Good Faith Needed in Australia's Franchise Laws
Franchising is a complex, multi-faceted, versatile and dynamic organizational form. The many benefits of franchising include its ability to facilitate the efficient expansion/adoption of good business practices; to provide a vehicle for investment as well as a vehicle for training of fledgling entrepreneurs; and to promote the growth of small business. Franchising is personal, it’s accessible, and at the same time it’s larger-than-life. It has all the excitement of the brand, and the sophistication of modern intellectual property. As Professor Andrew Terry once observed, ‘Good franchising is very good. It is undoubtedly the most efficient, effective distribution system ever invented. It is the greatest invention of Western capitalism since the invention of the corporation.’
Despite its many benefits, however, there is in the franchise relationship conflict which arises from time to time when the power and information advantage enjoyed by franchisors leads to abuse and creates unanticipated hardship for franchisees. For evidence of the extent to which there is a perceived need for action, one need look no further than the extensive reading provided in the numerous submissions to four government inquiries into the governance of franchising that have been carried out in Australia in the past three years and in the reviews of franchising that each inquiry has produced. Professor Andrew Terry, after extolling the benefits of franchising, qualified his praise of the sector with observation that, "Good franchising is so much better than an independent small business operation but bad franchising is so much worse."
We don’t refrain from making laws against robbing banks because law-abiding citizens don’t rob banks. (thanks, A) Similarly, we should not shy away from regulating abusive practices in franchising because well-managed franchise systems are not engaged in them.
Franchising is an important business structure, a major contributor to economies the world over. Nevertheless, it cannot be denied that there are problems. Several government inquiries in Australia have recommended that action should be taken. Of the many tools/approaches that have been proposed, a statutory obligation of good faith has been recommended by three of four government inquiries.
A statutory duty of good faith in franchising could provide one means toward engendering a balance of competition and cooperation in franchising through appropriate governance. It would seem an obvious argument, but clearly, it is one that needs to be made more forcefully, as the sector remains one where stories of abuse of power persist, while the government continues to resist calls for action.
Personally, I believe in and am devoted to promoting the strength and promise of franchising, a fascinating and versatile organizational form. I wonder if I believe in it more strongly than those who oppose a duty of good faith, as they can only have scant faith in the worth of franchising as a business structure if they fear it cannot withstand from a duty good faith as a part of their agreements. Good franchising already embodies the principle of good faith, and the sector can only suffer because of attitudes that run counter to the spirit of all that is best in franchising. It is the spirit of good faith and cooperation that makes franchising great.
So stay tuned!
About the author: Dr. Liz Spencer is Assistant Professor, Faculty of Law at Bond University in Queensland, Australia. Elizabeth is undertaking research toward a doctorate on the regulation of the franchise sector in Australia. Assistant Professor Spencer has been a member of the State Bar of Texas since 1996. Her blog is in response to changes to Australia's Franchising Code of Conduct announced November 5.
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I have a qualified support for good faith, having a reservation on one ground only - that is it ultimately takes a Court to determine what it means in each circumstance.
An exhaustive definition of "ggod faith" is not desirable or possible, making it subjective in all but the clearest of abuses. Similar problems exist with the negatively drafted "unconscionable conduct" provisions already available under the Trade Practices Act.
The various franchise inquries have recognised that the cost of litigation is beyond the reach of most franchisees, so wouldn't the inclusion of a "good faith" provision without other changes have little impact on day to day franchise disputes? Do other changes have to be made to make the "good faith" provision more accessible to ordinary franchisees/franchisors?
Do you think that including "good faith" into the Code will so alter franchise behaviour at a grass roots level as to justify its inclusion?
Simon,
Absolutely.
Gilian Hadfield's 2000 expert testimony (last 3 paragraphs)::
Avoid 20 years of definitions with an airy fairy good faith clause:
Specifically charge franchisors with the responsibility of deciding as if the they owned the franchisees' assets.
to 'they can only have scant faith in the worth of franchising as a business structure'.
The issue Simon eludes to and Les, whether he likes it or not, reinforces is that no matter what the Australian government puts forward, it obviously does not get that systemic franchising abuse goes unchallenged because bad franchisors break zees as a function of business and there is no access to a reasonable remedy.
Some propose an Ombudsman and others suggest that option would simply offer franchisors the opportunity to continue to delay and where the cost and psychological strain would continue to provide a default win.
Some recommend the installation of a Franchising Tribunal as the only means to negate those deficiencies and to offer a forum where it's existence minimizes its use as it could reasonably be expected to be seen as an effective encouragment for such franchisors to either behave fairly or discouragement for those with deliberate intentions to defraud. But the question is whether government has faith that effectively regulated franchising can sustain its contribution to the economy.
I think the Rudd government has already decided that the economy needs the bad boys.
The more things change; the more they stay the same.
Many in Australia have called for the registration of franchises however, that call seems to have been lost in the noise of good faith and penalties etc.
The argument put forward against registration suggets that it may leave prospective franchisees performing less due diligence [if that is possible] in the belief that a registered franchise brings with it some level of government assurance of quality. Therefore it is argued that registration would add unnecessary costs to franchising, detrimentally effect efficiency, therefore damage confidence in the sector and increase non-compliance.
Those that argue for registration suggest that the industry needs to be monitored to offer accurate data on performance. At the moment no one in Australia can tell you how many franchises there or how many franchisees there are or how many are successful and how many fail and which perform well and which don't. Figures are thrown around by everyone but at best they are estimates and at worst they tend to be selective spin to usually indicate a suggestion that all is well in the sector.
The Committee for the Franchising Inquiry in Australia noted in Brisbane that the only available data came from a relatively small part of franchising and was virtually all provided by less than 20% of FCA membership [franchisors].
But is there anything really wrong with the idea of registration of franchises and what should that entail? Should registration only cater to performance data and could registration produce any other industry benefits? I believe that in the US some States have registration and many don't. Has it proven to be better with or without?
I understand that the FCA wish not to have accurate performance data available which tends to support the view of many that too much of franchising is flawed and the disasters must stay under the carpet. Registration may not produce huge benefits today but are there future benefits to franchising and its economic contribution? Given that many other sectors have registration and they 'got over it' and accepted that the benefits to quality performers far outweighted the cost of doing business; would registration assist?
The more things change; the more they stay the same.