The Franchising Code of Conduct (Code) has been in existence now since 1998, after it was passed to address perceived deficiencies in the industry which were not being addressed by the then voluntary code of conduct. Since that time the Code has been subject to regular review which has seen amendments made to it to better address the needs of those involved or considering becoming involved in the industry.

The explanatory statement for the Code states:

“The Code aims to provide protection for all franchisees through the establishment of minimum standards of disclosure and conduct. Franchisees will have access to the remedies and sanctions available under the Act. The Code will be administered by the Australian Competition and Consumer Commission (ACCC).”

More recently the Commonwealth and State legislatures have legislated, or indicated they intend to legislate, to create Small Business Commissioners or Councils to address what are perceived as issues for small businesses, including franchises, dealing with each other and with government.

Some of the preliminary comments raise fears of this adding an additional layer of regulation to the operation of the franchising industry.

We examine in brief the legislative developments which may impact the franchising industry, issues that may arise and impacts that might be felt for those in the franchising industry.

Legislative developments

Changes

Victoria has had a Small Business Commissioner since 2003.

New South Wales has introduced the Small Business Commissioner and Small Business Protection Bill 2012.

South Australia has introduced the Small Business Commissioner Act 2011.

Western Australian has had a Small Business Commissioner since 2010 and has passed to the second reading speech stage the Franchise Agreements Bill 2011, on 24 November 2011.

The Queensland Government has recently announced the formation of the Queensland Small Business Advisory Council, whose first meeting was held in September 2012.

The Commonwealth in March 2012 announced the creation of a Small Business Commissioner, with Mark Brennan appointed on 17 October 2012.

Impact on Franchising

The South Australian (SA) Small Business Commission has indicated that SA codes are being developed by it as the SA legislation provides that the Minister for Small Business may prescribe Industry Codes of Conduct.

The first of these SA codes is expected to be a farming code then to be followed by a franchising code.1

Areas being discussed as potential matters to be regulated under State codes include:

  • dispute resolution mechanisms;
  • penalties for infringements; and
  • introduction of legislative good faith requirements.

SA’s Deputy Small Business Commissioner however has stated that he:

“believe(s) the (South Australian) reforms we have are better for franchising”, and that he: “wouldn't encourage anyone to speculate about what will, or will not happen regarding the legislation.2

This begs the questions of:

What will the Small Business Commissioners add to the already operative system of interaction in the sector under the Code regulated by the ACCC?

How will these changes be introduced and integrated with the Code system?

Will franchise systems (franchisors, franchisee and suppliers to the sector) receive substantive benefit from the legislation being introduced or will the good intentions of “fairness” and “addressing perceived problems” simply burden the very businesses to which this assistance is sought to be extended?

Issues that Arise

Duplication of the Code system: Can the States do it?

The Commonwealth Constitution provides at section 109 that a Commonwealth law is to prevail over an inconsistent State law rendering the inconsistent State law invalid.3

To determine if a State law is inconsistent the question asked is did the Commonwealth law seek to “cover the field” in the area being legislated. That is did the Commonwealth intend the law in question to be “complete statement of the law governing a particular matter or set of rights and duties”.4

Section 51AD of the Competition and Consumer Act 2010 (Cth) (CCA) [formerly the Trade Practices Act 1974 (Cth)] provides that “a corporation must not in trade or commerce, contravene an applicable industry code.”

Section 172 of the CCA provides that the Governor-General may make regulations for the purposes of the Act.

Section 51AE CCA allows the regulations to prescribe an industry code. The regulations may declare the industry code to be a mandatory or a voluntary industry code.

Regulation 3 of the Trade Practices (Industry Codes - Franchising) Regulations 1998 states that the Franchising Code of Conduct is a mandatory industry code under the CCA.

Section 51AEA CCA, however, indicates that the provisions on industry codes in the CCA was not intended to cover the field in its areas of operation and is therefore not intended to exclude or limit the operation of equivalent State law.

States therefore on first glance are entitled to introduce State laws promulgating industry codes.

Inconsistent with Commonwealth laws

That is not to say that a State can introduce laws that are inconsistent with any Commonwealth laws.

Inconsistencies between State and Commonwealth laws can arise in the following situations:

  • Where laws are in direct conflict or textual collision or make contradictory provision on the same topic;5
  • Where simultaneous obedience of both laws is impossible;6
  • Where one law destroys the rights conferred by another;7 and
  • Where two laws impose different penalties for the same conduct.8

If there is no conflict between the laws there may still be inconsistency if the State attempts to deal with a matter which has already been dealt with by the Commonwealth law if that law intended to express completely the law governing a certain subject matter.

This is not an new area of law and an example of how these types of issues have arisen previously is the case of Holburn & Anor v Shig Pty Ltd & Ors [2007] NSW IRComm 104, which concerned a party who claimed the regional master franchise was not a viable business and sought relief under section 106 of the NSW Industrial Relations Act9 (IR Act): Powers of Commission to declare contracts void or varied.

The franchisor argued that the Trade Practices Act10 and the Federal Franchising Code provides remedies for misrepresentation and therefore “covers the field”, which would leave the franchisee with no power to seek a remedy for misrepresentation under s106 of the NSW Industrial Relations Act.

A full bench of the Industrial Court of NSW found that the wording of the Franchising Code indicates that it was not intended to “cover the field” and it was premature to determine whether there was any direct inconsistency or conflict between the Franchising Code and the Industrial Relations Act.

This case was settled before final consideration of the issue, but leaves open the possibility that the NSW unfair contracts jurisdiction may be available for franchisees or that an inconsistency exists and the Code and now CCA provisions prevail.

Impacts on franchising industry

Many franchises will fall under the scope of the Small Business Commissioners and the legislation under which they operate.

Many franchise systems operate on a national scale, so having to potentially deal with Federal and State Small Business Commissioners as well as the ACCC who may operate different systems and have varying powers may only add to the costs of business.

The Code is regularly reviewed with the next review thought to be scheduled for 2013.

The efficiencies therefore of States legislating or regulating what has been understood to be a consolidated Code system, particularly in light of potential amendments to the Code occurring, is not yet clear.

Given one of the most oft-repeated complaints of small business is ‘too much red tape’ State franchising codes face opposition simply because they are feared to impose duplicitous structures or regulation.

Despite these concerns benefits of new, cost effective avenues for dispute resolution, can only be applauded if properly resources and implemented.

The benefits of penalty regimes which do not assist parties with valid grievances but only go to funding government consolidated revenue is also not clear.

In some views, where the good will of all involved in a franchise system is required to maintain a substantially viable franchise system, deterrence measures in the form of penalties, are unlikely to be significant driving factors in interaction between franchising parties.

Having said that the need to penalise the few who deserve sanction also cannot be argued against but its effectiveness in shaping long term behaviours is also untested.

The more problematic area of introduction of “good faith” requirements, when arguably the common law already addresses this issue and such a legislative requirement removes the parties rights to freedom of contract, has received much commentary.

This is an area where all involved in the franchising industry or thinking about becoming involved in the franchising industry will need to keep themselves informed due to the potential impact these developments may have on commercial, operational and strategic decision making. Unfortunately, it is not just watch this space NSW, or SA but watch multiple spaces as different approaches are appearing to be being taken.