Franchising is big business in Australia. In 2016, franchising was estimated to contribute approximately 9 per cent of gross domestic product (GDP). As a business structure, franchising exhibits a substantial disparity in power between franchisors and franchisees. This power imbalance is inherent to the structure, given the franchisor owns the business model and has control over operations and franchisee contracts, as well as their tenancy in many cases.
As a distinct form of business with characteristics that differentiate it from other forms of business, franchising is governed by its own code and legislation. The developers of this regulatory framework promoted it as being designed to address the power disparity that is reinforced in the contract (the franchise agreement) between the franchisor and franchisee, without unduly constraining the market. However, in practice the framework has not achieved that outcome and has in some cases further entrenched the power imbalance.
A franchise agreement is typically a standard form long-term contract between franchisor and franchisee. The franchise agreement is designed by the franchisor. Therefore, it has ordinarily been used to protect the franchisor's interests and place most of the commercial risks, burdens and responsibilities on the franchisee. Even a franchise agreement that may appear fair and reasonable when the franchise is operated to the mutual benefit of the franchisor and franchisee can, if the circumstances change (such as a change of ownership), be abused by the franchisor to the detriment of the franchisee. Indeed, many of the public and confidential submissions received by the committee outlined the significant, and often lifechanging, detriment that many franchisees endured as a direct result of being exploited by franchisors.
When this committee inquired into franchising in 2008, it appeared that some franchisors were behaving opportunistically, but that the issues were relatively isolated. By contrast, the evidence to this inquiry indicates that the problems, including exploitation in certain franchise systems, are systemic. Resolving systemic issues requires a much broader and more comprehensive approach. The committee is therefore proposing substantial changes to the Franchising Code of Conduct (Franchising Code), to the sections of the Oil Code of Conduct (Oil Code) that relate to franchising, as well as to the responsibilities and powers of the regulator.
Prior to this inquiry, the principal regulatory response to issues in the franchising sector has been around improving pre-contractual disclosure. During this inquiry, much was made of: firstly, improving the awareness of prospective franchisees and ensuring that they have access to appropriate legal and business advice prior to entering a contract; and secondly, improving the accuracy and meaningfulness of the information provided to prospective franchisees.