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04 March 2010 Topics: Franchising

In November 2009 the Minister for Competition Policy and Consumer Affairs, Craig Emerson, established an expert panel to examine various issues concerning unconscionable conduct in franchising.

The panel’s report was released on 3 March 2010.

The panel considered whether a list of examples of unconscionable conduct to be included in the Trade Practices Act 1974 (Cth) would aid in the understanding and application of the existing provisions. Specifically, the panel was asked to consider particular issues associated with conduct in franchising relationships including:

  • whether specific inappropriate [unconscionable] conduct can be identified; and
  • whether provisions can be introduced into the Franchising Code of Conduct to counteract this conduct.

A brief summary of the panel’s findings is as follows:

  • A list of examples of unconscionable conduct would not improve or aid the understanding of the existing provisions, but interpretative principles could assist the courts, stakeholders and regulators in their interaction with the provisions.
  • Allowing a franchisor to vary the franchise agreement in specific circumstances without reference to the franchisee remains a legitimate commercial practice. The panel supported the notion of full franchisor disclosure in relation to where, why and how these variations may happen.
  • Franchisors are still able to require franchisees to make unforeseen capital expenditure but the panel supports full upfront disclosure about when and why this expenditure may be required.
  • When a franchisee is seeking to sell its business, the franchisor should be allowed to vary the franchise agreement for legitimate commercial and regulatory reasons.
  • Clauses attributing legal costs are important for legitimate business purposes. They allow the franchisor to facilitate dispute resolution with franchisees or allow the franchisee to bear the risk of disputes in return for a lower franchise fee. However, clauses which attempt to attribute legal costs irrespective of the outcome are of concern.
  • Confidentiality agreements are an important tool in the franchising sector. The panel agreed that more disclosure was necessary particularly in respect of the issues prospective franchisees cannot discuss with existing and former franchisees (for example, outcomes of mediation or trade secrets).

The panel advocated for the preparation of a short, simple, plain English document to be used in disclosure in addition to the disclosure documents currently required to be provided to franchisees.

The findings from the report indicate positive changes for all stakeholders. Franchisors are retaining their ability to make commercial decisions and franchisees should receive better disclosure to assist them in their decision to buy a franchise.

If you would like to discuss this legal alert in more detail please contact a member of our team on 07 3231 2444.

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