Opinions split on need for franchising code review

Published 28 February 2013 00:28, Updated 22 July 2013 14:12

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Opinions split on need for franchising code review

FCA deputy chairman Stephen Giles says a minority of former disaffected franchisees and academics are seeking to find cures for problems that don’t exist. Photo: Paul Jones

The code that monitors the conduct of operators in the franchise sector is under review again and it’s hoped that this time it will help put to bed disputes giving the $131 billion sector a bad name.

Troubles between franchisees and franchisors have been well publicised in recent years. In 2010, the owners of Seal-A-Fridge were found to have acted unconscionably by the Federal Court for demanding increases of up to 50 per cent for franchisees in weekly fees simply for accessing the national phone number needed to operate the fridge repair franchises.

Last year, franchisees of South Australian cafe chain Billy Baxter’s won a $1.2 million damages claim over misleading representations.

And now, Pie Face, the food chain founded by Wayne Homschek and his wife Betty Fong in 2003, is facing backlash from franchisees who are claiming that the costs of doing business were misrepresented.

A recent Australian Financial Review investigation unveiled a group of disgruntled franchise owners who are going broke, or not making nearly as much money as expected.

Some have lodged complaints with the competition and consumer watchdog and others in the group are taking Pie Face to court.

While some of the issues being raised may relate more broadly to alleged misleading and deceptive conduct, the case also raises the question of whether disclosure requirements are adequate and whether franchisees require greater protections.

The federal government’s review of the franchising code of conduct, which was announced in January, is working to resolve these issues.

The man heading the review – the founder of the House homeware stores franchise Alan Wein – is expected to work within the tight time frame to deliver his findings well ahead of the September 14 federal election.

The code, which was established in 1998 to ensure the franchisor discloses the terms and conditions and rights and obligations to the franchise, will be reviewed to assess whether changes made to it in 2008 and 2010 are working as intended.

As part of that investigation, it will examine the concept of “good faith” and whether there should be penalties for code breaches.

Acting in good faith in theory means franchisors act fairly and honestly, and not in a way that’s detrimental to franchisees. Yet in practice sometimes the rights of franchisees, especially at the end of the term of their franchise agreement, come into question. Furthermore, if there are no financial penalties for a breach of industry code, it begs the question, why would anyone follow it?

Submissions to the review closed last week. It’s unclear exactly what changes will be announced – some lobby groups want greater protections while others argue it’s just another review and more red tape.

“The concern is that they [the government] will make decisions without properly researching both sides of franchising, which in turn will be detrimental to franchisors and franchisees,” says Plus Fitness director and franchisor Nigel Miller.

But South Australia’s deputy small business commissioner, Frank Zumbo, welcomes the review. He says if there’s one change he hopes will eventuate, it’s direct financial penalties for breaches of the code. “And then issues around disclosure and good faith follow on from that,” he says.

Franchise arrangements work tremendously when everyone is making money but problems often arise at the end of agreements. Zumbo says franchisors often change the terms of the agreement, including introducing more onerous terms and conditions or increasing fees.

You may have hard-working franchisees that don’t do well because the franchisor plays games.

“You may have hard-working franchisees that don’t do well because the franchisor plays games,” he says. “It’s the bad apples that give the sector a bad name. We get examples from time to time that the Australian Competition and Consumer Commission investigates. What we’re trying to do is provide a code of conduct whereby all involved comply with the code. If there’s not penalties they won’t comply.”

Franchises account for about 5 per cent of businesses, with 73,000 franchise units operating across Australia and employing 400,000 people. Griffith University research suggests 1.5 per cent of franchisees are in dispute with their franchisor.

The Franchise Council of Australia has argued that good faith requirements are already implied in national law and doesn’t see the need for more red tape.

Its submission says the code has already been amended four times since 1998, demonstrating an “inordinate focus on franchising”.

The FCA’s deputy chairman, Stephen Giles, who is also a lawyer at Norton Rose, says a minority of former disaffected franchisees and academics are seeking to find cures for problems that don’t exist. “There’s no real endemic problem in franchising,” Giles says.

The FCA says in its submission that it is prepared to “contemplate an amendment to the code to expressly incorporate the current common law duty of good faith into all franchise agreements and consider the introduction of specific and commensurate penalties for blatant non-compliance”.

The body is firmly against changes that it believes will raise compliance costs, such as a new defined statutory duty of good faith and a requirement to pay compensation at the end of the franchise term.

Its submission says penalties should be “tailor-made, carefully targeted at only the flagrant and fundamental breaches and be commensurate”. It says a $50,000 penalty for failure to have a disclosure document and $5000 for failure to update a disclosure document, would be supported but that penalties should apply only to fundamental breaches of these provisions, not technical breaches.

Zumbo wants penalties to apply more broadly so that franchisees are better protected. “We need to make sure franchisors do the best thing by their franchisees, where possible,” he says.

Regardless of what the review recommends, Zumbo points out an additional problem: it’s an election year and there might not be enough time to make changes before the election. That would be unfortunate for franchisees and franchisors alike, he says.

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