Franchises are often fraught with power imbalances, as the Franchisee carries most of the risk but lacks autonomy over the products sold or the business model. In recognition of this, on 14 March 2019 a Parliamentary Joint Committee released a number of recommendations intended to correct this imbalance. The Committee considered over 400 submissions from across the sector, and their report is an acknowledgement that the 2010 Franchising Code of Conduct currently in force is in need of a substantial overhaul. There are a total of 71 recommendations in the report, and so we will only focus on certain key areas in this article.
It is important to note that these are recommendations only – it remains to be seen whether the necessary legislative changes will be made to enhance the rights of Franchisees.
Often the previous financial success (or challenges) and legal obligations of a specific franchise store are not fully disclosed when entering into a Franchise, leading to Franchisees becoming trapped in poor performing outlets.
At times, this can lead to Franchisees making costly decisions based on information that is misleading or incomplete, resulting in them abandoning the unviable business after years of losses. Sometimes this is a deliberate strategy by the Franchisor called ‘churning’ – where poorly performing franchises are constantly resold so that the Franchisor obtains the benefit of upfront fees, despite the Franchisees’ constant losses. To counter this practice, the Committee has made the following recommendations in relation to disclosure:
Supplier Rebates and Third Line Forcing
In many franchising relationships, profits are made by the Franchisor not only from royalties but also from products they sell to the Franchisee. Those products can either be heavily marked up in price, or the Franchisor may receive a rebate for selling those products to the Franchisee. Due to the nature of the relationship, a monopoly is created by the Franchisor which allows them to profit whilst increasing the Franchisee’s fixed costs.
It has therefore been recommended by the Committee that the following changes be considered:
Unfair Contract Terms
Often Franchisors have used their power over Franchisees to add and use unfair contract terms within franchise agreements. This can result in franchise agreements which provide few rights but plenty of obligations to Franchisees that are not reasonably necessary for the protection of the Franchisor. Unfortunately though, the current definition of a small business for the purposes of the unfair contract term regime may exclude certain Franchisees from being able to rely upon it.
To create a better balance of rights and obligations in franchising agreements, the Committee has recommended the following in relation to terms within franchising agreements:
This report has acknowledged the power imbalance which favours Franchisors and it is promising to see such a wide variety of recommendations aimed at addressing it. However, we do maintain a healthy skepticism until these recommendations start to be implemented.
Should you require any assistance regarding franchising agreements, including dispute resolution and agreement reviews, our highly experienced lawyers are available to assist you.
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