WA’s proposed state laws will harm franchise businesses

The storm created by a Western Australian MP’s private members Bill to regulate franchising in that state has spread across the nation, and even stirred an unexpected bystander in the Queensland Law Society (QLS) into producing a detailed exposé of the massive legal and commercial problems created by the proposed laws.

In the current debate surrounding the proposed WA Bill, it is significant to note that this highly detailed analysis has been prepared by the Queensland Law Society’s franchising committee, which consists of lawyers who act for franchisors and franchisees, and therefore can see both sides of the same argument.

The QLS franchising committee has provided a very detailed line-by-line analysis of the WA Bill that offers an objective assessment of fundamental problems with the general nature of the Bill, as well as its specific provisions.

It makes for fascinating reading because it honestly and vividly portrays the truly dangerous consequences of what has been proposed in WA, and anyone interested in being informed about the risks of the WA Bill should read it as a matter of urgency. (Click here to see the QLS analysis of the Bill).

While the sentiment behind the Bill may have been well-intentioned when it was introduced to WA Parliament last month by Liberal backbencher Peter Abetz, the nature and drafting of the Bill creates greater problems for franchising than it solves. Even before considering the QLS analysis, a layman’s reading of the Bill highlights some of these problems as follows:

State regulation will increase business costs

Any state attempt to legislate franchising beyond the national standard that already exists will create greater bureaucracy and compliance costs for franchisors, which in turn will inevitably be passed-on to franchisees and consumers. Claims that greater regulation will not increase compliance costs clearly fail to take into account the time and resources that will be required to understand and operate within any new regulations. This would be yet another cost to participants in the sector.

The haste with which the WA Bill has been tabled and promoted without any kind of economic impact study to determine the true cost to franchisors with operations in WA (as well as the flow-on costs to their franchisees, consumers and employees of franchisees) is a fundamental oversight of policy planning and the due processes of government.

Uncertainty over who is responsible for enforcement

State regulations risk a Mexican stand-off between any future state enforcement body and the Australian Competition and Consumer Commission (ACCC) as to who has jurisdiction in the event of a breach, and also risks the absurd situation that a party could be prosecuted by both types of enforcement groups for the same transgression without double-jeopardy protection.

Spurious third party claims

Under the WA Bill, a third party to a franchise agreement (ie. Not the franchisee or franchisor), can make a claim for harm arising from a breach of the proposed WA regulations.

This could result in the absurd proposition (for example) that a child who is not able to attend a private school could sue a franchisor because his parents (the franchisees) were unable to afford the tuition fees, or that a spouse who feels aggrieved by a poor divorce settlement could seek to apportion blame to a franchisor for economic loss in the division of assets if their husband/wife had been a franchisee.

Such a proposition is untenable and provides an uncapped risk to franchisors and master franchisees whose public liability or other insurance premiums could skyrocket, or worse still, result in a denial of insurance coverage altogether.

Problems with defining Good Faith

The definition of Good Faith proposed in the WA Bill denies the court system the freedom to determine good faith as is already implied in law (and recognised via the Franchising Code of Conduct) for the specifics of individual cases. The proposed definition also risks creating more (not less) uncertainty because of its reliance on four key terms – fairly, honestly, reasonably and cooperatively – all of which are tremendously subjective and are likely to fuel extensive legal argument.

The Bill is all stick and no carrot

There is no consideration anywhere in the Bill to improve the pre-commencement education levels of either potential franchisees or potential franchisors. Nothing in the Bill is designed to assist either party to improve their awareness and understanding of sound business principles and franchising best practice before committing to a franchise agreement.

In other words, the proposed Bill threatens various penalties and sanctions for even involuntary transgressions, but offers nothing proactive to boost the knowledge and proficiency of either franchisees or franchisors as business operators.

A state law that reaches outside WA

The Bill can effect any franchisor with any business dealings in WA, including for that matter international master franchise agreements where an international company grants the master franchise rights to a party for all of Australia (even though no outlets may yet exist in WA).

Similarly, franchise groups without outlets in WA, but who provide goods or services to customers there (for example, via internet sales) will also be caught by the proposed regulations.

Enforced renewals would create more conflict

Court-ordered renewals of franchise agreements (Clause 14 of the Bill) will result in more, not fewer franchise disputes. Like a lease on a property, it’s over at the end of the initial term and only if the parties can agree between themselves on the terms and conditions of renewal is the agreement extended.

By allowing a court to order a renewal, when one party does not wish to do so defies the concept of “freedom of contract”. This would create a platform for ongoing bickering between the parties and cause more disputation (not less) and is about as logical as telling an estranged couple that they must live together until they fall in love again. (Anyone who has seen the movie “War of the Roses” will know that such a scenario cannot end well).

The undermining of franchise resale values

Buyers of existing franchise businesses will have their investments undermined by the risk that any former franchisee of that business can take court action against the franchisor up to six years after they have left the system and apply for a court-ordered renewal of the franchise. Such a provision risks creating chaos and substantially reducing the confidence of buyers of existing franchise businesses, which in turn would undermine the resale value of these businesses and increase demand for new (ie. greenfield) rather than established outlets.

There are many other aspects to the WA Bill which are either undesirable, impractical or both, and warrant a full economic impact assessment and widespread consultation with all stakeholders if it is to be progressed further.

If not, the consequences for franchising in Western Australia – and potentially the rest of the nation should other states consider a similar path – would be devastating.

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.