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ACCC on franchising in Australia
Writing recently on the occasion of the 30th anniversary of the Trade Practices Act, Australian Competition and Consumer Commission chairman Graeme Samuel commented that: ”At its very heart the TPA can still be encapsulated in two basic commandments for business; Thou shalt not engage in anticompetitive, harsh, oppressive or unconscionable conduct. Thou shalt be honest.”
In 1980 New South Wales was the first jurisdiction in Australia to challenge the time-honoured principles of freedom and sanctity of contract – that contracts entered into freely and voluntarily cannot be challenged on the basis of unfairness, unreasonableness or injustice. The Contracts Review Act 1980 (NSW) empowered NSW courts to set aside ‘unjust’ consumer contracts. The legislation included a list of non-exclusive indicators of ‘injustice’ to assist the court through ‘specifying guidance criteria’ to which the court was obliged to have regard in determining whether a contract is unjust. The business lobby was strongly opposed to the introduction of this new law, claiming that it would destroy the basis for contracting and would force NSW businesses to relocate interstate – a massive overreaction that brings to mind the comment of Alan Bennett's character Veronica in his play The Old Country: "I saw somebody peeing in Jermyn Street the other day. I thought, is this the end of civilisation as we know it. Or is it simply someone peeing in Jermyn Street?"
The Contracts Review Act did not signal the end of civilisation as we know it. What it did do was provide the avenue for redress for consumers in cases in which the stronger party had abused its superior bargaining power to impose unjust contract terms or otherwise make an unjust agreement. Although the NSW law challenged well-established principles, it acknowledged that society had changed dramatically in the 200 years since the freedom of contract principles were laid down. In the 18th century marketplace, virtually unrecognisable from that of today, there was little disparity in bargaining power between buyers and sellers, and freedom of contract principles simply reflected caveat emptor – ‘let the buyer beware’ – in theory and practice. This was the era in which the foundations of our contract law were formulated, including the cut-and-thrust of offer and counter-offer as the parties vied for bargaining advantage, culminating in an inviolate agreement.
The growth of standard form contracts in the 20th century, in which contractual terms are presented on a ‘take it or leave it’ basis by the stronger party with little opportunity to negotiate – usually referred to as contracts of adhesion because you are stuck with them – and the rapidly growing disparity between the bargaining power of buyers and sellers, challenged the basic assumptions of the traditional principles. Without some semblance of equality of bargaining power, the traditional principles of freedom of contract were not compelling. Although they originally delivered certainty and predictability through the stronger party, which had drafted the contract, invariably excluding any possibility of external review, judges worked hard and idiosyncratically to redress contractual ‘injustice’ flowing from rigid adherence to their principles – which of course reduced certainty and predictability.
The logic of the NSW reform, replacing an unwritten and idiosyncratic attempt to do ‘justice’ in individual cases with a legislative scheme of general application, was readily apparent. The NSW reforms did not destroy the ultimate and basic significance of the contract in consumer transactions. It did, however, provide for freedom from freedom of contract. It may perversely be regarded as having promoted the sanctity of contracts by not allowing the contract – theoretically a mutually negotiated agreement – from being discredited by being simply an instrument for the stronger party to impose its unilateral decree. The contract remained the basic and fundamental expression of the parties' agreement but the court could intervene in a case where a stronger party had abused a powerful bargaining position to impose ‘unjust’ terms. Within a few years the Commonwealth embraced and extended the NSW reforms through amendments to the Trade Practices Act (TPA) allowing the courts to grant redress in the case of ‘unconscionable’ conduct in consumer transactions. The TPA reforms (currently s51AB) adopted the NSW formula of prohibiting ‘unconscionable’ conduct but not defining it, instead setting out a list of factors to be taken into account in determining whether conduct was unconscionable. This prohibition has since been mirrored in the Fair Trading legislation of each state and territory.
While the consumer unconscionabilty reforms are not regarded as controversial or inappropriate today – it being acknowledged that consumers comprise a vulnerable class deserving of legislative protection – the extension of the statutory consumer unconscionabilty principles to business conduct as a result of the introduction of TPA s51AC in 1998 was much more controversial. Section 51AC, enabling the court to grant relief in cases of unconscionable business conduct, was introduced as part of the ‘New Deal Fair Deal’ reforms which introduced the Franchising Code of Conduct.
Had Alan Bennett's Veronica been in Australia in July 1998 she may have been concerned for the future, if not of civilisation itself then at least of franchising in Australia. English franchising authority Martin Mendelsohn certainly was, and opined to a New Zealand audience who no doubt enjoyed his prediction that the introduction of the Franchising Code of Conduct in combination with the unconscionabilty reforms would make Australia the least desirable destination for franchise systems in the world.
