Franchising sector to benefit from South Australian law reform: Zumbo

Yesterday, SmartCompany blogger Jason Gherke explained why South Australia’s proposed franchising laws are impractical. Today, franchising and competition expert Frank Zumbo argues in favour of the laws.

The South Australian Labor Government is to be applauded for standing up for small businesses and franchisees. Last Friday’s announcement that South Australia will establish a Small Business Commissioner and legislate to strengthen franchising laws is a milestone for all those concerned at the increasingly poor treatment of franchisees by rogue franchisors.

Sadly, rogue franchisors do exist and give the Australian franchising sector a bad name. Rogue franchisors continue to undermine confidence in the franchising sector by failing to adhere to industry best practice and by effectively behaving as a law unto themselves. The Federal Government and the ACCC have repeatedly failed to stamp out these rogue franchisors thereby giving them a green light to continue to tarnish the sector’s reputation.

The South Australian Government’s leadership role in the franchising area is in stark contrast to the ‘head in the sand’ approach to franchising by the Federal Government and its last Small Business Minister Craig Emerson. The endless procrastination and typically window dressing approach by Craig Emerson to the deep seated concerns regarding rogue franchisors has forced the States to move to unilaterally strengthen the franchising regulatory framework. These concerns about rogue franchisors have been well documented in three recent franchising Inquiries and Emerson’s failure to deal with them has created a policy vacuum that needs to be filled by the States for the benefit of all franchising participants.

Those franchising inquiries have provided ample evidence of the unethical practices of rogue franchisors. Such evidence provides an undeniable case for the legal reforms to be enacted by the South Australian Government.

First and foremost, the absence of financial penalties for breaches of the Federal Franchising Code of Conduct means that rogue franchisors can effectively get away with not complying with the Code. With compelling evidence that rogue franchisors don’t always comply with the letter of the Code it’s clear that the spirit of the Code is being severely undermined by such rogue franchisors. Given that the Federal Franchising Code was always intended to represent industry best practice there’s no doubt that good franchising requires compliance with all aspects of the Code.

The imposition of financial penalties for breaches of the Franchising Code is a cornerstone of the South Australian reforms and will make the Code truly mandatory.

Standards of good franchising also need to be backed by a statutory duty of good faith. A statutory duty of good faith is, at its simplest, a codification of the implied duty of good faith long accepted by Australian courts. A statutory duty of good faith would provide legislative clarity and certainty to a recognised principle of good franchising. Good faith represents good franchising. To act honestly, fairly, reasonably and cooperatively is the essence of good and successful franchising.

South Australia’s adoption of a statutory duty of good faith is long overdue recognition of the need to provide all franchising participants with a statutory ethical norm of conduct within which to get on with business. Such a statutory duty of good faith would operate to support much needed effective laws against unconscionable conduct and unfair contract terms.

Finally, a well resourced South Australian Small Business Commissioner is critical to assisting franchising participants to resolve disputes in a timely and cost effective manner. A Small Business Commissioner is well placed to promote a commercial resolution of disputes in circumstances where litigation is simply not affordable and all too often outside the reach of ordinary franchisees.

Associate Professor Frank Zumbo is a franchising law expert from the University of New South Wales who has been at the forefront of franchising law reform both nationally and internationally.