What do the new Code changes mean for franchisees?

“Franchising is a substantial and growing part of our small business community and has displayed a great capacity for nurturing innovation and entrepreneurship in Australia. The Government’s commitment to these important franchising reforms will ensure that our regulatory settings remain responsive to the needs of the sector to promote confidence, competitiveness and productivity.”

These words of the Hon Bruce Bilson, Minister for Small Business, in introducing reforms to the Franchising Code of Conduct underpinned by, and in some cases going further than, the Wein Review recommendations will be welcomed by the franchising sector.

But while it may be politically correct to opine that franchising is the winner, in the context of the inevitable tension between franchisors and franchisee in matters regulatory it is franchisees rather than franchisors who will take most comfort from the reform package.

THE BIG CHANGES

The most significant reforms will:

• introduce a general duty for franchisors and franchisees to act in good faith in their dealings with each other
• introduce civil pecuniary penalties for Code breaches
• enable the ACCC to issue infringement notices for Code breaches
• improve prior disclosure
• improve the transparency of marketing funds
• invalidate certain restraint clauses

The proposal is to prescribe the reforms in a new 2014 Franchising Code of Conduct which, from 1 January 2015, will replace the current 1998 Code. 

This is a sensible development which reflects a cleaning up exercise. The 1998 Code has become increasingly cluttered and complicated by the addition of new provisions between original provisions requiring, in the case of the Disclosure Document for example, the introduction of Items 17A, 17B, 17C and 17D between Items 17 and 18. 

There is a three week period allowed for consultation but it is not expected that there will be any changes of substance to the proposals announced. The Government invited comments on “technical aspects of the implementation of the law” and made it clear in its 2 April Exposure Draft that “there is no intention for the process to reconsider the policy underlying the reforms”. 

For the most part the reform package holds no great surprises to those who have followed the Wein Review.

THE INTRODUCTION OF GOOD FAITH

The most high profile exception relates to good faith. The introduction of a general obligation of good faith imposed on franchisors and franchisees in relation to all aspects of the relationship was expected.

Wein concluded that despite their being “many compelling arguments both in favour of, and against, the introduction of a specific obligation of good faith the weight of opinion supports the inclusion of such an obligation”.

The Government has nevertheless rejected the Wein recommendation that good faith not be defined and instead be left to the judges to determine on a case-by-case basis. The Exposure Draft provides that good faith includes an obligation to “act honestly and not arbitrarily; and to cooperate to achieve the purposes of the franchise agreement”.

Good faith is a very ephemeral concept – it has been described as a concept  in search of a meaning – and a strong case can be made for leaving its meaning to be developed by the courts.

The Franchise Council of Australia’s argument  that the new wording will create “unnecessary legal uncertainty, disputation and compliance cost” and may affect bank lending as “it will not be possible to determine with certainty whether a signed franchise agreement will in fact be enforceable” may be overstated.

But franchisees must appreciate that good faith is not a universal solvent providing an antidote to anything that goes wrong in a franchising relationship.

Andrew Terry is Professor of Business Regulation in the University of Sydney Business School