John Williams (NSW, National Party) Share this | Link to this | Hansard source

On behalf on Senator Mason and the Parliamentary Joint Committee on Corporations and Financial Services, I present the report, Opportunity not opportunism: improving conduct in Australian franchising, together with the Hansard record of proceedings and documents presented to the committee.

Ordered that the report be printed.

I seek leave to move a motion in relation to to the report and to incorporate my tabling statement in Hansard.

Leave granted.

I move:

That the Senate take note of the report.

The statement read as follows—

The Parliamentary Joint Committee on Corporations and Financial Services inquired into the operation of Australia’s Franchising Code of Conduct (the code) with a view to identifying justifiable improvements to the code. The committee has made eleven recommendations which are consistent with its overall aim of raising the standard of conduct in Australian franchising.

Franchising is an ongoing relationship between two separate commercial parties, a franchisor and a franchisee. The franchising relationship is based on a prescribed business model which is offered by the franchisor and carried out under their guidance and oversight by franchise owners (franchisees). The nature of franchising dictates that each party’s obligations are ongoing and variable, forming an interdependent contract that is fundamentally based on an ongoing relationship.

Variable contracts underpinning the franchising relationship can impair the viability and success of individual franchise agreements for the following reasons:

• differing expectations about the obligations of each party to the agreement; and
• an asymmetric power dynamic within franchise agreements, with potential to lead to abuse of power.

The time during which a prospective franchisee is considering entering into a franchise agreement represents the best opportunity for both franchisee and franchisor to make an accurate and informed assessment about whether this is the right agreement for them. Undertaking unbiased pre-agreement education is important, but even more critical is obtaining sound legal and business advice before entering into a franchise agreement.

Although many franchise agreements result in successful and profitable ongoing business relationships, issues arising during the term of the agreement can cause tensions with the potential to escalate into disputes.

Franchisee expectations about renewal need to be better managed, and the financial implications of non-renewal better understood, before fixed term franchise agreements are initially signed. Franchise agreements should clearly stipulate what the end of term arrangements and processes are, and these arrangements should be fully and transparently disclosed to prospective franchisees. To specifically reduce disputation around end of term arrangements, the committee also recommends that disclosure provisions in the code be amended to increase transparency before the start of a franchise agreement about what processes will apply at the end.

To assist the Australian Competition & Consumer Commission in its enforcement role, the committee recommends the introduction of pecuniary penalties for code breaches. Such penalties would act as a deterrent to unacceptable conduct. The committee also recommends enhancing the ACCC’s proactive investigative powers in relation to potential breaches of the code.

Due to a lack of sound data, the true extent of disputation in the franchising sector is difficult to determine. When disputes do occur and cannot be resolved through internal processes, parties may choose to enter into formal mediation. If mediation fails, litigation is an alternative (but generally expensive) avenue for pursuing settlement.

Suggestions for improving dispute resolution outcomes included: an increased focus on pre-mediation strategies; the creation of a tribunal to make determinations; or the introduction of a franchising ombudsman. But inserting another layer into the resolution process between mediation and the courts would most likely add another layer of complexity and expense to the process without achieving materially improved outcomes.

Instead, many of the issues which lead to franchising disputes, and hence the need for mediation or other alternative dispute resolution mechanisms, may be mitigated by the introduction of an explicit obligation into the code for all parties to a franchise agreement to act in good faith.

The committee is of the opinion that the optimal way to provide a deterrent against opportunistic conduct in the franchising sector is to explicitly incorporate, in its simplest form, the existing and widely accepted implied duty of parties to a franchise agreement to act in good faith.

I seek leave to continue my remarks.

Leave granted; debated adjourned.

Sue Boyce (Queensland, Liberal Party) Share this | Link to this | Hansard source

I would like to speak very briefly in relation to this report from the Parliamentary Joint Committee on Corporations and Financial Services which we entitled Opportunity not opportunism: improving conduct in Australian franchising. The report is a bipartisan result of the committee’s inquiry into the current Franchising Code Of Conduct. We began this inquiry on 25 June this year. I would like to speak on behalf of our deputy chair, Senator Mason, and the other members as someone who was involved in the inquiry for its entirety.

We set out to identify improvements that could be made to the code and to look closely at the sometimes very fraught relationships that exist between franchisors and franchisees. I make the point at the outset that, as in so many cases, it is the minority of relationships between franchisors and franchisees that cause the most problems and that are the most talked about. In the vast majority of cases, we found that people on both sides acted honestly, openly and in the best interests of both parties.

