Current legal issues in franchising in Australia

17 November 2008

Paula Pyburne
Law and Bills Digest Section

Contents

Introduction
What is franchising?
Relevant law
Matthews Review
The basis for the current disquiet with franchising
  South Australia
  Western Australia
  New South Wales
Common themes
Background to the law of contract
Ketchell’s case
  Comments
The disclosure provisions of the Code
  Arguments for further amendment
  Arguments against further amendment
Unconscionable conduct
  The development of the law on unconscionable conduct
  Section 51AC of the TPA
  Arguments for further amendment
  Arguments against further amendment
Good Faith
  What is ‘good faith’?
  An alternative to ‘good faith’
  Productivity Commission report
  Comments about further amendment
Goodwill
  What is ‘goodwill’?
  No requirement to pay goodwill
  If not ‘goodwill’, then what?
Current mediation arrangements
  Proposed amendments
    Should mediation be compulsory?
    Good faith in mediation
Conclusion

Introduction

On 25 June 2008 the Parliamentary Joint Committee on Corporations and Financial Services resolved to inquire into the Franchising Code of Conduct (the Code) and related matters.  That Committee is due to report on 1 December 2008. Only two years have elapsed since the last Commonwealth inquiry into franchising.[1]  As this new Commonwealth inquiry follows on the heels of similar formal inquiries in both Western Australia and South Australia, it is timely to consider the current legal issues in franchising in Australia.

What is franchising?

Franchising is a method of building a business whereby a franchise owner (‘franchisee’) is granted for a fee, the right to offer, sell or distribute goods or services under a business system determined by the business founder (‘franchisor’).  The franchisor supports that franchised business group by providing leadership, guidance, training and assistance, for which they receive ongoing service fees.  

The number of franchise systems in Australia jumped to 960 in 2006 from 850 two years earlier, and 693 back in 1988.  Total turnover for the franchising sector was estimated at $128 billion in 2006, making up 14 per cent of gross domestic product.  More than 600,000 Australians are employed in franchising.[2]

The relationship between franchisors and franchisees has often been termed a ‘commercial marriage’.  In many ways this is true, though the difference is that in the franchise relationship, there must, by definition, be a ‘senior partner’—the franchisor.

Relevant law

The franchising sector is regulated by both the Trade Practices Act 1974 (TPA) and the Trade Practices (Industry Codes – Franchising) Regulations 1998 which contains, amongst other things, the Code.[3]

Whilst the Code in its current format is mandatory, it was, originally, a voluntary code of conduct.  That being the case, it was not contained, as now, in any statute or regulation.

It was in June 1996 that the then Minister for Small Business and Consumer Affairs asked the House of Representatives Standing Committee on Industry, Science and Technology to investigate and report on, amongst other things the major business conduct issues arising out of commercial dealings between firms including, but not limited to, franchising and retail tenancies.

The report, entitled Finding a Balance: Towards Fair Trading in Australia (the Finding a Balance report) was published in May 1997.  In response to the report, the Government announced a new era for small business, part of which was to introduce a mandatory Franchising Code of Conduct. 

The Trade Practices Amendment (Fair Trading) Act 1998 inserted references to industry codes into the TPA.  As a result, the Code of Conduct became a separate regulation.  The Code requires the mandatory disclosure of 23 categories of information to existing and prospective franchisees. The Code also provides for the mediation of disputes and a cooling off period.

Matthews Review

Mr Graeme Matthews led the review of the operation of the disclosure provisions of the Code in 2006 (the Matthews Review).  The aim of that review was to identify possible amendments to the Code that could improve those provisions. The Matthews Review was the subject of considerable criticism because its terms of reference were confined only to the disclosure provisions of the Code and not to the operation of the franchising industry as a whole.[4]

The report by the Matthews committee (the Matthews report), containing some 27 separate recommendations, was delivered to the then Minister for Small Business and Tourism, the Hon. Fran Bailey, in October 2006.[5]

The former government’s response was provided in February 2007.[6]  The former government agreed to 15 of the recommendations with another six agreed in principle.  However the former government did not agree to three key recommendations[7] and considered that another three recommendations were more appropriately addressed in section 51AC of the TPA (which deals with unconscionable conduct), rather than in the disclosure provisions of the Code.[8]

In response to the Matthews Review recommendations, the Trade Practices (Industry Codes – Franchising) Amendment Regulations 2007 (No. 1) was tabled in the House of Representatives on 14 August 2007 and in the Senate on the following day.[9]  The purpose of the proposed regulation was to amend the Code to increase the transparency, quality and timeliness of disclosure to existing and prospective franchisees.[10] Announcing the changes, the Hon Fran Bailey, then Minister for Small Business and Tourism stated that:

Prospective franchisees will have greater access to better information before signing on the dotted line.  This will assist people to make the right decisions before investing large sums of their money in a business.[11]

The amendments commenced on 1 March 2008.

The Explanatory Statement to the Regulation contains relevant information about the amendments which include but are not limited to:

  • details of section 87B undertakings[12] under the TPA by franchisors, must be disclosed to franchisees within 14 days rather than the 60 days previously required[13]
  • franchisors must disclose from whom they receive rebates and financial benefits[14]
  • details of the expenses of marketing and other cooperative funds must be provided by franchisors to franchisees[15]
  • the last known particulars of name(s) and contact details of each ex-franchisee will be disclosed, unless the ex-franchisee requests that it be withheld[16]
  • the business experience of all ‘officers’ of the franchisor will need to be disclosed[17]
  • disclosure of ‘materially relevant facts’[18] to franchisees must be provided within 14 days rather than 60 days[19]
  • materially relevant facts concerning franchisor directors must be disclosed to prospective and existing franchisees and the scope of disclosure will extend from only serious offences (defined as an offence under any Australian law for which there is a jail term of more than 5 years for a first conviction) to also include contravention of any provision of the Corporations Act 2001[20]
  • franchisors must not inhibit prospective franchisees from communicating with each other or existing franchisees[21]
  • general waivers (i.e. broad disclaimers), regarding prior written or verbal representations, are not permitted in franchise agreements,[22] and
  • the details and history of the territory or site to be franchised must be provided together with the disclosure document.[23]

The basis for the current disquiet with franchising

South Australia

On 24 October 2007 (that is, before the amendments to the Code could take effect) the Economic and Finance Committee of the South Australian Parliament announced an inquiry (the SA inquiry) into the efficacy of current laws regulating the franchisee/franchisor relationship, with particular emphasis on the disclosure of information to potential franchisees and dispute resolution processes.

