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.