchisee has little or no ability to negotiate amendments to the agreement, meaning a franchisee either accepts the franchisor’s terms, or does not proceed with the franchise business.

It is essential that franchisees understand the franchise agreement and the obligations it places on them.  For this reason, before signing any franchise agreement or contract to purchase a franchise business, franchisees should:

1. thoroughly read the Franchise Agreement, Disclosure Document for Franchisee and all other documentation issued by the Franchisor;

2. ensure expert legal advice is obtained from a lawyer experienced in franchising in relation to the legal implications of the franchise agreement and associated documents; and

3. obtain financial advice from an experienced accountant in relation to the financial viability of the franchise business.

Whilst numerous problems have been identified, the report acknowledges that many franchisors operate a franchise system which is for the mutual benefit of franchisors and franchisees.  As such, franchisees should thoroughly investigate the franchise system they propose entering into before committing to a franchise agreement.

After an assessment of the operation and effectiveness of the Franchising Code of Conduct, the report makes recommendations which aim to alleviate the current power disparity and address widespread problems in the franchising sector, including:

(a) introducing a franchising taskforce;

(b) whistle-blower protection mechanisms;

(c) increased ACCC powers;

(d) increased obligations for upfront and pre-contractual disclosure from the franchisor;

(e) further education for franchisees to ensure franchisees understand the franchise agreement and the risks they are taking on, including launch of a new FranchiseSmart website;

(f) creation of a public franchise register;

(g) clarification regarding cooling off periods;

(h) allowing franchisees to collectively bargain;

(i) transparency and accountability on third line forcing and supplier rebates;

(j) examination of unfair contract term laws;

(k) fair exit rights and goodwill;

(l) restriction of “churning and burning”; and

(m) a change in the dispute resolution process.

This report is likely to be the first step in reforms to our franchise system designed to give greater protection to franchisees.

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