SA and WA Franchising Bills can be part of nationally consistent franchising regulations: Zumbo

The following piece was submitted by franchisee advocate Frank Zumbo, in response to this piece from Jason Gherke. Zumbo helped draft the franchising regulation under consideration in South Australia and Western Australia.

After three comprehensive inquiries into the Australian franchising sector it is readily apparent that there remains a number of unresolved issues within the sector. The fact that we have had three inquires and many bi-partisan recommendations flowing from such inquiries itself provides ample proof that some issues remain unresolved. At the heart of these issues lies the need to deal effectively with rogue franchisors continuing to give the sector a bad name.

From the outset, let’s be clear about one thing. The SA and WA Franchising Bills are only concerned with rogue franchisors. The Bills represents a faithful adoption of the key bipartisan recommendations from the recent Federal and South Australian franchising inquiries regarding the need for financial penalties for breaches of the Franchising Code and a well-defined statutory duty of good faith so as to tackle rogue franchisors.

Good franchisors have nothing to fear from the SA and WA Bills for the simple reason that they already comply with the Franchising Code and act in good faith throughout the franchising relationship, including in relation to renewals. Identifying and keeping good franchisees through appropriate disclosure and standards of ethical conduct are all part and parcel of good franchising and are the practices that set good franchisors apart from the rogues.

Are there bad apples in the franchising sector? Of course there are. There are rogue franchisors as there are rogue franchisees. Let’s not forget that the statutory duty of good faith in the SA and WA Franchising Bills applies to both franchisors and franchisees. Obviously, rogue franchisors can cause much more damage to franchisees and the sector’s reputation than rogue franchisees can cause. Accordingly, it would not be surprising to find rogue franchisors feeling the heat from the Bills. On this score, rogue franchisors clearly have a vested interest in seeking to oppose the Bills and it’s important to see through such self-serving attempts.

Why the need for the SA and WA Franchising Bills? Here the answer is quite simple. The current Federal Small Business Minister Nick Sherry has continued with the previous Minister’s line that there will be no consideration of any further legal reform relating to the franchising sector until 2013. Sadly, Craig Emerson’s repeated refusal to act on key bipartisan recommendations handed down by the Federal Inquiry headed by Bernie Ripoll, a leading Labor backbencher, has played into the hands of rogue franchisors who believe that they are immune from federal action regarding financial penalties and an express good faith provision for another three years.

In the absence of policy leadership at the Federal level, the key States of SA and WA have seen fit to fill the policy vacuum themselves so as to effectively address the concerns with rogue franchisors that were so clearly identified in their own Franchising Inquiries. In short, the continued refusal of the Federal Labor Small Business Ministers to date, Craig Emerson and Nick Sherry, to act against rogue franchisors have left SA and WA with no choice but to deal with rogue franchisors themselves in order to protect the franchising sector.

The SA and WA Bills have been carefully drafted to be a clear and targeted framework for promoting best practice in the franchising sector. Importantly, the SA Bill was drafted as a template for other States to adopt. As a template the SA Bill was designed to lay the foundation for a nationally consistent approach for dealing with rogue franchisors. Indeed, the template nature of the SA Bill and its subsequent adoption in WA has helped ensure that both Bills are consistent in their nature and scope.

Having a nationally consistent regulatory framework for the Australian franchising sector has remained a key objective and this can be done in a nationally cooperative manner in much the same way that it was done with the competition and consumer law parts of the Trade Practices Act.

Nationally consistent State and Territory franchising laws are essential in underpinning the Federal Franchising Code and such State and Territory laws are still required even if any changes were implemented federally so as to ensure that the Code and related standards of conduct have full constitutional coverage.

Let’s not forget that there are clear precedents for a State taking a leadership role in the absence of timely Federal action. For example, the Victorian initiative a number of years ago to legislate against unfair terms in consumer contracts was recently taken up federally.

In a Federal system of government it is clear that a national approach can and should allow for the States and Territories to lead the way provided we get a nationally consistent approach. With the SA and WA Bills we have a nationally consistent approach that works to give full backing to the Federal Franchising Code and to set out a statutory duty of good faith in keeping with best practice in franchising.

The imposition of financial penalties for breaches of the Franchising Code is a key part of the SA and WA Bills and that would ensure that such breaches of the Code are treated consistently with breaches of other parts of the Trade Practices Act.

Currently while there are serious financial penalties for breaches of the competition and consumer law parts of the Trade Practices Act, there are no financial penalties for breaches of the Franchising Code even though it is also part of the Trade Practices Act.

The Franchising Code of Conduct will only be truly mandatory if backed by financial penalties for breaches of the Code. Indeed, it’s time to give the Franchising Code the full backing of financial penalties so as to ensure full compliance with the Code. Anything less leaves the door wide open for varying degrees of non-compliance with the Code by rogue franchisors.

Importantly, the SA and WA Bills impose a well-defined statutory duty of good faith. This statutory duty of good faith is intended to codify the long recognised common law duty of good faith, especially as applied within a franchising context. In this regard, the Bills set out a statutory duty of good faith and defines that duty to mean acting “fairly, honestly, reasonably and cooperatively.” In short, good faith represents good franchising.

In practice, the case law demonstrates that the meaning or essence of “acting in good faith” is to act fairly, honestly, reasonably and cooperatively. The Bills use these words so as to set out in the Bills themselves the generally understood meaning or essence of “acting in good faith.” While other words may be used to describe “acting in good faith,” the words to act “fairly, honestly, reasonably and cooperatively” remain the common thread in common law cases dealing with good faith.

The point of having a clear statutory definition of acting in good faith is that it provides legislative clarity and certainty to both franchisors and franchisees regarding the nature and scope of the duty. Similarly, if any matters were to end up in Court a clear statutory definition of acting in good faith would ensure that the Courts could just get on with applying the new statutory norm of conduct without having to spend valuable court time determining what the common law meaning of “acting in good faith” may be from time to time.

All in all, the SA and WA Franchising Bills represent a valuable part of a nationally consistent regulatory framework and, in this regard, it is particularly noteworthy that the SA Bill was moved by a Labor backbencher, Tony Piccolo and the WA Bill moved by a Liberal backbencher, Peter Abetz. What better way to demonstrate the bipartisan nature of the reforms?

Associate Professor Frank Zumbo is a franchising law expert from the University of New South Wales.