One of the catalysts for this inquiry was the complaint by disgruntled Bakers Delight franchisees of ‘churning’.  This is where a franchisor sells a site or territory that cannot turn a profit then sits back and waits for the business to fold.  The franchisor then reclaims the site for a nominal price and resells it to another franchisee who inevitably fails a year or two down the track.

The final report into Franchises by the Economic and Finance Committee (the SA report) was tabled in the South Australian Parliament on 6 May 2008.[24]  The key issues to emerge from this report were:

  • whether the disclosure provisions in the Code are sufficient to counteract ‘churning’ and
  • whether there is a duty for a franchisor to contract ‘in good faith’.

Western Australia

On 2 November 2007 the Small Business Minister for Western Australia, the Hon Margaret Quirk also announced an inquiry (WA inquiry) into the operation of franchise businesses in that state.[25]  The role of the inquiry was to review the adequacy of existing franchising legislation, with particular emphasis on unconscionable conduct and the renewal of licences.

The major catalyst for this inquiry was the complaint by Competitive Foods Australia Limited (CFAL) which holds some 50 franchising contracts to operate KFC stores in Western Australia and the Northern Territory.  In 2007 the franchisor advised CFAL that it did not intend to renew any of the franchise agreements when they fell due—this would occur progressively over a period ending in 2026.  Instead, the franchisor intends to run the stores directly.

The report into the Inquiry into the Operation of Franchise Businesses in Western Australia: (the WA report) was published in April 2008.[26] The key issues which arose from this report were:

  • whether there is a law which would compel a franchisor to enter into a new franchise agreement when the existing agreement ends and
  • whether a franchisee should be entitled to ‘good will’[27] from the franchise business at the end of the agreement period.

New South Wales

In New South Wales the Court of Appeal ruled in July 2007 that a breach of one of the procedural requirements of the Code rendered a franchise agreement illegal.  The court held in the Ketchell case[28] that if a franchisor did not have a written acknowledgement that a franchisee had received, read and understood the disclosure document, the franchise agreement was unlawful and unenforceable.

The Franchise Council of Australia (FCA) funded an appeal to the High Court against the decision.[29]  The outcome of the appeal is discussed under the heading ‘Ketchell’s case’.

Common themes

The amendments to the Code which came out of the recommendations of the Matthews Review commenced on 1 March 2008.  However, the South Australian and Western Australian inquiries were announced, and submissions gathered before that date.  As a result, some of the concerns, for example, those about ‘churning’ have now been addressed wholly or partly, by those amendments.

The SA inquiry, the WA inquiry and the Ketchell case provide valuable insight into some of the current legal issues in franchising in Australia.  These are:

  • the decision of the High Court in the Ketchell case
  • whether the disclosure provisions in the Code are sufficient
  • whether the provisions about unconscionable conduct are effective, especially with regard to some end of agreement matters
  • whether there should be an obligation to contract in good faith, especially with regard to some end of agreement matters
  • whether a franchisor should pay ‘goodwill’ to a franchisee at the end of the franchise agreement and  
  • whether the current mediation arrangements are adequate.

These issues are considered further below.

Background to the law of contract

The law of contract as we know it today developed in the 19th century side by side with the economic ideals of a free market.  Its foundation lay in the three ideas of ‘caveat emptor’,[30] ‘freedom to contract’ and the ‘sanctity of contract’.  The maxim ‘caveat emptor’ is based on the idea that the individual is in the best position to judge his or her own interests.  Consequently it is up to each individual to protect their own interests when entering into contracts.[31]  ‘Freedom of contract’ and ‘sanctity of contract’ were based on the ideas that efficient market transactions require commercial players to have the liberty to contract with whoever is willing, and that once promises are made they must be kept.[32]

In the 20th century, it became increasingly apparent that traditional laws of contract were not sufficient to control exploitative market practices and facilitate commercial fairness between all commercial participants.  As a result, there was a shift towards legislating to ensure individual fairness in contracting.[33] 

The question for law makers, especially those who are considering changes which will affect the franchisor/franchisee relationship, is how far those notions of fairness should be allowed to impact on the predictability and certainty attributed to the traditional laws of contract.[34]

Ketchell’s case

The Code was introduced in 1998 to regulate and strike a balance between the interests of franchisors and franchisees. Under section 51AE of the Trade Practices Act 1974 (TPA), the Code is a mandatory code.  This means that it forms part of the TPA and that a breach of the Code constitutes a breach of the TPA. Section 51AD of the TPA provides that ‘a corporation must not, in trade or commerce, contravene an applicable industry code’.  If a franchisor fails to provide disclosure documents as required by the Code, it will be in breach of the Code and, correspondingly, in breach of the TPA.  The issue in Ketchell’s case was what the consequences of such a breach would be.

The dispute in Ketchell arose when the franchisor brought an action in the Local Court at Mudgee for money it alleged was due to it under a franchise agreement. By way of defence, the franchisee, Mrs Ketchell, pleaded that the franchisor had failed to comply with clause 11 of the Code.  That clause requires a franchisor to obtain a Certificate from a franchisee stating that the franchisee has read, received and had a reasonable opportunity to understand the disclosure document and the Code, before entering into the franchise agreement.  Mrs Ketchell argued that in the absence of such Certificate the franchisor was not entitled to receive any payments under the franchise agreement. This defence was unsuccessful in the Local Court and subsequently in the Supreme Court of NSW.

However, on appeal, the New South Wales Court of Appeal decided that the failure to comply with clause 11 of the Code rendered the whole of the franchise agreement void for illegality.

