Thomson Playford Cutlers report on Federal Government's announcement of changes to the Franchising Code of Conduct

Federal Minister for Innovation, Industry, Science and Research announced on 5 November 2009 that the Government will strengthen the Franchising Code of Conduct and the unconscionable conduct provisions of the Trade Practices Act to offer small businesses greater protection from anti-competitive behaviour by more powerful businesses.

The long awaited announcement is in response to the report of a Federal Inquiry conducted by the Parliamentary Joint Committee on Corporations and Financial Services.

The Government intends to amend the Code to prevent behaviours that are inappropriate in franchising agreements. The proposed amendments to the Trade Practices Act are intended to make clear that protection from unconscionable conduct relates to the process of settling a contract and to the terms and conditions of the contract and the ongoing behaviour of the parties under the contract.

The Minister has also announced changes will be made to the Code and the Trade Practices Act dealing with:

• End of franchise term arrangements
• Dispute resolution
• Penalties for corporations or individuals engaging in unconscionable conduct or making false or misleading representations
• Random audits of franchise systems by the ACCC
• The issue of public warnings by the ACCC about rogue franchisors

An expert panel will be established and will be required to report to the Minister, before the end of January 2010, on other specific behaviours that might be considered inappropriate in a franchising arrangement, with particular reference to:

• End of term arrangements
• Dispute resolution
• Unforeseen capital expenditure
• Unilateral contract variation
• Attribution of legal costs
• Confidentiality agreements
• Changes to franchise agreements when the franchisee is trying to sell the business

The Minister will then determine whether it is necessary to further amend the Code.

The actual amendments to the Code are not yet available as they have not been drafted and no commencement date has been announced.

Thomson Playford Cutlers  comment that the Minister’s announcement is welcome news to franchisors because good faith is not to be defined in the Code, nor will the Code be amended to include a general obligation to act in good faith. Rather the Government is prepared to allow the concept of good faith to continue to evolve in the common law over time. The meaning of this is that franchisors and franchisees will need to continue to look to the latest (and highest) court authority and be guided by the advice of their lawyers as they continue to grapple with the content and boundaries of the concept of “good faith” both when entering into franchise agreements and in the course of performing them.

It is unlikely that specifics of the proposed amendments to the Code will be available this year. This will give the franchise industry an opportunity to review existing documents. It is to be expected that existing franchising documents will need to be amended once the amendments to the Code are known.

Thomson Playford Cutlers offer franchise legal advice to franchisees and franchisors.