WA move to regulation shows education, not legislation, is what franchising needs

Following the recent announcement by South Australian Small Business Minister Tom Koutsantonis that SA will press ahead with its own state-based franchise legislation, a private member’s bill has now also been tabled in Western Australia.

Much of the proposed WA legislation is similar to that already suggested for WA, with one or two key differences.

One is that the WA legislation places a time limit of six years after an action in which an adversely affected party can make a claim against the other.

The second key difference is that the WA legislation proposes that a party to a franchise agreement or a Commissioner appointed under the legislation can seek to force franchise agreements to be renewed at the end of their term.

This means that a franchisor could be forced to continue a relationship with a franchisee after the agreed term has ended, and in some cases when the relationship has deteriorated.

Such a concept would not bring an end to conflict in franchise relationships, but rather signal a new beginning for conflict to occur between franchisors and franchisees if they are forced to stay together in the same way that a divorced couple would be likely to bicker if they were also forced to stay living together.

The concept also strikes at the very heart of what franchising is all about – that is, a conditional grant for a limited period of time.

The WA proposal to enforce renewal of franchise agreements risks creating arrangements that may be renewed indefinitely. This then ceases to be a franchise because the limitation of time no longer exists. The franchisor’s capacity to enforce standards and uniformity in the system is diminished because a franchisee can apply to have their agreement renewed irrespective of their capacity to actually operate in accordance with the system’s requirements.

As the old saying goes, the road to damnation is paved with good intentions. Despite the well meaning that may lie behind the state proposals to regulate franchising, their unintended consequences are likely to increase traffic on the aforementioned road.

Fundamentally, any kind of state-based legislation for franchising or any other sector or industry already subject to national regulation is not only manifestly undesirable from a national commercial perspective, but subject to constitutional challenge.

If there is dissatisfaction with the federal system of regulation, then this should be dealt with at the federal level.

Changes made to the Franchising Code of Conduct which came into affect on July 1 (and in relation to disclosure may not be fully implemented in some cases until the end of this month) have not been in place for long enough to determine what impact they have or will make.

Aside from changes to the Code, additional enforcement powers granted to the Australian Competition and Consumer Commission (ACCC) are yet to be fully tested as well, which further demonstrates the premature and impractical nature of state-based legislation.

If the fundamental thrust of any move to state legislation is that franchisees are unable to afford any kind of dispute resolution, then state governments should instead direct their energies to franchise education before and during the term of the franchise.

Surely it is better to prevent a person from making a poor business decision and becoming financially distressed from an inappropriate investment choice or an underperforming business model than to belatedly offer them a tenuous lifeline after the fact? (This is the crux of state-based legislation, which is all stick, and no carrot).

Education prior to buying a franchise was a consistent theme in the Western Australian, South Australian and Federal franchising inquiries in 2008 and yet this vital ingredient to a healthy and robust sector is currently excluded from both the SA and WA franchise legislation proposals presented to date.

This seems to indicate that the advocates of state legislation support the idea of local regulation only up to the point of actually spending real money – aside from hiring a commissioner of some kind for which the funding model is yet to be disclosed.

The principle of good faith is now acknowledged in the Franchising Code of Conduct as one of the changes introduced on July 1 this year.

Unlike the SA and WA proposals, the Code did not attempt to define good faith as case law is still determining what good faith looks like. In releasing the latest changes to the Code, the federal government stopped short of defining good faith because any “one-size-fits-all” definition risks substantial unintended consequences in franchising and in other areas of trade and commerce.

Similarly, unconscionable conduct is also not defined in the Code, as this is also an area in which case law continues to evolve.

Complaints by disaffected franchisees that dispute resolution processes as they stand today could and should be quicker are not without merit, but also fail to take into account the ACCC’s new powers to issue substantiation notices and conduct random audits (among others), the changes to the Code itself, and a significant lack of awareness among potential and existing franchisees themselves about WHEN or HOW to act if their business is failing. (Which again reiterates the need for education as a key element to address the perceived problems of franchising, rather than additional legislation).

If state governments are serious about improving outcomes for franchisees, then funding should be made available for further work to be done in the area of pre-franchising education for both franchisees and franchisors.

The benefit of educating franchisees in advance is obvious. By simply improving the number of potential franchisees who really take the time to learn about what they are getting into and to thoroughly investigate the business proposal from all angles must go a long way toward improving overall franchise outcomes.

The problem is that buying a franchise for many is an emotionally-driven rather than a rational decision, and consequently pre-purchase advice may not be sought and appropriate due diligence not undertaken. Not surprisingly then, franchisees who have skipped these two vital steps later look for help in dealing with issues as they emerge in the franchise.

Until franchise education is given the priority and funding it deserves, then aggrieved former franchisees are being misled into thinking that their problems will be solved by well-intentioned politicians but who have an incomplete understanding of what it is they are proposing, and no personal stake (unlike franchisees and franchisors) in the consequences when their legislation fails to address the perceived problems they sought to fix.

Jason Gehrke is the director of the Franchise Advisory Centre and has been involved in franchising for nearly 20 years at franchisee, franchisor and advisor level.

He advises both potential and existing franchisors and franchisees, and conducts franchise education programs throughout Australia, and publishes Franchise News & Events, a fortnightly email news bulletin on franchising issues and trends.

The comments contained in this article are not intended to constitute legal or other professional advice. The Franchise Advisory Centre is not a law firm and does not offer legal advice. Readers are strongly advised to seek their own legal advice relating to their own particular circumstances.