I would particularly like to thank the secretariat for the work they did on this inquiry. There were some changes during the inquiry which made this very complex task that much more complex. There were a variety of very polarised views from various witnesses in regard to the functioning of the code and what should be done about it, all of which were handled with very great grace by the secretariat. I thank them for that.

The report defines franchising as an ongoing relationship between two separate commercial parties and sets out that this relationship is based on a prescribed business model offered by the franchisor to the franchisee, who buys the right to use a provided business system. I think that setting that out is important because it is, in some way, still a bone of contention. There are a number of models of franchising, such as motor dealerships, which do not naturally fit within the framework but which are required to function under the Franchising Code Of Conduct and which, in the view of the committee, should do so.

We made 11 recommendations in regard to the conduct of franchising in Australia. Many of the issues that were raised with us relate to the power imbalance between the system’s owner, the franchisor, and the system’s user, the franchisee. At every stage of the process along the way—before a contract is signed, during the resultant business relationship and then at the end of the contract—the franchisor is in a stronger negotiating position than the franchisee. We have one franchise system for every 20,000 citizens. That is five times the density of the USA, where, of course, the franchising industry was born. Given the size of the franchising industry in Australia, the growth of the Australian franchising industry has also been extraordinary. But, given both these facts, we have very little statistical information about the sector. We have made recommendations that the Australian Bureau of Statistics should take on the task of working out how we will define the size of this industry.

Some of the other recommendations we have made are designed to ensure that franchisees go into contracts with their eyes wide open. There was very little appetite in the committee for evidence that was brought to us of people who had gone into contracts unaware of what they were doing. The code very clearly states that this should not be happening. It is, in the end, up to individuals to look at the contracts they are about to sign and ensure that they understand them, particularly given that in many cases franchisees may well be mortgaging their family homes to enter these businesses. We believe the code should be amended so that franchisees also have a very clear understanding of the liabilities and consequences they could suffer in the event of franchisor failure. We heard evidence of franchisees who not only were left without a business when the franchisor went bankrupt but also lost their premises, so they could not even continue in a similar business, because an entity related to the franchisor was also their lessor. There are some very difficult issues there, and we have suggested not only that the issues should be made clearer under the code but that the government should examine ways to better balance the rights of parties in the situation where the franchisor business fails.

In recommendation 5, we are suggesting that the code should be amended so that, before they enter into an agreement, franchisees understand what the process would be at the end of the agreement, having due regard to whether there is an equity in the business or whether there is not. We had views that went from one extreme to the other, from one view which said that every contract is a closed-end contract—it finishes when it says it finishes—to people who wanted an automatic right of renewal. Obviously, the franchisor is in quite a powerful position as the contract comes up for renewal, and we believe that this is a situation where a lot more work needs to be done.

I would particularly like to concentrate on our recommendations 8 and 11. Recommendation 8 suggests that all parties, the franchisors, the franchisees and the people who wish to be franchisees, must act in good faith in relation to all aspects of a franchise agreement. The committee had a particularly lengthy discussion to arrive at this outcome. We were of the view that ‘in good faith’ is certainly implied within most negotiations under the Trade Practices Act and within the franchising code. We heard evidence from franchisors who did not want the term ‘in good faith’ included in the code and yet told us that they included it within their own contracts with franchisees. Our view is that, whilst the current provisions in sections 51AC and 51AD of the Trade Practices Act on unconscionable conduct leading to misleading or deceptive conduct assist, that is not sufficient to cover the areas before contracts are entered into and when people begin to negotiate the potential end of the contract.

The other area I would like to talk about briefly relates to the ACCC and the way it was viewed by submitters to the inquiry. In relation to franchising, the ACCC has the role of ensuring compliance with the Trade Practices Act in conjunction with the Franchising Code of Conduct. The ACCC gave evidence that it deals with franchisee complaints at three levels: situations where a complaint has been lodged but the complainant does not want to take the complaint any further, situations where a complaint has been lodged but insufficient evidence is available to the ACCC to substantiate the claim and situations where the complainant can provide evidence that substantiates the claim and it goes ahead. Nevertheless, we heard evidence from submitters that the ACCC was a toothless tiger. One witness told us that she had been advised by the ACCC that the franchisor she was complaining about had told the ACCC that they were not engaging in misleading conduct. As this witness pointed out, what company is going to fess up voluntarily to the regulator that they have been engaged in misleading conduct or misuse of funds? Recommendation 11 is designed to give the ACCC greater power to proceed to investigate a franchisor when the franchisee may be too frightened or unwilling to assist with the inquiry. I recommend the report.

Anne McEwen (SA, Australian Labor Party) Share this | Link to this | Hansard source

I seek leave to continue my remarks.

Leave granted; debate adjourned.