Minister for Small Business Provides Timely Reminder to Franchisors to Act in Good Faith

Commercial

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DATE PUBLISHED: April 30, 2020

COVID-19 has caused significant disruption to businesses throughout Australia, and will continue to do so for some time. 

While the Federal Government has taken strides towards assisting landlords and tenants to negotiate with each other on commercial and residential leases and is providing assistance to small business employers through the JobKeeper scheme, no formal action or direction has been given so far which interferes with the contractual relationship between Franchisors and their Franchisees. 

Small and family businesses make up around 101,000 of the franchisees operating in Australia, employing over 598,000 people. 

Despite a significant drop in turnover of a Franchisee being caused by Covid-19, Franchise Agreements will often not include any contractual right for a Franchisee to suspend their payment obligations to their Franchisor.  Where that is the case, any relief sought by a Franchisee must be achieved through commercial negotiation in each individual circumstance. 

In this environment, the Federal Minister for Employment, Skills, Small and Family Business, Senator Michaelia Cash, has issued a clear statement earlier this month providing a timely reminder for Franchisors and Franchisees to remember the obligation in the Franchising Code of Conduct (Code) to act in good faith in their dealings with each other. 

Minister Cash has highlighted her concern regarding recent reports that some Franchisors are continuing to charge their Franchisees regular fees despite their businesses being temporarily closed or suffering a significant loss of income.

The Minister said “Franchisors should be working with their franchisees to waive, reduce or defer their fees in the coming months, whilst these businesses are affected by the impact of the coronavirus.” In an already challenging time forcing business operators to close their doors, Franchisors should not be charging unreasonable fees. In her press release, Minister Cash has said that reports of unacceptable behaviour by Franchisors will be investigated and pursued. 


FAILURE TO ACT IN GOOD FAITH CARRIES PENALTIES

Since 2015, the Franchising Code of Conduct has contained an obligation on both current and prospective Franchisees and Franchisors to act in good faith in their business dealings with one another.  This obligation applies to any Franchise Agreement entered into or renewed after the update to the Code. 

While this obligation does not require parties to act in a manner that is contrary to their legitimate commercial interests, Franchisors should bear this in mind when considering whether to keep charging Franchisees fees if they’re not able to operate because of Covid-19. 

Minister Cash indicated that Franchisors continuing to charge fees during this time could potentially be a breach of the good faith obligation.

“During such challenging times, the last thing small business operators need are for their franchisors to continue to charge fees while their doors are closed” Minister Cash said. 

When determining whether a party has acted in good faith, regard will be had to whether the parties have cooperated to achieve the purposes of the agreement. In line with this obligation, Minister Cash has encouraged “franchisors to take this opportunity to step up and assist their franchisees and employees during this difficult time.”

This obligation extends to any matter in relation to the Franchising Code or a franchise agreement, including pre-contractual negotiations, performance of the contract, dispute resolution and the end of an agreement.


FINANCIAL PENALTY

A breach of the good faith provision of the Franchising Code carries a civil penalty of up to $63,000. The ACCC may take court action seeking this maximum financial penalty, or issue an infringement notice of $10,500 for corporations or $2,100 for individuals for failure to comply. 


WHAT SHOULD YOU DO?

If you are a Franchisor, you should contact our office if you are considering the termination of a franchisee or taking any penalty action at this time.   

Similarly, if you are a Franchisee, please contact us if you are in need of assistance and believe your Franchisor may be acting unfairly.   

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