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YET ANOTHER FRANCHISE INQUIRY FOR AUSTRALIA

by Jason Gehrke, Franchise Advisory Centre,
last updated 23/07/2009

Australian franchising faces its third enquiry in nine months, this time at Federal level. Jason Gehrke reports.

A new Australian Federal Government inquiry into franchising was announced last week barely four months after the introduction of changes to the Franchising Code of Conduct arising from the last Federal inquiry (the Matthews Report) held in 2006. This inquiry will be the third in nine months for the sector, following-on and prompted by separate state inquiries in Western Australia and South Australia.

However, the new inquiry has been launched by a Parliamentary Committee, not from the office of Federal Small Business Minister Craig Emerson. The inquiry will be chaired by Queensland-based Labor MP Bernie Ripoll, who announced it is ‘timely and necessary' for the Federal Government to look at franchising after himself reading the findings of the two state-based inquiries.

The inquiry, to be conducted by the Parliamentary Joint Committee on Corporations and Financial Services, has broad terms of reference and will report on the operation of the Franchising Code of Conduct and potential improvements in line with the following terms of reference:

1. The nature of the franchising industry, including the rights of both franchisors and franchisees;

2. Whether an obligation for franchisors, franchisees and prospective franchisees to act in good faith should be explicitly incorporated into the Code (having regard to its presence as an element in paragraph 51AC(4)(k) of the Trade Practices Act 1974);

3. Interaction between the Code and Part IVA and Part V Division 1 of the Trade Practices Act 1974, particularly with regard to the obligations in section 51AC of the Act;

4. The operation of the dispute resolution provisions under Part 4 of the Code; and

5. Any other related matters.

Inquiry submissions are due by September 12, with a report due on December 1.
South Australian MP Tony Piccolo, a key figure behind the South Australian franchise inquiry, has declared that he will push for separate state-based franchise legislation in SA if the Federal Government fails to reform franchising within ‘a reasonable time.'

Meanwhile, a franchisee lobby group has called for the regulation of the sector to be handed to the Australian Securities and Investments Commission (ASIC) instead of the Australian Competition and Consumer Commission (ACCC) which would also up the ante for continuous disclosure by franchisors.
The Australian Retailers Association, whose executive director is a former CEO of the Franchise Council of Australia (FCA), has hit out at the announcement of another franchise inquiry and demanded that this be ‘the last', while the influential Australian Financial Review has published a rare commentary on the issue.

Just one day prior to the announcement of the inquiry, the Minister for Small Business indicated no special interest in a federal review or further changes to the Franchising Code of Conduct when asked during a meeting with Franchise Advisory Centre director Jason Gehrke. Coming from a Parliamentary Committee and not the Minister's office (as with the Matthews Report in 2006), this inquiry's broad terms of reference have the potential to hold far-reaching ramifications for the Australian franchise sector.

FCA Response

In its newsletter to members, the Franchise Council of Australia made the following comments about the news:

‘The "good faith negotiations" issue was raised in the WA and SA inquiries. The FCA has urged all Governments to approach this issue with caution. The concepts of good faith negotiating and its opposite, unconscionable conduct, are already understood and accepted across the entire small business sector. Indeed they are specifically addressed in the Trade Practices Act and the FCA member standards.

‘Introducing a non-specified ‘good faith' element to the Franchising Code of Conduct could simply create an overlap and opportunity for legal argument as to meaning. And what would this achieve? Over 97% of agreements are renewed at present, usually on similar terms to those which applied in the preceding agreement and without the need for a legal wrangle.

‘The issue of the ownership of goodwill has been tested in courts with the standing precedent that the goodwill resides in the business brand, not with the licensee. Those who promote the idea of a ‘good faith' clause to be added to the Code are seeking to unsettle the status quo in order to allow legal argument as to the possibility of goodwill, or some other similar entitlement, for franchisees at the end of term. This could have the effect of not only creating a legal argument where there is currently none, but also add to the cost of concluding an agreement - a cost likely to be built into the entry price of future agreements, making it more costly for franchisees to buy into a system.

‘The franchisee representative on the FCA board, Tony Mellhem, has made it clear this is not a clear-cut benefit. No franchisee or business person of any kind would be likely to say ‘no' to the opportunity of a end-of-agreement bonus; but they may not be so enthusiastic if they anticipate a costly legal argument as to entitlement (and the size of it) or if they were asked to pay up-front instalments to cover a franchisor against the cost of a end-of-term payout.'

The concept of 'good faith' is not yet recognised in New Zealand law; however, it was referred to in a recent speech by Judith Tizard to the National Franchise Conference in Rotorua and it seems that it might form part of any future regulation of the franchise sector here.

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