The parliamentary committee charged with assessing the franchising industry released its scathing report on 14 March 2019 (report), which identified a “systematic exploitation of some franchisees by a subset of franchisors”.
The report concluded that the disclosure obligations imposed by the Franchising Code of Conduct (Code) were “insufficient” at protecting the interests of small franchisees against the “contractual power” of large franchisors.
The report’s recommendations included fairer exit rights for franchisees; higher penalties for breaches of the Code; disclosure of supplier rebates; further disclosure of financial information; further reporting and accountability related to marketing funds; allowing franchisees to collectively bargain with the franchisor; and re-clarification of the contractual cooling-off period.
The report also provided that the Australian Competition and Consumer Commission (ACCC) should have the power to intervene in the practice of “churning and burning”, which involves the opening, closing, and transferring of a large number of franchise outlets in order to profit from the up-front payment of fees by incoming franchisees.
The report follows a string of recent court decisions, such as that of ACCC v Geowash Pty Ltd and ACCC v Ultra Tune Australia Pty Ltd, which found that franchisors were failing to adequately meet their disclosure obligations under the Code, resulting in in the imposition of hefty fines.
As it appears that the franchising sector is due for a considerable shake up, franchisors, franchisees, and prospective franchisees should ensure that they are fully aware of all of their rights and obligations under the Code.
Watch this space for further updates and reforms of the Code.
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