Franchising in Australia has of course prospered under the new regulatory regime. While the positive contribution of the Code is well documented, the contribution of the unconscionability provision is more debatable. Real or imagined fears that it would threaten the necessary dynamics of franchising have nevertheless proved unfounded.
The biggest problem with the unconscionability provisions is the concept itself. ‘Unconscionability’ is, of course, a wonderful word. Not many seven syllable words are in common usage and roll off the tongue, with practice, so satisfyingly. However its meaning is more difficult than its pronounciation. The legislation includes a list of factors that the courts can take into account in determining whether conduct can be categorised as unconscionable, but the term itself is not defined. The factors – which include relative bargaining strengths, whether conditions were imposed which were not reasonably necessary to protect the stronger party’s legitimate interests, whether the stronger party’s conduct was consistent with its conduct in similar transactions, compliance with the Franchising Code of Conduct, whether the stronger party unreasonably failed to advise of intended conduct that could have a detrimental affect, and the extent to which the parties acted in good faith – have a crucial influence on unconscionability but provide no clear guidelines for the concept of unconscionability. No special weighting is given to any of the specific factors and individual factors cannot be regarded as a gateway to relief. They are simply factors to be taken into account with any other relevant factors in determining whether conduct was ‘unconscionable in all the circumstances’.
What, then, is unconscionable conduct? There is wide judicial acknowledgement that, in the words of Justice Hill: “Conduct will be said to be unconscionable where the conduct can be seen in accordance with the ordinary concepts of mankind to be so against conscience that a court should intervene.” It is hardly surprising that the judges have commented that this is a concept that is “better described than defined”. For this reason the concept remains elusive. While its close ethical relation – the prohibition of misleading conduct – also encapsulates a broad, general and ethical principle, the standard for ‘misleading’ is more straightforward than a standard based on ‘conscience’, which is not universal and which has no defined border between hard but acceptable conduct and hard but unacceptable conduct. There are ill-defined categories of ‘hard’ conduct – from ‘unfair’ at the lesser extreme of the culpability continuum to ‘unconscionable’ at the opposite extreme. Descriptions such as ‘harsh’, ‘burdensome’, ‘extreme’, ‘outrageous’, ‘monstrous’, ‘unreasonable’, ‘repugnant’, ‘oppressive’, could be slotted in somewhere in between in a meaningless Sale of the Century-type exercise if a sufficiently wise panel could be assembled to adjudicate.
It was argued before the Senate Committee which recently reported on the effectiveness of the Trade Practices Act in protecting small business that, “In the absence of amendment to section 51AC to include ‘unfair’, ‘harsh’ as well as ‘unconscionable’ conduct, the provision will continue to be ineffective [and] oppressive and opportunistic behaviour by corporations with greater bargaining power or which are the economic captors of tenants and franchisees will continue unabated.” The Senate Committee nevertheless did not accept this recommendation, maintaining the higher ‘unconscionability’ threshold as appropriate, in part because of lack of clarity and precision in the lesser threshold concepts. It should be noted, however, that Victoria has recently widened the scope of the consumer ‘unconscionability’ provisions in its Fair Trading Act by prohibiting ‘unfair’ terms in consumer contracts.
Moses may or may not have told his followers on descending from Mt Sinai that, “The good news is that I’ve got them down to 10. The bad news is that adultery stays.” For Australian business the list may be smaller but it is no less significant. In most cases the TPA erects a legislative scheme to give meaning to the general principles encapsulated in the Two Commandments. However in the cases of the misleading and unconscionability provisions they stand in splendid isolation – as broad, general and ethical commandments demanding simply that conduct which is ‘misleading’ or ‘unconscionable’ not be engaged in.
The unconscionability provision does not provide an insurance policy or an escape clause for a bad bargain. It does not provide a refuge in the case of a commercial hard bargain where the better positioned bargainer came out on top. In the words of Justice Heery, “that might be unfair, but the world is not always fair”. Conduct can be redressed only if it passes over “the ill-defined border into that specially reprehensible and repellent unfairness which lawyers call unconscionabilty –something that ‘shocks the conscience’”. Whatever that means!
Justice Stewart, when on the US Supreme Court, expressed similar frustration in giving meaning to broad concepts in a case involving pornography. His Honour commented, “I cannot define it but I know it when I see it.” In our complex society our consciences are not pricked in unison and the unconscionabilty provisions will continue to challenge the business community, their legal advisors and the courts.
Feel free to read more information on buying a franchise and running a franchise.10.05.2006