Introduction

The Expert Panel appointed by Minister Craig Emerson has published its final report, entitled Strengthening statutory unconscionable conduct and the Franchising Code of Conduct. The report runs to well over 100 pages, and is a comprehensive analysis of the development and status of the law of unconscionable conduct.

The Expert Panel has rejected calls for extensive changes to the law of unconscionable conduct, or the establishment of a list examples or a statement of principles that would constitute conduct that was unconscionable unless it could be proven otherwise. Industry bodies have welcomed the key recommendations of the Expert Panel, and the rejection of calls for further unnecessary regulation. Apart from minor amendments to the Franchising Code of Conduct requiring additional disclosure in certain areas, the Expert Panel has not recommended any substantive changes to the law.

Background

The Minister for Small Business, Independent Contractors and the Service Economy and Minister for Competition Policy and Consumer Affairs, Craig Emerson, established an Expert Panel comprising Trade Practices Act experts Professor Bryan Horrigan, Mr David Lieberman and Mr Ray Steinwall on November 27, 2009. He asked the Expert Panel to examine proposals concerning unconscionable conduct and the regulation of the franchising sector and report to him with its findings. Specifically, the Minister asked the panel to:

  • consider whether a list of examples that all parties agree constitute unconscionable conduct, or a statement of principles concerning unconscionable conduct, should be incorporated into the Trade Practices Act 1974 (TPA), and
  • inquire into and report on the need to introduce into the Franchising Code of Conduct (Franchising Code) a list of examples of specific behaviours that may be inappropriate in a franchising arrangement, with particular reference to five behaviours:
    • unilateral contract variation
    • unforeseen capital expenditure
    • franchisor initiated changes to franchise agreements when a franchisee is trying to sell the business
    • attribution of legal costs, and
    • confidentiality agreements.

In summary, the Expert Panel found that a list of examples would not improve the understanding or implementation of the unconscionable conduct provisions. The Panel also rejected having a set of principles which would operate as rebuttable presumptions of unconscionable conduct, instead preferring a set of interpretative principles intended to provide general guidance.

Interpretative Principles

The Panel observed that the interpretive principles should recognise that s51AC is intended to go beyond the scope of the equitable doctrine of unconscionability, and noted that the following principles may be distilled from relevant case law and the policy intention of previous and current governments:

  • the court may consider the terms and progress of a contract
  • the provisions may apply to systems of conduct or patterns of behaviour, and
  • the identification of a special disadvantage is not necessary to attract the application of the provisions.

The Panel recommended that Regulators pursue further test cases to draw on conduct in diverse industries, and assist in the understanding of the interpretative principles recommended by the panel.

Rejection of specific franchising examples

Importantly the Expert Panel rejected calls for five nominated activities in franchising to be specified as examples of unconscionable conduct, preferring instead to encourage improved disclosure in these areas. The Expert Panel noted that there were legitimate commercial reasons for unilateral variation of franchise agreements, and supports franchisor disclosure of:

  • the circumstances in which unilateral variations to their agreement may take place, and
  • the circumstances in which the franchisor has unilaterally varied a franchise agreement in the past three financial years.

Similarly the Expert Panel felt that there should be no prohibition on unforeseen capital expenditure, but rather there should be additional disclosure as to whether or not a significant capital expenditure imposed on a franchisee towards the end of the franchise term would be a factor to be considered in end of term arrangements and whether that has been a factor in the past.

Where the franchisee is seeking to sell its business, there may be legitimate commercial and regulatory reasons for the franchisor to amend the franchise agreement, so it was not appropriate to prohibit this behaviour. Rather the provisions of the Franchising Code relating to transfer of a franchise agreement could be extended to cover novation of a franchise agreement, and there could be additional disclosure of the possibility that a franchise agreement may be amended, even when the franchisee is seeking to sell the franchise.

Clauses attributing legal costs were considered to be common place, but additional disclosure may be warranted to better enable franchisees to weigh the risks and rewards of entering a particular franchise system.

The Expert Panel felt that confidentiality agreements may be used for legitimate commercial interests, but they supported improved disclosure alerting prospective franchisees to the categories of information that cannot be discussed with existing and former franchisees. This could include, but would not be limited to outcomes of mediation, settlements, intellectual property, trade secrets or particular aspects of individual agreements.

Other issues

Other suggestions by the Expert panel included:-

  • A short, simple, ‘Plain English’ document should be developed, to be provided to prospective franchisees before they are psychologically, financially and legally committed to entering a franchise agreement as a ready reference to the nature of the franchise relationship.
  • The Government and the ACCC should consider ways to examine the nature and incidence of problems associated with the five identified franchising behaviours, including through empirical research. The research, and advocacy more broadly, should inform guidance material for the franchising sector. The ACCC should consider whether additional educational activities are required in this area.
  • Acknowledging that whilst the existence of the legal frameworks of the TPA and Franchising Code are important regulatory measures for fostering good business conduct, not all business disputes will fall within these frameworks, and it is not necessarily the function of the ACCC to arbitrate every commercial dispute, even where contraventions of the TPA are alleged.
  • Australian governments, and particularly the States and Territories, should consider whether there are any means whereby early intervention dispute resolution services for small business might be improved and harmonised across jurisdictions as part of existing or proposed reviews.
  • There should be more research (particularly empirical research) carried out concerning the interests of small business, particularly with respect to the effectiveness of the legal frameworks of the TPA and Franchising Code in protecting these interests.