In the meantime the Federal Court made a completely different decision in the matter of Hoy Mobile Pty Ltd v Allphones Pty Ltd (No. 2)[35] (the Allphones case).  The Allphones case is important because it looks at the question of a failure to comply with the Code from a different angle.  In this case, it was the franchisee who was taking action against the franchisor for monies owed to it by way of commissions.  Using the reasoning in the Ketchell case, Allphones (the franchisor) argued that it had not complied with the Disclosure provisions in the Code and, as a result, the franchise agreement with Hoy Mobiles should be declared void for illegality.  If they were successful in this argument, Allphones would have completely prevented the franchisee from making a claim for monies payable under the franchise agreement.  This argument was an unexpected and wholly unsatisfactory consequence of the decision of the NSW Court of Appeal in the Ketchell case.[36] 

The Federal Court of Australia completely rejected that argument, concluding that the New South Wales Court of Appeal decision in Ketchell was 'plainly wrong'.[37]  The Federal Court considered that the purpose of clause 11 of the Code is to provide franchisees with the opportunity to be informed by independent advice if they wish to obtain it.  That being the case, non-compliance with the Code ‘could not have been intended to have the draconian consequence of invalidating’ a franchise agreement.[38]

The decision of the High Court in Ketchell’s case was handed down on 27 August 2008.[39]  In a unanimous decision, the High Court adopted the same approach as in the Allphones case.  The High Court took into account the reasoning in the case of Baxter Healthcare[40] that when a statute contains a prohibition on entry into a particular agreement [as clause 11 of the Code does], a contravention of the prohibition does not necessarily mean that the agreement is void – that will depend on ‘the mischief which the statute is designed to protect … and the consequences for the innocent party.[41]

The High Court stated:

As in Allphones, it would be an unusual result if … a franchisee’s bargain was struck down in every case, regardless of the position in which it places the franchisee.  It is not to be assumed in every case that a franchisee wishes to be relieved of their bargain.  To render void every franchise agreement entered into where a franchisor had not complied with the Code would be to give the franchisor, the wrong-doer, an opportunity to avoid its obligations, and at the same time to place the franchisee in breach of obligations to third parties.  A preferable result, and one for which the Act provides, is to permit a franchisee to seek such relief as is appropriate to the circumstances of the case.[42]

Comments

The High Court has now clarified the consequences of a franchisor’s failure to comply with the Code.  Importantly, a determination that the entire franchise agreement is void for illegality, and therefore unenforceable, is not available.  In cases where the franchisor has not complied with the Code then, given the current state of the law, the onus is on the franchisee to seek one of the remedies set out in Part VI of the TPA.  Those remedies include the grant of an injunction,[43] damages,[44] non-punitive orders,[45] and a range of other orders including orders varying contracts and refusing to enforce all or any contractual provisions.[46] 

However, the WA inquiry formed the view that:

while the Code contains a plethora of provisions, no penalties are explicitly stipulated.  The Inquiry believes that compliance with Code requirements would be further improved if strong penalties, including penal terms for criminal offences, were prescribed under the Code and committed to by the regulator.[47]

That view was echoed by Deanne de Leeuw, a former Bakers’ Delight franchisee, whose submission to the SA inquiry states:

‘The lack of penalties prescribed for breaches of the Code ensures that no franchisor takes the Code seriously … there needs to be substantial monetary penalties for breaching any provision in the Code, with penal penalties for conduct by a franchisor that results in the failure of a franchisee’s business’.[48]

Whilst there is no evidence that franchisors uniformly disregard the disclosure provisions of the Code, it has been reported that:

recent comments made by officials associated with the Franchise Council of Australia [prior to the decision in] the long-running Ketchell court case suggest 10 per cent of franchise agreements could [have been] rendered illegal because of breaches of the code of conduct disclosure requirements.[49]

Alternatively the WA inquiry stated that it believed that:

… enforcement activities need to be improved in order to deal with those in the sector who disregard the Code before their conduct threatens the operation of the franchising business environment in such a way that the reputation of franchising as a sound business model is damaged.  A number of suggestions to improve Code enforcement were put to the Inquiry. These included the setting up of a dedicated and focused franchising unit within the ACCC, the appointment of a Franchising Ombudsman or Advocate, and the establishment of an independent Franchising Authority to administer the Code and franchise agreements.[50] 

The disclosure provisions of the Code

One of the main purposes of introducing the Code was to ensure that current and prospective franchisees had ready access to information about the franchising business which they were proposing to buy, or had bought, through the disclosure provisions.  However, the effectiveness of those provisions is the subject of continuing debate between franchisees and franchisors, as is evidenced by the submissions to the SA and WA enquiries.

Part 2 of the Code sets out an extensive list of the information which a franchisor must disclose to its franchisees and prospective franchisees.   The disclosures must be contained in a written document, prepared by the franchisor in a form which accords with the Code.[51] The franchisor must give the franchisee the disclosure document at least 14 days before the franchisee enters into, renews or extends the franchise agreement, or pays a non refundable deposit.[52] The franchisor must also update the disclosure document each financial year and provide it to existing franchisees.[53]  

As already stated, the disclosure provisions of the Code were amended with effect from 1 March 2008 in response to the Matthews report.  According to the submissions made to both the SA and WA inquiries, some further matters may need to be addressed including:

  • disclosure of franchisee entitlements and responsibilities at the end of an agreement[54]
  • a clear statement that highlights the rights and responsibilities of, and risks to, the franchisee[55]
  • disclosure not only of the existence of any rebates or other financial benefits from the supply of goods or services to franchisees, but also the amount of that rebate or benefit[56]
  • disclosure of the exact services a franchisor will provide such as training and marketing including a statement of their quantity and quality[57]
  • a statement not only about the ongoing financial viability of the franchise, but also of the franchisor.[58]

Arguments for further amendment

One of the reasons that the disclosure required by the Code is so important to franchisees is that it can be expensive and difficult to carry out ‘due diligence’ prior to the purchase of a franchise business.  Franchisees do not tend to register their business names.  This makes a potential franchisee’s task of tracking down, via the public record, and contacting prior or other franchisees for the purposes of information gathering, very difficult. In addition, the corporate structure of franchisor businesses can often be complex.  This complicates the potential franchisee’s task of identifying exactly with whom they will be dealing and contractually associated.[59]

