On 20 October 2011, the upper house of the South Australian parliament passed the Small Business Commissioner Bill (Bill), which paves the way for state-based franchising regulation in South Australia. The new legislation will create the office of Small Business Commissioner (SBC), who will have powers to investigate contraventions of the Franchising Code, designed to operate in concert, and potentially in conflict, with the Australian Competition and Consumer Commission (ACCC)'s enforcement powers, meaning franchisors could be subject to scrutiny from a number of bodies.

Opposition to the Bill

State-based franchising legislation has been widely opposed throughout the franchising sector. The Franchise Council of Australia campaigned tirelessly over many months in an effort to defeat the Bill and similar proposed new laws in Western Australia. Federal Small Business Minister Nick Sherry has also voiced his opposition to state-based franchising laws.

In the days leading up to the passing of the Bill, the Liberal Party Opposition and several other non-government MPs campaigned strongly in favour of several amendments to the Bill. Those campaigning against the Bill had expressed concern that it could put South Australian franchisors at a disadvantage compared to other states and may discourage franchisors basing their operations and opening stores in South Australia.

In spite of strong opposition from the franchising community, the Bill was passed with only one amendment. The sole amendment was an important one, as it dictates that the rules of franchising in South Australia cannot be changed without the Government first undertaking a 60 day mandatory consultation period with relevant stakeholders. If this procedure is not followed, a ‘disallowance motion’ can be put forward in respect of the proposed changes. The amendment means that in the short term, the franchising sector will not be subject to dual regulatory frameworks in South Australia.

Key features of the Bill

The Bill provides, amongst other things, for the Franchising Code of Conduct (Code) to be adopted into South Australian law as a prescribed code under the new legislation, to be known as the Small Business Commissioner Act 2011. The new legislation will create the office of SBC, who will have powers to investigate contraventions of the Code, compel people to provide information in connection the exercise of its powers and impose on-the-spot civil penalties for contraventions of the Code. This framework will operate in concert, and potentially in conflict, with the ACCC’s enforcement powers in respect of the Code. In particular, both the State and the Commonwealth will have the power to prosecute for failure to comply with the Code, which may result in confusion in the sector.

It is important to note that any new laws that conflict with Commonwealth laws, such as rewriting the dispute resolution provisions in the Code, are likely be constitutionally challenged. However, the Commonwealth would be powerless to prevent changes that extend the scope of the Code, such as the introduction of a general obligation of good faith, which the Minister has foreshadowed.

Who is affected by the new laws?

The new laws will apply to any franchise granted in South Australia. Also, franchisors that are based in South Australia will be subject to the new laws in respect of their operations Australia-wide. This means that all franchisors, and particularly those based in South Australia, must become familiar with the implications of the new laws.

Request for information

The SBC will have the power to serve a notice compelling a person to supply information and/or documents to the SBC within a reasonable timeframe, as specified in the notice. Failure to comply with such a notice from the SBC may result in a fine of up to $20,000. The recipient of the notice may only refuse to supply the information and/or documents where they would incriminate the person or where they are subject to legal professional privilege. Subject to certain restrictions, the SBC has the power to publicly release information gathered in this way, which could lead to a ‘name and shame’ policy.

Civil penalties

The SBC will have the power to issue on-the-spot fines, known as ‘civil expiation notices’, to any person who contravenes, attempts to contravene or is involved in a contravention of the Code. The Minister for Small Business will determine the relevant penalties by regulation, although they must not exceed $6,000 for bodies corporate and $1,200 for individuals. Upon receiving a penalty notice, the recipient can pay the fine or defend the matter in the Magistrates’ Court. 

Moving forward

The Minister for Small Business, Tom Koutsantonis has indicated in the past that he is intent on broadening the regulatory framework governing the franchising sector, so it may not be long before the 60 day mandatory consultation period is tested.