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Ben covers the property industry and has a keen interest in entrepreneurship and travel writing. He speaks Mandarin and previously covered housing and urban affairs for The Australian Financial Review.

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Franchise ‘good faith’ provisions under review

Published 10 January 2013 12:36, Updated 22 January 2013 11:48

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Franchise ‘good faith’ provisions under review

Minister for small business, Brendan O’Connor Photo: Arsineh Houspian

The head of the federal government’s review into franchising conduct codes will re-examine the fraught issue of whether franchise groups owe their franchisees any “good will” when deciding whether to renew a franchise agreement.

Alan Wein, a lawyer and entrepreneur, says he will examine whether more rules are needed to prevent franchise groups “churning” through operators by selling the franchise agreement to another party at the end of a term.

“This concept of good will and the concept of churning is really critical,” Wein told BRW. “Is there any right to good will a franchisee has at the end of a fixed term of a franchise agreement? This is an issue that has been raised with quite some degree of fervour by Jack Cowin’s Competitive Food Group.”

The issue is a major source of conflict in the franchise industry, with some business owners feeling outraged when a franchisor does not renew a fixed term agreement and sells it to another operator, particularly without a “good cause” for doing so.

Amendments to the Franchising Code in 2010 included a new obligation for franchisors to notify franchisees six months in advance of their decision to renew or not renew a franchise agreement. They are also obliged to disclose at the beginning of the franchise agreement a clear policy regarding the end of term arrangements, such as whether the franchisee should be compensated for capital expenditure or given an exit payment.

But the issue remains a heated one, particularly with last year’s dispute between BRW rich lister Jack Cowin and fast-food giant Yum! over the decision by Yum! not to renew franchising agreements with Cowin’s Competitive Foods.

Some franchisee advocates have called for a statutory obligation to act in “good faith” to be inserted into the code, but this has been a polarising issue. The Franchise Council of Australia argues this would create uncertainty in the franchising relationship and drive up costs for franchisors. It argues the obligation to act in good faith already exists in common law.

Previous inquiries into franchising laws have backed away from a good faith clause. But Frank Zumbo, associate professor of business law at the University of New South Wales, and also South Australia’s deputy small business commissioner, argues a statutory obligation to good faith would increase certainty.

“I’ve been a long-term advocate of a statutory duty of good faith, not just at the end of a franchise agreement but simply in the sense that good faith is the essence of good franchising,” Zumbo says. “The challenge of common law is finding the cases, having to look up all the cases to look up what the common law duty is at a point in time. If you set it out in a statutory duty in the code of conduct ... it becomes a point of reference where both sides can look.”

“If both parties act in good faith – reasonably, fairly and cooperatively with each other – they don’t have problems. The only time there is a problem is if one party plays games.”

Wein said he was open-minded about inserting a good faith provision, but had concerns it would become rigid and not change with the times.

“What is good faith? If you set a definition in place, does that limit then where you go with regard to a circumstance or event or situation in the future that doesn’t fall within that definition?” Wein says.

“Unconscionable conduct is another concept deeply rooted in our consumer competition laws regarding the conduct of parties. There have been new definitions arising over what unconscionable conduct is over time as circumstances change. Is good faith a similar type of scenario, I’m not sure. That’s something I have to look into.”

Submissions to the inquiry, announced last week by small business minister Brendan O’Connor, close February 15.

Other issues on the agenda include disclosure provisions at the start of the agreement, whether the ACCC should be given powers to issue pecuniary fines to enforce industry codes, and whether better dispute resolution mechanisms can be found to keep parties out of court.

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