State-based franchising bills promise certainty: Zumbo

The Abetz Franchising Bill continues to come under attack from the Franchise Council of Australia and its members for creating “uncertainty” in the Western Australian franchising sector and the same attack has been mounted against the Piccolo Bill in South Australia.

When addressing the uncertainty argument it’s important to go back to basics and understand what the Abetz and Piccolo Bills are trying to do.

The context is simple enough. We all know that there is a Federal Franchising Code of Conduct and we are always reminded that it is a mandatory code.

The problem is that franchisors don’t always fully comply with the code and that’s detrimental to the franchising sector.

There are ample cases where the code has not been fully complied with.

Good franchisors will do their utmost to fully comply with the code but there will be franchisors who  will cut corners – intentionally or because their compliance systems are not up to scratch.

Where the code is not fully complied with franchisors and franchisees will be disadvantaged when non-compliance leads to disputes and loss of confidence.

Disputes are disruptive and costly, which is why it’s important that the code is fully complied with at all times.

It provides an industry-wide benchmark for minimum standards of conduct and full compliance with the code promotes confidence in the franchising sector.

Building confidence is clearly essential and that’s critical if prospective franchisees are to continue to invest in the sector, and it’s trite to say that lack of confidence in the sector will discourage prospective franchisees.

Promoting confidence is inevitably tied to there being a high level of confidence that the code is being fully complied with.

At the moment that level of confidence is threatened by the growing number of examples where franchisors have not fully complied with the code.

Franchisors involved in breaches of the code will argue that the breaches were technical, minor or that they were not intentional.

While each will be debatable depending on the circumstances it’s clear that a breach is a breach – and that negatively impacts on confidence levels.

The Abetz and Piccolo Bills seek to promote full compliance with the code by a providing an effective deterrent against breaches, with deterrents in the form of possible court-imposed penalties.

Imposition of penalties under the Abetz and Piccolo Bills will be at the discretion of the court, which means if the matter gets to court the court is able to decide if the breach was intentional or not.

Obviously the court would consider the scale of breaches and whether they were isolated or part of a pattern of conduct with larger penalties reserved for more blatant breaches.

That’s assuming matters would end up in court. In practice few cases would because most would be resolved by the state enforcement agency responsible for administering the Abetz and Piccolo Bills if they become law.

Franchisors will take greater care to fully comply with the code for the simple reason that they will know that under the Bills there could potentially be serious monetary implications if they fail to fully comply.

Critics of the Bills seem to forget that where a franchisor fully complies with the code there is certainty that the franchisor will not be subject to the possibility of court-imposed penalties.

The message from the Abetz and Piccolo Bills is simple – no breach of the code, no risk of a penalty.

Franchisors need to be accountable if they do indeed breach the code and accountability can occur at federal or state level.

A breach is a breach and Western Australia and South Australia are well within their legal and constitutional power to make franchisors fully accountable for breaches.

It’s critical to acknowledge that the Abetz and Piccolo Bills do not change or incorporate any new requirements into the code, which remains the national uniform code that it has always been.

In that regard the Abetz and Piccolo Bills make franchisors fully accountable for any non-compliance in their states but remember no breach, no penalty under the Bills.

Then there is the “statutory duty of good faith” included in the Bills and we need to remember that there is already a common law duty of good faith in franchising relationships.

The problem is that there is an endless need to review court cases to understand the nature of the common law duty of good faith.

Under the Abetz and Piccolo Bills the duty of good faith is set out in a way that faithfully reflects the common law duty of good faith but spares everyone the time and cost of having to review endless court cases to work out the scope of the common law duty of good faith.

The statutory duty of good faith in the Abetz and Piccolo Bills has to be applied to the facts and circumstances of the particular case but that’s no different to determining how the law against misleading or deceptive conduct applies to a particular situation.

Setting out a standard of conduct in a law needs to be distinguished from the application of the standard to particular circumstances.

Even with the common law duty of good faith the court has to first identify the scope of the duty and then the court needs to apply that standard to the particular case.

In that context the Abetz and Piccolo Bills take the opportunity to identify the scope of the statutory duty in the Bills themselves thereby saving valuable court time, but like the common law duty of good faith they leave it to the court to apply the duty to the particular case.

So while certainty is in the eye of the beholder the Abetz and Piccolo Bills have been drafted to provide the franchising sector, especially prospective franchisees, with the certainty that franchisors are fully complying with the code and that franchisors will be behave in accordance with accepted standards of good faith.

Associate Professor Frank Zumbo is a Franchising Law Specialist at the University of New South Wales and is advising the South Australian Government regarding small business and franchising reforms in that state.