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Australia Updates Franchise Code to Include Good Faith

Fireworks over Sydney Harbor and the Opera House
Fireworks over Sydney Harbor and the Opera House. Photo by Joseph Younis

After a number of media stories about abusive franchising practices, Australia has set in motion major changes to its federal franchise law. Some American franchisee advocates are in awe. Created in 1998, Australia's amended Franchising Code of Conduct will enforce in law a duty to act in good faith and fair dealing. Failure to do so could incur penalties of A$51,000 (US$54,000) for a wayward franchisor.

American franchisee advocates surprised

Robert Purvin, chairman of the two-decades-old American Association of Franchisees and Dealers, an independent association that represents the interests of U.S. franchisees, is in awe when he sees what is happening in the Land of Plenty. "The new Australian code changes contrast sharply to the evolution of franchise law in the United States, where the duty of good faith in the franchise relationship has been under siege for the past decade," says Purvin. "More and more, franchise agreements in the U.S. seek to empower franchisors to act at their sole discretion and disclaim any duty of the franchisor to protect or even consider the interests of the franchisees."

"Franchisee advocates in the U.S. are recently focused on passing a statutory affirmative duty of good faith between franchisors and franchisees with mixed success," says the franchisee association chairman. Purvin's franchisee association has sponsored California Senate Bill 610 to establish good faith in franchising. But the California bill faces an uphill battle. "The duty exists in Iowa, Arkansas, Washington and Hawaii, but recent efforts to create a statutory duty of good faith in franchising have stalled in such states as California, Maine and Pennsylvania. It is clear that the lobbying muscle of the International Franchise Association is far more powerful in the U.S. than the influence of franchisors in Australia."

The changes in Australia's franchise code and its critics from both sides

Australia's amended law, based on the 2013 recommendations from an independent review of the current franchise rules by mediator Alan Wein, would require an annual audit of the ad fund that franchisees pay, if they collectively vote for it. Moreover, franchisors can be penalized by the Australian Competition and Consumer Commission (ACCC) for code violations by up to A$51,000 (US$54,000). The commission regulates the franchising code of conduct.

Steve Giles, a deputy chairman of the Franchise Council of Australia, and attorney Greg Hipwell, both of whom are partners at law firm Norton Rose Fulbright, wrote that the FCA wants to cooperate. "The Franchise Council of Australia has been working collaboratively with the Government to endeavour to give effect to the Wein Report recommendations in a manner that is practical, and reduces compliance costs."

The new law has been touted as reducing clerical red tape for franchisors since it removes a double disclosure requirement for both the foreign franchisor and Australia's sub-franchisor. But some in Australia's franchisor sector disagree. "It does not currently deliver on many of the red tape savings flagged by the Minister," publicly wrote attorneys Giles and Hipwell. "Indeed if no changes are made to the Exposure Draft, compliance costs will increase in some areas, and possibly overall."

Although they seem accepting of the changes to the pre-sales part of the code – namely, the disclosure documents that must be given to franchise buyers before the sale is made, Australia's franchisors are concerned about the post-sales franchise relationship part of the new law – particularly when it comes to franchisors having to act in good faith with franchisees. "The Exposure Draft is extremely problematic and also introduces a financial penalty for breach of the new good faith obligation," writes the Franchise Council of Australia's deputy chairman Giles and co-author Hipwell.

Some are concerned that the new code will push American franchisors away from selling franchise licenses Down Under.

ACCC's Canberra office
ACCC's Canberra Office. Photo by Charles Strebor

But Jason Gerhke, also a deputy chairman of the Franchise Council of Australia, disagrees with that line of thinking. He told Australia's SmartCompany journal: "The predictions that Australia would be undesirable for international franchisors started circulating in 1998 when the code was first introduced, but that hasn't stopped them coming," he says. He added how a bright economy is attractive. "If the market conditions are right, they will come."

The new law will prohibit franchisors from imposing significant new capital expenditures on franchisees unless the majority of franchise owners agree to it or the franchisor can justify that franchisees should pay out money by issuing a statement which shows a rationale, costs and anticipated benefits associated with the investment.

With over twenty years of experience as a franchise owner and franchising firm staffer, Ray Borradale is unhappy with what he considers Australia's watering down or downright circumventing of the original Wein recommendations. Borradale writes on Blue MauMau: "History suggests this will be yet another opportunity to water down the original recommendations from 2009." He adds, "Meanwhile, the franchising regulator will continue to be underfunded making trivial fines a sound gamble for rogue franchisors."

Expert: Law needs a fiduciary duty on the part of the franchisor to franchise owners

Associate professor Jenny Buchan, who researches and teaches business law at the Australian School of Business, University of New South Wales, is concerned over the minimal progress that has been made in Australia's franchising law. "Australian franchise regulation continues to be a pro-franchisor work in progress," says Buchan to Blue MauMau. Her additional concern is that the Franchise Council of Australia will erode through its persistent lobbying what little progress has been made in franchisee protection.

Dr. Buchan views the upcoming changes as basically window dressing for public consumption. She thinks the good faith clause in relation to the agreement and franchise code is so nonspecific that its gaps in franchisee protection are big enough to "drive a very big truck through … ." She points out, "In reality the Australian duty of good faith as currently drafted will pose few problems for franchisors. They can meet the standard by acting purely in their own commercial interests, even to the detriment of their franchisees."

Buchan, who has also looked deeply into American franchise law, argues that there is a fundamental misalignment between franchise owners and franchisor owners and that a fiduciary duty by franchisors to franchisees is needed in law to bring franchisors around, much like franchisors now have a statutory fiduciary duty to their shareholders. "Where the franchisor is a corporation, the franchisor directors' duties should be expanded so the directors owe to franchisees the same duties as directors currently have to a company," wrote Dr. Buchan in her groundbreaking 2013 book Franchisees as Consumers: Benchmarks, Perspectives and Consequences.

There are no such duties by franchisors under existing laws in the United States or Australia.

The law professor also stresses that the new franchise code has bypassed one of the most onerous areas of franchising – a franchisor's bankruptcy and the terrible impact of its insolvency on the franchise owners. "The government has ignored Mr. Wein's recommendations concerning franchisee rights on franchisor failure despite numerous instances of franchisor failure: Quiznos, Angus & Robertson, Borders, Cookie Man, Ghermez Cupcakes, The Cupcake Bakery and others," says Buchan.

Some who wanted no change in the law argued that franchisors become insolvent because of a failure to dictate to and control franchisees, so any law that restricts franchisors weakens the franchise chain and brand. But Buchan rebuts, "Administrators' reports identify that a franchisor's failure is not caused by its franchisees."


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