A central element of the proposed WA franchising legislation is the introduction of a new statutory duty that is described, in our view rather misleadingly, as “good faith”. In reality the current push for a statutory duty of good faith is simply the latest effort by a small group of lobbyists to have what is essentially a new concept of “fairness” introduced into business contracts. The lobbyists failed in their attempts to do so in the context of the changes to the Australian Consumer Law, in the recent review of the operation of the unconscionable conduct provisions of the Trade Practices Act and in the recent Federal review of the Franchising Code of Conduct, so they have turned to other means to try to achieve their ends.

Contrary to the position presented by the lobbyists, there is already at law an existing duty of good faith and fair dealing implied under common law into most franchise agreements. Although the courts have stopped short of implying a duty of good faith and fair dealing into all franchise agreements, there are a number of franchising examples where a duty has been implied and there is already a strong body of law governing the implied duty of good faith and fair dealing. For a detailed article as to the status and meaning of the implied duty of good faith, by Greg Hipwell and Elizabeth Stary, click here.

In the franchising context the caveat emptor (buyer beware) principle has been somewhat supplanted by the Franchising Code of Conduct in the codification of specific principles for responsible franchisor behaviour in key areas such as pre-contractual disclosure, transfer, termination and dispute resolution. Further, the comprehensive franchisor disclosure process is supported by requirements for franchisees to have ample time to consider their decision and certification requirements concerning obtaining legal, accounting and business advice.

Given the current position at common law and the existing regulatory framework, there is little justification for establishing a statutory duty of good faith.Further, the proposed WA legislation dramatically extends the concept of “the duty to act in good faith” from where it has thus far been developed by the courts. The proposed legislation defines acting in good faith as acting “fairly, honestly, reasonably and cooperatively”. It also rather curiously and alarmingly, creates a specific extension of good faith in the context of the granting of an extension to or renewal of a franchise agreement. In particular, the proposed obligation to act fairly pushes the duty dramatically toward a duty which is more in the nature of a fiduciary obligation. The proposed new statutory duty would create a different and new obligation that will potentially override the wording of a contract and create uncertainty in the parties respective obligations.

If the Bill is introduced and becomes law, plaintiff law firms will have considerable incentive to chase franchisees and encourage them to litigate knowing that respondent franchisors will be under extreme pressure to settle. This may result in franchisors being subject to legal proceedings that a fair minded person would regard as having little merit. The cost and difficulty of defending a claim of unfair or uncooperative conduct will be prohibitive given that 95% of all franchisors are small to medium enterprises. In its submission to the WA politicians the Franchise Council of Australia expressed concern that the concept of mediation underlying the Australian regulatory framework may be destroyed in Western Australia, with litigation the new norm.

Concepts of fairness and cooperative behaviour are often anathema in commercial dealings. Determining whether a franchisor has acted cooperatively or fairly would be highly subjective. Furthermore, in circumstances where franchisors and franchisees are competitors, (which is often the case) acting cooperatively may breach the cartel provisions in the Trade Practices Act. Justice Kirby in Royal Botanic Gardens and Domain Trust v. south Sydney Council (2002 186ALR289) expressed some concerns with the implied duty, particularly its apparent conflict with the “fundamental notions of caveat emptor (i.e. buyer beware) that are inherent (statute and equitable intervention apart) in common law conceptions of economic freedom”.

The current regulatory framework features the comprehensive requirements of the Franchising Code of Conduct, and the broad and highly effective prohibitions on misleading or deceptive and unconscionable conduct. It is overseen by the ACCC as an effective and well-resourced regulator with strong and recently enhanced enforcement powers. Add the current statutory framework to the fact that a common law duty of good faith will be implied into most franchise agreements and there is no logic behind any new statutory obligation of good faith which dramatically broadens the common law obligation. Such a statutory obligation will tip the risk scales too far against franchisors and damage the industry.