Changes to ‘good faith’ in franchising

The Federal Government’s plans to amend the Franchising Code of Conduct (“Franchising Code”) and Trade Practices Act 1974 (Cth) (“TPA”) were announced on Thursday 5 November.  The amendments will include changes to the unconscionable conduct provisions to cover such throughout the contracting process, but will not include a broad and general reference to good faith as recommended by the Parliamentary Joint Committee on Corporations and Financial Services (“the Joint Committee”) in December 2008.

In December 2008, the Joint Committee released its report on improving conduct in Australian franchising. This included a recommendation that a broad and general reference to good faith be included in the Franchising Code.

While accepting the intent of the Joint Committee recommendation, the Government has determined that inserting a general, undefined good faith obligation into the Franchising Code would only create extra uncertainty and could have adverse commercial consequences for franchisees.  Despite this it is intended that the Franchising Code will be amended to provide that nothing in the Franchising Code limits any common law requirement of good faith.  This means that existing duties of bargaining in good faith will continue to apply to franchisors and franchisees.

The Government considers that a better way to achieve the Joint Committee’s aim of a good faith reference is to address specific franchising behaviours that are considered inappropriate.  Based on consultations, the main behavioural issues that will be addressed are associated with:

• End-of -term arrangements
• Dispute resolution
• Unforeseen capital expenditure
• Unilateral contract variation
• Attribution of legal costs
• Confidentiality agreements
• Changes to franchise agreements when a franchisee is trying to sell the business.

The most significant proposed amendment is in relation to end-of-term arrangements.  This will require Franchisors to inform their franchisees at least six (6) months before the end of a franchise agreement of their decision either to renew or not to renew the franchise agreement.

The Franchising Council of Australia (FCA) has praised the Federal Government’s response to the Joint Committee Inquiry, saying that the Government has “put their faith in franchising and rejected calls for the introduction of an explicit ‘good faith negotiations’ clause in the Code”.  While, Steve Wright (FCA’s Executive Director) notes that no final decisions have been made by the Government, the balance of the initiatives announced is positive.

Additionally, the Federal Government has announced amendments to the TPA to provide protection from unconscionable conduct not only in the process of settling contracts, but also in the terms and conditions of the contract and the ongoing behaviour of the parties to the contract.

An expert panel will be formed to consider whether a list of examples of unconscionable conduct or a statement of principles of what constitutes unconscionable conduct should be introduced into the TPA.

Overall this is a good result for both franchisors and franchisees with limited impact on current practices.  However, franchisors should be aware of the potential impact of proposed amendments especially, in relation to end-of-term arrangements and seek advice as to whether amendments will be required to their franchise documentation.  Please contact a member of our Franchising Team for further information.

Author: Louise Tolson