In addition, public companies, representing approximately 14 per cent of franchisors, publish public company reports that do not contain meaningful information about the franchise division. Access to information about trusts, which is a business form adopted by approximately 10 per cent of franchisors, is even more restricted.[60]

In his submission to the SA inquiry, Associate Professor Frank Zumbo states:

… this Inquiry provides a valuable opportunity to identify remaining gaps in the disclosure requirements under the Franchising Code, as well as existing gaps in the legal framework governing franchising relationships. Of particular relevance at the moment is the ongoing failure for the Trade Practices Act and the Franchising Code to provide a clear and comprehensive set of standards of ethical conduct for the guidance of both franchisors and franchisees.[61]

Arguments against further amendment

The Franchise Council of Australia, in its submission to the SA inquiry, drew attention to both the scope and intent of the Code’s provisions and the responsibilities on potential franchisees to fully investigate their proposed investment stating that:

The Code requires franchisors to disclose more than 250 items as a starting point to the franchisee’s due diligence. The disclosure document is not intended to be an exhaustive source of all information—as stated on the front page it provides some of the information required to make an informed decision. Franchisees must accept responsibility for the investment decision.  They cannot simply assert that the franchisor did not fully disclose.[62]

Similarly, in its submission to the WA inquiry, the Franchise Council of Australia argued that:

… a disclosure document prepared in accordance with the comprehensive requirements of the Franchising Code of Conduct provides sufficient information to assist a prospective franchisee to make an informed decision in relation to the franchise.[63]

Unconscionable conduct

Both the SA inquiry and the WA inquiry received submissions about conduct which was alleged to be ‘unconscionable’ on the part of franchisors.  However, despite the seriousness of these allegations and accounts of personal loss and hardship, patterns of unconscionable conduct were not detected in franchising in Western Australia even though this was the particular focus of the WA inquiry.  Rather, the WA inquiry concluded that there were instances where existing laws do not necessarily provide a desired level of protection for all franchising participants.[64]   That existing law is section 51AC of the TPA.

The development of the law on unconscionable conduct

In the Amadio case[65] Chief Justice Mason of the High Court explained that a transaction will be set aside as being ‘unconscionable’ wherever one party by reason of some condition or circumstance is placed at a ‘special disadvantage’ vis a vis another and unfair or unconscientious advantage is then taken of the opportunity which has been created by the ‘special disadvantage’.

The High Court limited the application of the equitable doctrine[66] to those persons who can establish that they were under a ‘special disadvantage’ when the contract was made rather than to the conduct of the parties during the term of the contract or at the end of the contract.  The categories of ‘special disadvantage’ were established in the case of Blomley v Ryan where the Court stated:

The circumstances adversely affecting a party, which may induce a court of equity either to refuse its aid or to set a transaction aside are of great variety and can hardly be satisfactorily classified.  Among them are poverty or need of any kind, sickness, age sex, infirmity of body or mind, drunkenness, illiteracy or lack of education, lack of assistance or explanation where assistance or explanation is necessary.[67]

Existing section 51AA of the TPA contains a general prohibition on engaging in conduct that is unconscionable ‘within the meaning of the unwritten law’.  This means that section 51AA operates in accordance with the equitable principles outlined above and has not always been of assistance to small business operators.[68]  

Section 51AC of the TPA

Section 51AC of the TPA was inserted in response to the 1997 Finding a Balance report.[69]  The section generally provides that a corporation must not engage in conduct that is, in all the circumstances, ‘unconscionable’ in connection with the supply to a person, or the acquisition from a person, of goods or services.  In addition, subsection 51AC(3) provides a list of the sorts of matters that a court may have regard to, but is not limited to, in deciding whether conduct is ‘unconscionable’.  This makes section 51AC much broader in its application than section 51AA of the TPA.

According to the SA report, the problem with section 51AC is that the section has not been effective despite its broader remit.  The SA inquiry was told that despite the inducement in the provision to consider a wider definition, judicial interpretation of statutory unconscionability has tended to rely on so-called ‘procedural’ aspects of unconscionability, restricting its scope to cases of serious misconduct during the formation and performance of the contract.[70]   The SA inquiry recommended that section 51AC of the TPA be amended either by:

  • the inclusion of a statutory definition of ‘unconscionability’ or
  • the insertion of a prescribed list of examples of the types of conduct that would ordinarily be considered to be ‘unconscionable’.[71]

Arguments for further amendment

Associate Professor Frank Zumbo argues that section 51AC of the TPA has fallen short of the parliamentary intention behind the section.[72]  He takes the view that

… the insertion of a statutory definition in s.51AC would send a clear parliamentary signal to the courts that the concept is not only broader than the equitable concept, but that s.51AC is intended to promote ethical business conduct.  Such a definition would set out a non-exhaustive benchmark for assessing conduct to determine whether or not it goes beyond what is reasonably necessary to protect the legitimate interests of the parties involved.[73]

Arguments against further amendment

It has been argued that:

… cases involving section 51AC can be divided into two broad categories.  First, there are those matters where a contractual dispute has arisen between the parties and, as part of a ‘scatter-gun’ approach, a small business plaintiff has alleged unconscionable conduct contrary to section 51AC as one of a number of causes of action.  The pleading and evidence relating to unconscionability in these cases have tended to be flimsy and lacking in cogency.  Not surprisingly, the section 51AC claims in these cases have rarely succeeded.  The other category of case is where the large business defendant’s conduct has been simply so deplorable that it would be an affront to the conscience of even the most opportunistic commercial participant.  In these latter cases, the provision of relief is hardly controversial.

These cases demonstrate that concerns regarding the application of section 51AC are ill-founded and it appears that a well balanced jurisprudence concerning the obligations under the section is beginning to emerge.[74]

That emerging jurisprudence is apparent in the Allphones case which sets out clear legal principles to be considered when determining how section 51AC should be applied.[75] 

The fact remains though, that it is very difficult for a franchisee who is struggling to come to terms with some conduct of a franchisor, to identify when a hard commercial decision tips into the realm of unconscionable conduct, for example, where the franchise agreement contains a provision which allows a franchisor to terminate the agreement at will.

