How the lockdown affects franchise law.
With the Australian Competition and Consumer Commission shifting its regulatory focus to “affordability issues” – among other financial challenges created by COVID-19 – references to the obligations of franchisors and franchisees to “deal in good faith” have become increasingly common. On April 6th, the Minister for Employment, Skills, Small and Family Business, Michaela Cash, published a media release reminding franchisors of their obligations under the Franchising Code of Conduct. Breaches of the obligation to deal in good faith may result in fines reaching $63,000.
The most widespread issue has been franchisors continuing to charge franchisees regular fees despite the profound economic downturn and partial (or complete) business turnover loss. In these cases, details are paramount. For example, when evaluating whether they should continue to charge their franchisees fees, franchisors should consider the following:
Does their franchise agreement charge flat fees on a weekly, monthly or quarterly basis, or are payments calculated as a percentage of gross sales? If so, is there a “floor” in case sales are extraordinarily low? While no laws have been introduced defining such restrictions, it may be intuitively easier to justify charging a percentage of sales than continuing to charge regular flat fees in the midst of a crisis.
Is the franchisee forced by law to close their premises, or did they decide to cut costs by closing during the downturn?
Is the franchisee closing their doors entirely, or are they modifying their practices? An example is restaurants reducing their opening hours and exclusively offering takeaway or delivery.
While this may appear to be sacrificing the interests of franchisors for the survival of franchisees, it is worth mentioning that, under the Code, the obligation to deal in good faith does not necessarily preclude a franchisor from acting in their genuine commercial interests. A franchisor should demonstrate that they acted to achieve a mutually beneficial resolution with their franchisees. This may include considering waiving, deferring or cancelling fee payments and providing guidance to the franchisee on running their business as effectively as possible given the severe constraints. If franchisors satisfy these requirements, they are unlikely to validly be accused of not dealing in good faith, regardless of the business outcome.
If you are a franchisee having trouble with cash flow and are in business with a franchisor who may be violating the Code’s “good faith” provision, contact Furman + Furman or Franchise Legal for advice. We can negotiate on your behalf with the franchisor. If you are a franchisor and are seeking to better understand how your obligations under the Code impact your options, we can assist you as well.