Franchise agreements still open to challenge under NSW industrial relations law

Dibbs Abbot Stillman ’s Franchising Update for January 2006 claims amendments to the Industrial Relations Act of New South Wales will make it harder for franchisors to avoid scrutiny of their agreements by the New South Wales Industrial Relations Commission (renamed the Industrial Court of New South Wales under the changes).

Section 106 of the Act allows the Industrial Court to vary, declare void or declare partly void, a contract whereby a person performs work in an industry if it is unfair. Previous editions of the Franchising Update have argued that the phrasing of section 106 has been used to review commercial contracts (including franchise agreements) with a sufficiently direct connection with the performance of work in an industry. In Robberds v Turner Franchising & Allied Services Pty Ltd (9 September 2005) Backman J of the Industrial Court found a franchise agreement in relation to a chicken shop to be unfair under section 106 and awarded the franchisees iover $350,000.

The NSW Court of Appeal had, however, been increasingly restricting the ability of the Industrial Court to intervene in commercial cases, on the basis that the Industrial Court did not have jurisdiction to hear these claims. The reason for this stemmed from section 179 of the Act which has prevented appeal to the NSW Court of Appeal (and other tribunals) from a "decision or purported decision" of the Industrial Court. To avoid this roadblock, proceedings in the Industrial Court would be removed to the NSW Court of Appeal before the Industrial Court gave any judgement (i.e. immediately after the claimant lodged documents commencing the proceedings), making it more expensive and difficult for claimants to continue with their proceedings.

Limited ability to challenge application of s106

Under the changes, there is no right to question any proceedings commenced in the Industrial Court, even on the grounds that the Industrial Court does not have jurisdiction to hear the matter. Appeal to the NSW Court of Appeal and other tribunals will still be permitted in certain circumstances, but only when all rights of appeal within the Industrial Court have been exhausted.

Given that the Industrial Court has been increasing its scrutiny of commercial arrangements, cutting off immediate access to the NSW Court of Appeal should result in more section 106 claims about franchising and other commercial contracts.

Direct connection with performance of work not required

Under the reforms, the Industrial Court's jurisdiction to declare void or vary unfair contracts has been further clarified. The concept of "contract" under section 106 now explicitly includes contracts that are a related condition or collateral arrangement to a contract whereby a person performs work in an industry (even though the first contract does not lead to performance of work) provided that the performance of work is a significant purpose of the contractual arrangements as a whole made by the person.

This makes it easier for agreements such as franchise agreements, licence agreements and lease agreements to be varied by the Industrial Court, because they no longer need to have a direct connection with the performance of work. Instead, they need to be connected with another contract under which work is a significant purpose. This may mean that substantial franchisees with multi-unit franchises may be able to more easily access the Industrial Court.

The changes also allow the Industrial Court, in exceptional circumstances, to accept an application made up to three months out of time.

What cases are affected?

The commencement date for the amendments was 9 December 2005, however the changes regarding unfair contracts will apply to all cases instituted in the Industrial Court before commencement. The changes restricting appeals will apply to all cases instituted before commencement or pending in any other NSW State court or tribunal. Importantly, the changes will not affect the ability of the High Court to hand down its decision in Solution 6 (a prominent case in this area) concerning the jurisdiction of the Industrial Court in section 106 cases.

What franchisors need to know?

For franchisors with NSW franchisees these amendments bring into sharp focus their exposure to claims under the Industrial Relations Act.

The changes have counteracted the trend of the NSW Court of Appeal to exclude more sophisticated franchise relationships and other commercial arrangements from the ambit of s106. Franchisees may be emboldened to take action where the arrangements under question are less directly connected with employment, knowing that the franchisor will have to weather the initial hearing and appeal in the Industrial Court before they have a chance to challenge whether the matter should have been heard under s106 at all.

In future updates Dibbs Abbott Stillman will report on how the Industrial Court interprets the changes and on the outcome of Solution 6 in the High Court.