The government cannot stop small business owners from making stupid decisions, a leading franchising lawyer has told an inquiry into the scandal-plagued $144 billion industry.
HWL Ebsworth special counsel Derek Sutherland said on the opening day of the parliamentary inquiry into the Franchising Code of Conduct that while there had been some "terrible" things happen to franchisees, there was no problem with the current regulatory system.
Gloria Jeans Credit: Jessica Shapiro
Mr Sutherland said government could not legislate to protect people from their own “stupidity” or conduct when they signed up to become franchisees.
“They’re just not taking enough interest at the time when it matters, to really get some advice and make an informed decision," Mr Sutherland said.
"I’m not saying they're stupid, I’m just saying they’re not taking advantage at the right time, when the decision-making is at the most important.”
The inquiry is probing whether the existing code stands up against allegations of unconscionable and deceptive behaviour by franchise groups.
Industry giants including Domino's, Caltex, 7-Eleven and Retail Food Group have been accused of operating business models that crush franchisees, push many to underpay staff to stay above water and lead others to financial ruin.
While franchise agreements say small business owners should get financial and legal advice before entering an agreement, Mr Sutherland said in practice they did not because they did not want to spend the money.
“A lot of them just sign whatever they’re told to sign," he said.
Mr Sutherland, who said he represented franchisors in his work 80 per cent of the time, said there was an imbalance in power and information between franchisors and store owners.
One issue under the microscope is supply contracts where franchisees must buy ingredients from the franchisors.
That has been raised at Retail Food Group, where store owners at chains such as Gloria Jeans have claimed they pay unfairly high prices on coffee beans, which shifts profit margins from their business to head office.
Mr Sutherland said that existing laws on unconscionable conduct and unfair contract terms were sufficient to police this behaviour.
However, he said franchisees should be able to collectively negotiate with head office over disputes, which may include over supply agreements, without having to apply for exemption from competition laws.
But it would be "unfair" to allow collective negotiation on supply agreements and other contractual matters as a regular course of events, he said.
The inquiry also heard from Derek Minus, a mediator appointed under the existing Franchising Code, who called for the implementation of an independent arbitrator who could be called in unilaterally and make binding rulings on disputes.
Such a mechanism is included in the Food and Grocery Code on Conduct, which was introduced in response to claims of supermarkets mistreating their suppliers.
Mr Minus said that his role at the Office of the Franchising Mediation Adviser (OFMA) was largely unknown to franchisees.
Michael Fraser from mediation group Franchise Redress said he and all but one of his clients did not know OFMA existed.
There are over a thousand franchise businesses operating in Australia, and the industry body, The Franchising Council of Australia, has characterised the scandals as a case a few bad apples.
"We would argue that we can’t know the true number of franchisors doing the wrong thing until valid complaints have been investigated," Franchise Redress director Maddison Johnstone told the inquiry.
"If the [Franchising Council] didn’t know about the misconduct of 7-Eleven, Domino’s Pizza, Caltex, and Retail Food Group until they were publicly exposed, then how can they say with such confidence that it’s only a small number of franchisors doing the wrong thing?"