Good Faith

The SA inquiry received numerous accounts where a threat of termination was apparently employed to force the under-value sale of a franchise outlet by a franchisee back to their franchisor and of franchisors relying on trivial, technical or minor infringements which do not represent clear and persistent misconduct as a ground for termination.[76] 

The SA inquiry was of the opinion that there currently exist unacceptable limits on the ability of franchisees to seek redress in cases where franchisors abuse their contractual discretions and powers.  It recommended amending the Code by inserting a provision imposing a duty to act in accordance with good faith and fair dealing by each party of the franchise relationship.[77] However, before such an amendment is possibly made, the question to be answered is ‘what does the duty of good faith consist of?’

What is ‘good faith’?

In broad terms the duty of good faith connotes compliance with honest standards of conduct which are reasonable, having regard to the interests of the parties.[78]

A number of cases have looked favourably on the implication of a duty of good faith into a variety of contracts, including franchising agreements. However, some doubts remain as to whether Australian law has unequivocally accepted a duty of good faith in the performance and enforcement of contracts generally, and the High Court has not reached a binding conclusion on the issue.

In J F Keir Pty Ltd v Priority Management Systems Pty Ltd (administrators appointed),[79] Acting Justice Rein of the NSW Court of Appeal accepted submissions made by a franchisee that when the franchisor exercised its powers under the franchise agreement, the implied duty of good faith required the franchisor to act:

  • reasonably and honestly
  • objectively
  • without simply relying on information provided by third parties or ‘wilfully shutting (one’s) eyes’ or refraining from making inquiries, but exercising the degree of ‘caution and diligence to be expected of an honest person of ordinary prudence’
  • without some ulterior motive
  • with recognition and regard to the legitimate interests of both parties in the enjoyment of the fruits of the contract, and
  • to avoid action rendering the plaintiff’s interests under the agreement ‘nugatory, worthless, or … seriously undermined’.[80]

The issue of ‘good faith’ was given consideration in the Matthews Report which states:

A number of the reviewed foreign jurisdictions have either a general concept of good faith in commercial contracts or a specific concept of good faith which applies to franchise agreements, e.g. in the context of pre-contractual negotiations and in mediation of disputes. 

In Australia, some courts have accepted, to some degree, the implication of obligations of good faith in contractual dealings.  For instance, it has been suggested that good faith embraces three notions: an obligation on the parties to cooperate in achieving their contractual objects, compliance with honest standards of conduct and compliance with standards of conduct which are reasonable having regard to the interests of the parties. However, uniform acceptance and understanding of concepts, content and implications of good faith obligations has not emerged in the Australian jurisdictions.

The concept has been included in the voluntary Motor Vehicle Insurance and Repair Industry Code of Conduct 2006. In this case insurers and repairers have agreed to "observe high standards of honesty, integrity and good faith in conducting their business with each other and in the provision of services to claimants".[81]

An alternative to ‘good faith’

The issues of ‘unconscionable conduct’ and a ‘duty of good faith’ cannot be considered in isolation.  In Garry Rogers (Aust) Pty Ltd v Subaru,[82] Justice Finklestein of the Federal Court of Appeal talks of issues of ‘good faith’, ‘unconscionability’ and ‘unfairness’ as vaguely similar:

In my view, a term of a contract that requires a party to act in good faith and fairly imposes an obligation upon that party not to act capriciously.  It would not operate so as to restrict actions designed to promote the legitimate interests of that party.  That is to say, provided the party exercising the power acts reasonably in all the circumstances, the duty to act fairly in good faith will ordinarily be satisfied.

… I do not regard the refusal by the first respondent to withdraw its notice of termination as unconscionable conduct.  I take as the measure of unconscionability, conduct that might be regarded as unfair.[83]

It may be that Commonwealth legislators need to consider whether the problems experienced by franchisees which seem to attach to this concept would be better addressed by legislation in similar terms to the Contracts Review Act 1980 (NSW) (Contracts Review Act) which is directed towards ‘unfair’ contracts in that state.

Section 7 of the Contracts Review Act generally provides that where a Court finds a contract, or a provision of a contract, to have been ‘unjust’ in the circumstances relating to the contract at the time it was made, the Court may:

  • decide to refuse to enforce any or all of the provisions of the contract,
  • make an order declaring the contract void, in whole or in part, or
  • make an order varying, in whole or in part, any provision of the contract.

‘Unjust’ is defined as including unconscionable, harsh or oppressive, and ‘injustice’ is to be construed in the same way.  Section 9 requires the Court to always have regard to the public interest in making its decision about whether a contract is ‘unjust’.  The section also sets out a broad list of matters to which the Court can have regard to in making its decision.

Importantly, as already stated, the Trade Practices Amendment (Fair Trading) Act 1998 which inserted section 51AC into the TPA was at variance with the recommendation of the Finding a Balance report which cautioned against using the term ‘unconscionable conduct’.  That Committee favoured the use of the term 'unfair' conduct.[84] 

Productivity Commission report

The Productivity Commission recently delivered its report entitled Review of Australia’s Consumer Policy Framework.

The report does not deal specifically with franchise agreements or the franchising sector.  Rather it deals with the problem of unfair practices and ‘unfair contract terms’,[85] particularly in the context of ‘standard form contracts’ which are typically used in the supply of a broad range of services including air travel, telecommunications, energy, consumer credit, car hire, holiday packages, home improvements and software sales.  By their nature, these contract terms are offered on a ‘take-it-or-leave-it’ basis, are often complex and apparently mostly not read.[86]  As franchise agreements are also offered on a ‘take-it-or-leave-it’ basis, the report of the Productivity Commission has been taken into consideration in preparing this paper.

Whilst the Productivity Commission acknowledged that businesses sometimes use unfair terms against consumer and the public interest generally,[87] it did not support a blanket ban of apparently unfair terms stating:

… why do businesses … choose to insert unfair terms into their contracts?  One explanation is that ‘one-sided’ contracts can actually be beneficial to consumers as a whole by providing them—through the business—with a way of deterring problematic behaviour by small groups of consumers.  In particular, just as some businesses behave in bad faith or otherwise inappropriately, so too do some consumers.  For instance, they may not be careful in using their purchases, conceal damage they have done to a rented asset, or seek to extract themselves from contracts that require businesses to commit significant upfront resources. Crucially, unlike businesses, consumers do not generally have a brand name or reputation to lose from such conduct.[88]

This view can also be applied to franchising.

