In its’ 350 page report, tabled in March 2019 the Parliamentary Joint Committee of Inquiry (PJC) into franchising regulation, unanimously concluded that there was, a massive and unacceptable imbalance of power in franchising.
It went on to make 78 recommendations for change, including the potential for co-governance arrangements. The Morrison Government’s implementation taskforce then took over and proceeded to trivialise the inquiry’s work, completely ignoring the central conclusion of the report. They finally recommended and implemented some meaningless cosmetic changes, presumably in the interests of appearance.
That is the backdrop to the decision handed down by Justice Beach yesterday, in the class action case brought by Mercedes Benz dealers against the German car maker. The dealers relied on the general provision in the code that requires franchisors to not act unconscionably. Mercedes Benz had required dealers to sign new agreements that reduced them from dealers to commission agents. This unilateral change, the dealers argued, cost each of them, on average, $22million.
The Judge dismissed the Dealers claim because in their pre-existing, company generated contracts, Mercedes Benz had reserved the future right to unilaterally change the rules of the relationship. This right to unilaterally change the rules of the game, both during the contract period and on renewal, is at the heart of the franchising problem in Australia. Franchisees provide all the investment. Franchisors have all the say.
This reality is succinctly expressed in a letter received by one of our members after having made a complaint to the Franchising regulator, the ACCC. It reads as follows:
“The good faith provision of the code doesn’t require a party to act in the interests of the other party or prevent a party from acting in their own legitimate commercial interests”.
In plain English, this statement officially confirms that the franchisor has no commercial obligation or duty to their franchisees. Exploiting franchisees is not a breach of good faith, nor is it unconscionable conduct under the current franchising code. This interpretation formed the basis for the decision in the Pizza Hut Case, which is now reinforced by the Mercedes Benz decision.
The franchisee who received this letter has now lost their business of twenty years. The franchisor’s business in this case was taken over by foreign interests, with no knowledge of the business. Their agenda appears to be to drive Australian franchisees out of their businesses in the interests of bringing in business migrants. None of this is a problem under the current franchising code.
The reality of franchising is that franchisees make virtually all the investment. It costs very little to become a franchisor. Franchisees take virtually all the financial risk, and also commit their careers.
Franchising, in essence, is a form of capital raising for expansion. Franchisees are investors and make it possible for the franchisors brand to grow at a rate not possible by any other means. AAF estimates that more than ninety percent of all the investment in franchising comes from the savings and borrowings of franchisees. Put another way, Franchises now fund a sector worth $180 billion, around ten percent of the Australian economy.
It is critical for the Australian economy that franchising remains a credible form of investment. The franchising code itself, and decisions like the Mercedes Benz case, are undermining the confidence of Australians in franchising as an investment and career option. This undermining of confidence in the sector is also making it harder and more expensive for franchisees and potential franchisees to get access to loans and to grow the Australian economy and associated employment.
The bottom line is that franchisees need specific rights and protections, that are consistent with their significance as investors in Australia. Shareholders are protected by the Corporations Act. Company boards have a fiduciary duty to put their shareholders first. This is not reflected in franchising, where exploitation is both legal and commonplace.
The current franchising code expires on 1 April 2025. Under the leadership of Dr. Michael Schaper, the Labor government is currently undertaking a statutory review of the existing code, including its fitness for purpose, in anticipation of its expiration. If there was any doubt before the Mercedes Benz decision there is none now. The Current regulatory framework for franchising is not fit for purpose. It needs to be replaced. Franchisees put up the money and take the risks, they are more than entitled to a say in the decisions that affect them.
If you want to feel safe and respected in your franchise business, you need an accountable franchisor and a fair and balanced regulatory environment. We regularly see good franchisors turn into their franchisees’ worst nightmare. It only take one change at the top.
AAF is leading the fight for change. It will take time, a lot of effort and financial support. We will come up against stiff opposition from the franchisor lobby which is very wealthy. We urge all franchisees to join AAF and join us in the fight. If you have a franchisee group within your brand, urge them to affiliate with us.