Rudd’s rule

• The nature of the franchising industry, including the rights of both franchisors and franchisees;
• Whether an obligation for franchisors, franchisees and prospective franchisees to act in good faith should be explicitly incorporated in the Code;
• The interaction between the Code and the Trades Practices Act on the issue of unconscionable conduct;
• The operation of the dispute resolution provisions under the code.

Recent high profile franchisor failures, non-‘renewal’ concerns raised by Jack Cowin in respect of his KFC franchises and a perception that the scope of last year’s federal review was too narrow have collectively caused a stir in some sections of the industry.  Recent report commissioned by the governments of Western Australian and South Australia give an indication of the divergence of views in this sector that contributes more than 14% to Australia’s Gross Domestic Product and employs more than 600,000 people in Australia.

In particular, the report from the South Australian Economic and Finance Committee, released on May 6, 2008, recommend sweeping and controversial changes to franchise regulation at the federal level.  The most controversial recommendations include:

• increased disclosure obligations
• a mandatory federal registration scheme for franchise disclosure documents
• greater sanctions for breaches of the regulations
• establishment of either a Franchise Tribunal or a specific Franchise Arbitration Unit within the ACCC to hear franchise disputes
• a statutory definition of unconscionability
• a statutory enactment of the duty of good faith and fair dealing
• limitations to the freedom of contract by introducing specific legislation for unfair contracts

The recommendations, if implemented, will have a significant impact not only on the franchise sector but other industries.  For example, proposed unfair contracts legislation would be the first such legislation outside the employment or consumer context.  The SA report expressed a view that there is an inherent imbalance of power between the franchisors and franchisees, particularly in the case of termination and renewal of franchise agreements.

Further, the SA report recognised that ownership of goodwill (in the name, the location and the business) is a complex issue and is a challenge to the sector due to the unique nature of the franchise model.

Some of the recommendations in the SA report, such as the mandatory registration scheme, mirror recommendations of the 2006 Matthews Report that were rejected by the Howard Government during its review in 2007.  The SA report encouraged fresh action to be taken at a federal level to address these issues.

On October 24, 2007, during the federal election campaign, the Labor party issued a Franchising Policy Statement.  In that statement Labor supported the Howard Government’s changes to the Franchising Code to improve franchisor disclosure but considered that the Franchising Code should include a duty of good faith “as long as the scope of this obligation is well defined”.  That was one recommendation of the 2006 Matthews Report rejected by the Howard Government and now re-raised by the SA report.

The then Labor opposition statement that “Labor supports franchising as a good small business model” suggests that the Rudd government is unlikely to accept the analogy that franchisees are like employees.  That analogy underpins the SA proposal to introduce unfair contract laws into the franchise sector.

The terms of reference of the new federal inquiry, announced on June 25, are sufficiently broad to enable federal consideration of all proposals arising from the SA report.

The Committee is not due to report until December, with submissions remaining open until mid-September.  This timetable will probably mean that the long awaited decision of the High Court in the Ketchell case will be available to the Committee before they report.

The Ketchell decision, which will determine whether certain breaches of the Franchising Code render the Franchising Agreement void, was to be the High Court’s opportunity to provide the final word may rest with Kevin Rudd.

By Warren Scott, Partner - Mills Oakley Lawyers