Co-operatives and Mutuals: Free from Franchising Red-Tape

On 17 March 2022 the Governor-General signed off on amendments to the Competition and Consumer (Industry Codes – Franchising) Regulation 2014 (also known as the Franchising Code) to clarify that the Franchising Code does not apply to a ‘franchise agreement’ where the franchisee is either a member of a co-operative or a member with voting rights of a mutual entity. These changes are due to take effect on 15 April 2022.

This is great news for co-operatives, mutuals and their members where they would otherwise be considered a ‘franchise’ for the purposes of the Franchising Code replete with the significant disclosure obligations under that Franchising Code.

How does the Franchising Code work?

The Franchising Code works to regulate the conduct of participants in a franchise to address potential issues that may arise due to the power imbalance inherent in franchising relationships. The Franchising Code includes:

  1. obligations on the franchisor (the owner of the relevant brand and business system) to provide prospective franchisees a disclosure document that meet very specific requirements under s.8, as well as an information statement under s.11;
  2. prohibitions on certain terms in franchise agreements; and
  3. obligations on both the franchisor and franchisee to act in good faith, and to the manage disputes between them in accordance with the Franchising Code.

Although these regulations are necessary and highly valuable for franchisors and franchisees who are independent from one another and where there is likely to be an imbalance of power, the application of the Franchising Code would (in our opinion) serve only as bureaucratical red tape for co-operatives and mutuals.

What are co-operatives and mutuals?

Co-operatives belong to, are operated by, and benefit the people who become members of the co-operative; similarly with mutuals. Their democratic nature means that all members are equal decision makers, with one vote per member, enabling members to determine the decisions their co-operative or mutual makes. Co-operatives in particular, are already highly regulated in terms of the disclosures that they must make to potential members, and the Co-operatives National Law and the Co-operatives Act 2009 (WA) set out dispute resolution paths. 

If a co-operative and its members were in a franchising relationship, in one sense, the Franchising Code merely duplicates the regulations already imposed on the co-operative structure and arguably confuses matters as to which regime applies.

Aren’t co-operatives already exempt?

You may say, didn’t the Federal Government already amend the Franchising Code to exclude co-operatives? Yes and no. In 2021 the Government amended the Franchising Code to introduce section 3A which stated that the Franchising Code ‘does not apply in relation to a franchise agreement if the franchisor and franchisee are both members of the same co-operative’.[1] Unfortunately, the drafting of this provision fails to effectively carry out its purpose of exempting co-operatives from franchising regulations. The provision requires both the franchisor and the franchisee to both be members of the same co-operative which, in reality, is a rare occurrence. Therefore, most co-operatives would not reap the benefits of this exemption and would continue to be subjected to franchising regulations

The new amendment

To better reflect the commercial reality of a co-operative or a mutual franchisee amendments to section 3A were ratified to now read:

This code does not apply in relation to a franchise agreement that forms part of arrangements under which the franchisee is:

  • a member of the co-operative entered on a register maintained under:
  • the Co-operatives National Law; or
  • the Co-operatives Act 2009 (WA), as in force on the day this clause commences; or
  • a member with voting rights of a mutual entity’.[2]

Here, rather than requiring both the franchisor and the franchisee to be members of the co-operative, it requires only the franchisee to be a member of a co-operative for the exemption to apply.

Further, the amendment has extended the application of the exemption to include members of mutuals as well. This was in recognition of the similarities that mutuals and cooperatives share, being similar structures where their members work to promote a common goal.

This is great news for both members of cooperatives and mutuals involved in any franchising agreement

For further advice on co-operatives and franchise agreements, please contact our Business & Commercial team.

[1] Section 3A of the Franchising Code of Conduct.

[2] Part 2 clause 58 of Competition and Consumer (Industry Codes—Franchising) Amendment (Penalties and Other Matters) Regulations 2022

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