Are you ready for the inquiry? What you need to do to tighten up your business

Compliance and governance are key for franchisors
Compliance and governance are key for franchisors

Inside Franchise Business: franchisors need to review their franchise documents in light of the parliamentary inquiryFranchising is the subject of yet another inquiry called by the Federal Parliament. This inquiry is the latest in a series of government reviews that have scrutinised the franchising industry in recent years.

With current media reports catastrophising franchising as a business model, highlighting franchisor collapses, wage scandals and franchisee financial distress and the Australian Competition and Consumer Commission’s recent announcement that it received almost 5,000 reports from small businesses last year, it is not surprising that Parliament has reacted by launching a further inquiry.

The deadline for submissions to the inquiry has now passed and submissions have been lodged by a variety of participants in the franchise sector, including by franchisees, franchisors, the Department of Jobs and Small Business, the ACCC and the Franchise Council of Australia. The public hearing begins on Friday 8 June and the Joint Committee is due to report on the inquiry by 30 September 2018.

However, it remains to be seen whether this inquiry will necessarily have the desired effect of preventing alleged unscrupulous conduct in the franchising industry or whether resources could be better focused on enforcing existing laws that are not being complied with by some franchisors.

In any event, with the spotlight firmly on franchising franchisors should not wait for the outcome of the inquiry and should examine their disclosure documents, franchise agreements and related agreements and the manner in which they deal with their franchisees.

Some franchisors do not provide adequate information in their disclosure documents.  Simple answers such as “yes”, no” or “not applicable” are not sufficient answers to give prospective franchisees a clear understanding of their rights and obligations under the franchise.

For example, item 9 of the disclosure document requires disclosure of whether the franchise is limited to a particular site and whether the territory is “exclusive” or “non-exclusive”. A “yes” or “no” answer to the question will not provide sufficient information to many prospective franchisees, particularly those who are new to the industry to enable them to understand whether they are being granted a franchise for a territory and if a territory is being granted whether that territory is exclusive or not.

Franchisors should also review their franchise agreements especially in the light of the expansion of the unfair contact laws to standard form small business contracts in November 2016. One of the terms of reference of the Inquiry is a consideration of the impact of the unfair contract laws on franchise agreements.

The franchise sector featured in the ACCC’s report on Unfair Terms in Small Business Contracts and the ACCC has recently taken action against a number of businesses in a variety of industries alleging that clauses in their standard form contracts are unfair under the Australian Consumer Law and therefore void.

Franchisors should seek legal advice in relation to their franchise agreements. Such advice should comprise a systematic review of potentially unfair terms in the franchise agreement and an assessment of each potentially unfair term for its impact on each party’s rights and obligations, specifically whether it is necessary to protect a party’s legitimate interests, the potential detriment caused by the term and its transparency.

Potentially unfair contract terms should be removed or amended to mitigate the risk of claims by and disputes with franchisees or action by the ACCC.

When issues arise with franchisees franchisors should be proactive and tackle them head on rather than the waiting until the issues fester and intensify resulting in complaints to the regulators and as we have seen in recent times to the media.

Franchisors should more freely invoke the dispute resolution process under the Franchising Code.  It is an effective way of resolving disputes with franchisees on a cost effective and early basis.

Minor issues can be resolved through direct face to face meetings or contact between the franchisor and franchisee.  Where the issues cannot be resolved mediation is an option to facilitate further discussions in the presence of an independent third party.

Franchisors do not need to wait for the outcome of the inquiry to act.  Franchisors can act now and review their documents and processes to make sure they are following best practice.