The Productivity Commission recognised that measures against unfair contract terms have to steer a middle course, by seeking to stem acts of bad faith or otherwise inappropriate behaviour by either party to a contract.[89]  A new national generic consumer law to include a provision to address the use of ‘unfair’ contract terms was recommended.  The provision would allow regulators or consumers to take action where detriment was suffered as a result of the use of the unfair term.[90]

Comments about further amendment

Just as there have been recommendations for the inclusion of a statutory definition of ‘unconscionability’, any amendment which introduces a duty of ‘good faith’ should aim to sufficiently define the duty so that parties to a franchise agreement can identify the sorts of conduct which will amount to a breach of good faith.   

That may not be as simple as it sounds.  For example, Justice Giles admitted in Vodaphone Pacific v Mobile Innovations[91] that there is a lack of uniformity in the cases dealing with ‘good faith’[92] and that ‘good faith’ could be seen as having different meanings.

Similarly the application of the concept of ‘good faith’ has been unpredictable and inconsistent among US state Supreme Courts.[93]  The Illinois Supreme Court has said:

… what the term [good faith] means … remains somewhat of a mystery.  Its meaning, moreover, may change, depending upon the context in which it is used.[94]

In addition, legislators should also consider what the consequence of a breach of the duty would be, in the same way that the High Court has now made clear the consequences of a breach of the Code.

Finally, paragraphs 51AC(3)(k) and (4)(k) of the TPA already provide that, in determining whether there has been ‘unconscionable conduct’, a Court may have regard to the extent to which the parties acted in good faith.  It has been argued that there is an overlap between the concepts of ‘good faith’, ‘reasonableness’ and ‘unconscionability’ and that there is little or no understanding of the distinction between them.[95]  That being the case, a move to a simpler test of ‘unfairness’ may be preferable.

Goodwill

An issue on which both the SA inquiry and the WA inquiry focussed was whether a franchisee had any particular legal rights at the end of the franchise agreement, especially in circumstances where the franchisor does not offer a renewal of the agreement.

What is ‘goodwill’?

As with ‘unconscionability’ and ‘good faith’ it is important that all parties have a common understanding of what ‘goodwill’ in a franchise business actually is.[96]

One certainty about goodwill is that, in the words of Lord Macnaghten in 1901,[97] ‘it is a thing very easy to describe, very difficult to define.’[98]  He went on to describe ‘goodwill’ as follows:

It is the benefit and advantage of the good name, reputation and connection of a business.  It is the attractive force which brings in custom.  It is the one thing which distinguishes an old-established business from a new business at its first start … Goodwill is composed of a variety of elements.  It differs in its composition in different trades and in different businesses in the same trade.  One element may preponderate here and another element there.[99]

Jenny Buchan, Lecturer at the University of New South Wales’ Australian School of Business, described the elements of goodwill and its characteristic fragmentation in the franchise relationship to the SA inquiry as follows:

In legal terms there are three types of goodwill: business goodwill, site goodwill and personal goodwill. The franchisee pays for business goodwill and possibly site goodwill when buying into a franchise system. Personal goodwill is added by the franchisee. A component of goodwill is usually taken into account when the franchise fee is calculated. (…)

In exchange for the franchise fee (business goodwill), the franchisee has the right to trade using the franchisor’s intellectual property and system for the duration of the franchise term. This money is a sunk cost that is paid before the franchisee starts trading and is recouped over time as the franchisee derives value from the franchisor’s brand.[100]

No requirement to pay goodwill

According to Terry and Giugni:

The traditional view is that goodwill belongs to the franchisor.  The franchisee simply acquires the right to participate in a business system for a term specified by the franchise agreement. Absent contractual provisions to the contrary, the franchisee has no right to assign or to have the agreement renewed and on termination or non-renewal has no entitlement to be compensated by the franchisor despite the franchisee’s purchase of, or contribution to, goodwill.[101]

This view was confirmed by the Federal Court of Australia in Ranoa Pty Ltd v BP Oil Distribution Ltd and Anor.[102]  In that case their Honours stated:

But where a franchisor elects not to grant a new lease, the franchisee is turned from the site without compensation for any goodwill which it may have developed during its period of occupancy.  A franchisee, such as the appellant, may regard this result as harsh, the harshness being exacerbated if it should be the case – we do not know whether it is so – that the franchisors are more likely to decide themselves to operate sites to which substantial goodwill attaches.  But if this result is harsh, it is a product of the circumstance that the Act does not require the franchisor who elects not to renew to pay any compensation to the franchisee.[103]

It follows that a right to payment for goodwill upon expiry or termination of the franchise term must be set out in the contract. 

The SA inquiry acknowledged, in relation to the sale of a franchise business during the period of the franchise agreement, that:

… there is evidence suggesting that it is a standard practice for many systems to compensate franchisees for the transfer of goodwill at the end of a relationship. This is largely achieved by the franchisee selling the franchise and reaping the improved market value of the business as against when they originally purchased it; this relies on the relationship between franchisor and franchisee, not to mention the behaviour of the market, being conducive to such an arrangement.[104]

However, it is rare for the franchise agreement to spell out the franchisee’s entitlement to goodwill on the expiry or termination of the contract.[105]  That being the case, for the avoidance of doubt, the WA inquiry recommended that the Code be amended to require franchisors to explicitly specify, in the disclosure document, what the position is in relation to the franchisee’s entitlement or lack of entitlement to goodwill or other compensation if the agreement is not renewed.[106]

If not ‘goodwill’, then what?

The SA inquiry went a step further recommending that the Code be amended to include a provision mandating that franchise agreements must include the basis on which termination payments or goodwill or other such exit payments will be paid at the end of the agreement.[107]   This is a significant departure from the current state of the law.

