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Code of Conduct review. Again.

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Code of Conduct review. Again.
Professor Andrew Terry, University of Sydney Business School

Perhaps the most welcome of the 18 recommendations resulting from the 2013 Review of the Franchising Code of Conduct is Recommendation 17 –that there should not be another review of the Code for at least five years!  

The Report acknowledges that franchising has been reported on by government and parliamentary committees, at both federal and state levels, “many times since the concept of franchising regulation was first put forward in 1976”.

On my counting we average a franchising review every two years. This may not be a bad thing of course: we may not have ended up with the world’s strongest regulatory regime for franchising if it was not for the reviews and reports which, originally, proposed the case for strong regulation and, more recently, have proposed amendments to strengthen the regulatory scheme and improve its efficiency.

Franchise reform fatigue is nevertheless a real danger.

The 17 substantive recommendations are aimed at improving an already robust model and are claimed to be neither “overly conservative” nor “unduly interventionist”. 

GOOD FAITH

The two most significant recommendations are those to strengthen the obligations of the parties to act in good faith and to strengthen the enforcement regime by including financial penalties for Code breaches. No recommendations are made for minimum terms of franchise agreements or for automatic renewal of franchise agreements or for franchisees to receive an exit or goodwill payment at the end of the term of their franchise agreements.

The recommendation that the Code be amended to include an express obligation of good faith which extends to the negotiation or performance of a franchise agreement, as well as to the performance of Code obligations and dispute resolution, is not as controversial today as it was five years ago when recommended by the Opportunity not Opportunism Report. On that occasion the Government rejected this recommendation on the basis that the inherent uncertainty of the concept would lead to disputation.

The 2013 report expressly notes that there has been a shift in the attitude of some key industry stakeholders, including the Franchise Council of Australia, towards an obligation of good faith being included in the Code which will make it more difficult for the government to again reject this recommendation.

Under the recommendation good faith is not defined and it is left to the judges to determine its meaning on a case by case approach. There are obvious similarities with the prohibition of unconscionable conduct under the Australian Consumer Law the definition of which is also elusive and which is also left in the hands of the judges to shape and develop.

FINANCIAL PENALTIES

The recommendation that Code breaches attract financial penalties is sensible and overdue. More effective enforcement of the Code -- a government and ACCC  priority -- is facilitated by the  availability of financial penalties for Code contravention.  

Other recommendations  include amending the Code to require franchisors to provide prospective franchisees with a short summary of the key risks and matters they should be aware of when going into franchising  and to provide franchisees with the right to terminate the franchise agreement in the event that  the administrator of an insolvent  franchisor cannot turn the business around within a reasonable time. The Government’s response to the recommendations is, at the time of writing, uncertain.

Few will argue with the judgement in the Report  that the Code is a “good  franchise industry model” which “operates effectively within a very dynamic and difficult economic environment”.

And although there will be wide support for the wish that “the industry has a strong regulatory framework, that mandates best practice where required, to ensure outcomes that all reasonable parties would agree produce fairness and enhance confidence in commercial dealings” this sentiment is much more easily stated than achieved as future experience with a codified obligation of good faith will no doubt demonstrate.


 

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