It is beyond rational argument that franchising should be exclusively regulated at a Federal level. But the reality is that the franchise sector is faced with new and different State based franchise legislation in South Australia and possibly Western Australia on top of the existing comprehensive Federal regime.

The Federal Government, the Franchise Council of Australia and others are keen to see the franchise sector regulated solely at a Federal level, and harmonisation of laws is a key platform of the Productivity Commission and Coalition of Australian Government’s regulatory harmonisation project. So could Federal law reform head off State based regulation of franchising? If so, what new regulation is likely?

It seems “good faith” is the key term. If the Federal Franchising Code of Conduct could be amended to include explicit reference to good faith it would seem to take a lot of the wind out of the sails of those arguing for State based legislation. Importantly, the franchise sector could live with the introduction of a new provision into the Franchising Code of Conduct that incorporated the existing common law duty of good faith into all franchise agreements. As the FCA has pointed out, the duty is likely to be implied into most franchise agreements anyway. The important thing is that good faith remains as defined under the common law, rather than some new and different defined statutory duty.

There may need to be some tweaking around the termination of franchise agreements, and perhaps some of the consequences of termination, to reduce fears that franchisors are able to end the franchise relationship too easily. There is also a need to simplify disclosure and help lower the cost to franchisees of obtaining the recommended legal and business advice. However good faith seems to be the main issue, particularly from a political perspective.  

The Franchise Council of Australia has been portrayed as opposing the introduction of a specific reference to good faith in the Federal Code, but that is untrue. The FCA has opposed the introduction of a new and defined statutory duty of good faith, citing the obvious confusion that would arise from having two duties of good faith – one common law, and a differently defined statutory duty. Importantly, the FCA has also pointed out that the definitions of statutory good faith floated by some proponents go far beyond good faith as that term is currently known at law, and indeed seek to cloak end of term compensation and automatic rights of renewal of franchise agreements under “good faith”. They would be a disaster for the franchise sector.

There is an obvious common sense solution. If the Federal Franchising Code of Conduct were amended to provide that the common law duty of good faith is to be implied into every franchise agreement, this would essentially codify the existing law. It would not therefore impact on franchise lending, cause uncertainty, increase disputation or curtail franchisor expansion, as a new statutory duty would do. A codification of the existing common law duty of good faith is consistent with the manner in which the unconscionable conduct provisions were linked to common law unconscionable conduct, and the change to the Federal Code should satisfy those at State level who have claimed that the courts have interpreted too narrowly the unconscionable conduct provisions in the Competition and Consumer Act.

Former Small Business Ministers Nick Sherry and Craig Emerson were rightly incensed at the behaviour of their South Australian and Western Australian Labor colleagues, with Sherry threatening a constitutional challenge to the State franchise legislation were it introduced into South Australia. However it is probably time to move on. New Minister Brendan O’Connor has no history, and is therefore well placed to put in place the compromise solution outlined above. If he moves quickly he may be able to prevent the drafting and enactment of new State legislation. The South Australian Government could then simply prescribe as its mandatory franchising code of conduct under the Small Business Commissioner Act the existing Federal Franchising Code of Conduct. They can apply their new penalties to the Code, which gives them virtually all they were originally seeking to do. It is not ideal to have one State with different penalties, and South Australian franchisors would have cause for complaint about their Government deliberately placing them at a competitive disadvantage. However at least there would still only be one Federal mandatory code for franchising.