However the economic consequences of such a step should be considered.  For example the submission by the Cheesecake Shop to the current Commonwealth inquiry states:

If the law is changed to allow for goodwill payments to master franchisees at the end of the term, I believe franchisors will not appoint master franchisees so as to avoid having to make goodwill payments. They will appoint area developers. The Cheesecake Shop will have to look at the franchise model to see if it is financially worthwhile to continue with franchising.

There is only a finite amount of profit from the sale of product to consumers that can be split between franchisor and franchisee.  If TCS is forced to pay goodwill payments, it will have to increase the royalty it receives from franchisees to ensure it has the funds to pay the goodwill. This would result in franchisees earning less annual income. That is not something TCS wants to do and may threaten the successful franchise model that now exists.[108]

It may be that an entitlement to ‘damages’ exists under the TPA for those persons who have been subject to termination of a franchise ‘at will’ and without any breach of the franchise agreement under the unconscionability provisions in section 51AC.

Current mediation arrangements

Another recurring theme arising from the SA inquiry and the WA inquiry was mandatory process of dispute resolution through mediation which is set out in the Code.

Mediation is an informal negotiation where the independent and neutral mediator assists the parties to identify and explore options for settlement. A mediator does not hand down a decision like a judge, but helps the parties reach their own agreement.  The advantages of mediation include its informality, confidentiality, accessibility and low cost.[109] 

If either party requests mediation, it is mandatory under the Code for both parties to attend the mediation and to try to resolve the dispute. [110]  However, despite that requirement, the WA inquiry heard allegations of refusals to enter into mediation and of failures to adhere to the resolutions agreed to at mediation.[111]  The SA inquiry was told that non-attendance at mediation was common, sometimes because a party does not see any prospect of progress or, perhaps even more disturbingly, as a means of obstructing a dispute resolution process.[112]

Proposed amendments

Both the SA inquiry and the WA inquiry made recommendations to review and/or improve the current mediation arrangements.  One recommendation was to amend the Code to:

  • require parties in dispute to attend mediation compulsorily
  • make mediated agreements enforceable to ensure both parties adhere to the agreed resolutions, and
  • include prescribed penalties for refusing to attend mediation or refusing to make a genuine attempt to resolve the dispute. [113]

Another recommendation was to have a Franchise Ombudsman, or to set up a Franchise Tribunal, or a specific Franchise Arbitration Unit within the ACCC or other relevant entity to administer an enhanced dispute resolution system.[114]  In making this recommendation, the SA inquiry opined that:

… the rights of all parties are not well served in an environment where a self-regulating and poorly monitored mediation process is underwritten by a pre-existing structural imbalance between the parties in dispute and that has no adequate secondary means of adjudication other than formal legal action.[115]

Should mediation be compulsory?

Compulsory mediation begs the question whether the mandatory nature of the process results in participation of the parties or mere attendance.[116]  In considering mediation of franchise disputes, it is useful to look at mediation of commercial disputes which is ‘court-ordered’. 

Venus[117] provides evidence that the views of judges of the Supreme Court of New South Wales about the usefulness of mandatory mediation have changed dramatically in recent years.  He states that in Morrow v chinadotcom Corp[118] the Court refused to order a reluctant party to engage in mediation on the grounds that if the mediation were not engaged in willingly, the process would be pointless and likely to be a waste of money.  In comparison, in Idoport Pty Limited v National Australia Bank Limited[119] the Court made orders for mediation despite the opposition of the parties.  Since that time the Court has recognised that mediation may well succeed when ordered, despite some initial opposition.[120]   Nevertheless, there have also been cases where a Court has refused to make an order for compulsory mediation on the grounds that the position of the parties is so entrenched as to make the prospects of successful mediation doubtful.[121]

Once a court has ordered the parties into mediation, the agreement which is reached between the parties is filed in the court.[122]  The threat of a Court imposed sanction provides any incentive which the parties may need to ensure that they comply with the terms of the mediation agreement.

The ‘court-ordered’ model confirms that there is legal precent for a compulsory requirement that parties attend mediation.  That already exists in the Code.  A failure to attend mediation is, technically, a breach of the Code and also a breach of the TPA.  The issue of a breach of the Code and the approach of the High Court to that breach has already been canvassed in this paper.

One possible solution to the problem may be an independent entity which would monitor and control the mediation of disputes including making a determination as to whether it is in the best interests of the parties to engage in mediation, and with whom the final agreement would be lodged.   

Good faith in mediation

The earlier discussion on the issues of ‘good faith’ also impacts on mediation.  Would, for example, the inclusion of a term in the Code that the parties to a franchise agreement ‘act in good faith’ alter expectations about the conduct of, and outcomes from, mediation?  According to Venus, there is no definition of what constitutes participation [in mediation] in good faith and this is an issue which has received relatively little judicial consideration.[123]

By way of example, Venus[124] notes the comments of Justice Ipp that participation in good faith requires the parties to adopt a non-obstructive and cooperative attitude.[125]  However, he suggests that it is doubtful that a party must do little more than this, opining that it is unlikely a party would lack good faith if they were willing to entertain even the smallest compromise.[126] 

With this in mind, it is important to note the comment made earlier in this paper that what the term [good faith] means may change, depending upon the context in which it is used.

Conclusion

The Parliamentary Joint Committee on Corporations and Financial Services into the Franchising Code of Conduct and related matters has broad terms of reference.  It has the opportunity to inquire into all aspects of the franchising industry, including the rights—and obligations—of both franchisors and franchisees.  There is no doubt that the evidence to, and findings of the SA inquiry and the WA inquiry will provide valuable assistance. 

