It is beyond rational argument that franchising should be
exclusively regulated at a Federal level. But the reality is that
the franchise sector is faced with new and different State based
franchise legislation in South Australia and possibly Western
Australia on top of the existing comprehensive Federal regime.
The Federal Government, the Franchise Council of Australia and
others are keen to see the franchise sector regulated solely at a
Federal level, and harmonisation of laws is a key platform of the
Productivity Commission and Coalition of Australian
Government's regulatory harmonisation project. So could
Federal law reform head off State based regulation of franchising?
If so, what new regulation is likely?
It seems "good faith" is the key term. If the Federal
Franchising Code of Conduct could be amended to include explicit
reference to good faith it would seem to take a lot of the wind out
of the sails of those arguing for State based legislation.
Importantly, the franchise sector could live with the introduction
of a new provision into the Franchising Code of Conduct that
incorporated the existing common law duty of good faith into all
franchise agreements. As the FCA has pointed out, the duty is
likely to be implied into most franchise agreements anyway. The
important thing is that good faith remains as defined under the
common law, rather than some new and different defined statutory
There may need to be some tweaking around the termination of
franchise agreements, and perhaps some of the consequences of
termination, to reduce fears that franchisors are able to end the
franchise relationship too easily. There is also a need to simplify
disclosure and help lower the cost to franchisees of obtaining the
recommended legal and business advice. However good faith seems to
be the main issue, particularly from a political perspective.
The Franchise Council of Australia has been portrayed as
opposing the introduction of a specific reference to good faith in
the Federal Code, but that is untrue. The FCA has opposed the
introduction of a new and defined statutory duty of good faith,
citing the obvious confusion that would arise from having two
duties of good faith – one common law, and a differently
defined statutory duty. Importantly, the FCA has also pointed out
that the definitions of statutory good faith floated by some
proponents go far beyond good faith as that term is currently known
at law, and indeed seek to cloak end of term compensation and
automatic rights of renewal of franchise agreements under
"good faith". They would be a disaster for the franchise
There is an obvious common sense solution. If the Federal
Franchising Code of Conduct were amended to provide that the common
law duty of good faith is to be implied into every franchise
agreement, this would essentially codify the existing law. It would
not therefore impact on franchise lending, cause uncertainty,
increase disputation or curtail franchisor expansion, as a new
statutory duty would do. A codification of the existing common law
duty of good faith is consistent with the manner in which the
unconscionable conduct provisions were linked to common law
unconscionable conduct, and the change to the Federal Code should
satisfy those at State level who have claimed that the courts have
interpreted too narrowly the unconscionable conduct provisions in
the Competition and Consumer Act.
Former Small Business Ministers Nick Sherry and Craig Emerson
were rightly incensed at the behaviour of their South Australian
and Western Australian Labor colleagues, with Sherry threatening a
constitutional challenge to the State franchise legislation were it
introduced into South Australia. However it is probably time to
move on. New Minister Brendan O'Connor has no history, and
is therefore well placed to put in place the compromise solution
outlined above. If he moves quickly he may be able to prevent the
drafting and enactment of new State legislation. The South
Australian Government could then simply prescribe as its mandatory
franchising code of conduct under the Small Business Commissioner
Act the existing Federal Franchising Code of Conduct. They can
apply their new penalties to the Code, which gives them virtually
all they were originally seeking to do. It is not ideal to have one
State with different penalties, and South Australian franchisors
would have cause for complaint about their Government deliberately
placing them at a competitive disadvantage. However at least there
would still only be one Federal mandatory code for franchising.
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