Australian Retailers Association Executive Director and former CEO of the Franchise Council of Australia Richard Evans has stated:

Let this inquiry be the last inquiry for the franchise sector for some time and allow a sense of certainty to develop within the sector. Businesses fail - that is true - but it is not the Franchising Code of Conduct that lets them down.  Let all people with any gripes against the franchise sector submit to yet another inquiry and allow this report to consider the strength of the franchise sector.[127]

It is difficult not to have a sense of déjà vu about this and the recent state inquiries.  Perusal of the Finding a Balance report which was published in May 1997, refers to an even earlier review of the Franchising Code of Practice dated 1994.   That review identified the following areas of dispute between franchisors and franchisees:

  • charging excessive prices for goods supplied to franchisees
  • secret rebates and commissions from suppliers
  • discrimination in terms of trading between company owned outlets and franchised outlets
  • encroachment on the franchisee’s geographic trading area
  • failure to address lack of viability of franchise outlets
  • making substantial increases to renewal fees
  • failing to provide adequate service and support to franchisees
  • unwillingness to discuss and negotiate problems
  • using advertising levies for other purposes
  • intimidation and victimisation of franchisees and
  • unfair terminations.[128]

It is disturbing that many of these same issues continue to be the subject of complaint today.  Whether those complaints are valid or are merely the result of misplaced expectation will be for the Committee to determine.  Stephen Giles’ comments are worthy of note:

But franchising is not a pot of gold, and there are failures.  There is an obligation on [the] prospective franchisee to do due diligence.  Market forces will still mean that certain types of franchi–ses will do better than others, certain locations will perform above average, and some systems will provide a better return.  Like any business process, preparation and investigation are mandatory before buying.[129]

 


[1].    On 28 June 2006, the then Minister for Small Business and Tourism announced a review of the disclosure sections of the Franchising Code of Conduct.

[2].    D. Lynch, ‘Fast-growth sector, but mind the flaws’, Australian Financial Review, 14 February 2006, p. 2.

[3].    Depending on the nature of the franchise business, state ‘fair trading’ Acts may also apply.

[4].    Russell Emmerson, ‘Franchising views cause extension to Federal review’, Courier Mail, 2 October 2006, p. 56 and Damien Lynch, ‘Code aims at franchise fears’, Australian Financial Review, 21 August 2007, p. 49.

[5].    Independent Committee, ‘Review of the Disclosure Provisions of the Franchising Code of Conduct’, Office of Small Business, Canberra, October 2006.

[6].    Hon Fran Bailey, Minister for Small Business and Tourism, ‘Australian Government’s Response to the Review of the Disclosure Provisions of the Franchising Code of Conduct’, Canberra, February 2007.

[7].   Recommendation 3: the requirement for the franchisor to include a Risk Statement in the    disclosure document; Recommendation 7: that the Australian Competition and Consumer Commission (ACCC), as part of the registration process      outlined in Recommendation 23, collect    information on the extent to which franchisors'     financial statements are currently audited and   provided pursuant to item 20.3 of Annexure 1      of the Code; and Recommendation 23: that       the Government implement a mandatory process of franchisor registration and annual lodgement of the most current disclosure document and other prescribed information. The process       would be administered by the ACCC.

[8].   Recommendation 16: that the Risk Statement and ACCC educational material refer to the    risks     associated with unilateral franchisor termination rights contained in Part 3 clause 22 of    the       Code;   Recommendation 17: that the Risk Statement and ACCC educational material refer to   the risks associated with unilateral franchisor changes to franchise arrangements; and    Recommendation 25:       that a statement obligating franchisors, franchisees and prospective      franchisees to act towards each     other fairly and in good faith be developed for inclusion in    Part       1 of the Code.

[9].    Senate Hansard, 15 August 2007, p. 153.

[10]. Explanatory Statement, Trade Practices (Industry Codes – Franchising) Amendment Regulations 2007 (No. 1), p. 1.

[11]. Hon Fran Bailey, ‘More Transparency in Franchising’, Media Release, Canberra, 15 August 2007.

[12]. Section 87B undertakings are voluntary and legally enforceable undertakings that a party may give to the ACCC, for example, to settle or avoid proceedings alleging that the party has breached the TPA.

[13]. Trade Practices (Industry Codes–Franchising) Regulations 1998, Annexure 1, item 4.3.

[14]. ibid., item 9.1(j).

[15]. ibid., item 12.1,

[16]. ibid., items 6.4 and 6.5.

[17]. ibid., items 2.6 and 3.1.

[18]. The ‘materially relevant facts’ are listed in Part 3, subclause 18(2).

[19]. ibid., Part 3, subclause 18(1).

[20]. ibid., Part 3, paragraphs 18(2)(b) and 18(2)(d) and Annexure 1, item 4.

[21]. ibid., Part 3, clause 15.

[22]. ibid., Part 3, clause 16.

[23]. ibid., Annexure 1, item 11.2.

[24]. Economic and Finance Committee, Final Report: Franchises, Parliament of South Australia, Adelaide, 6 May 2008.

[25]. As in South Australia, this inquiry was announced before the amendments to the Franchising Code of Conduct could take effect.

[26]. Small Business Development Corporation, Inquiry into the Operation of Franchise Businesses in Western Australia: Report to the Western Australian Minister for Small Business, Perth, April 2008 p. ii.

[27]. For more detail about ‘good will’, see the discussion at page 20.

[28]. Ketchell v Master of Education Services Pty Ltd [2007] NSWCA 161 (19 July 2007)

[29]. Peter Switzer, ‘Franchisors’ day of destiny arrives as Ketchell decision faces High Court test’, Australian, 10 June 2008, p. 19.

[30]. Meaning ‘let the buyer beware’.  Butterworths Concise Australian Legal Dictionary, third edition, LexisNexis Butterworths, Australia, 2004, p. 64.

[31]. Liam Brown, ‘The Impact of Section 51AC of the Trade Practices Act 1974 (Cth) on Commercial Certainty’, Melbourne University Law Review, vol. 28, 2004, pp. 589-622, at p. 592.

[32]. ibid., p. 593.

[33]. ibid.

[34]. ibid., p. 594.

[35]. [2008] FCA 810

[36]. Kate Watts and Tova Gordon, ‘Ketchell v Master of Education Services and Hoy Mobile Pty Ltd v Allphones Pty Ltd, Australian and New Zealand Trade Practices Law Bulletin, vol. 24, no. 3, 2008, pp. 34-36 at p. 35.

[37]. [2008] FCA 810, paragraph 97.

[38]. [2008] FCA 810, paragraph 98.

[39]. Master Education Services Pty Limited v Jean Florence Ketchell [2008] HCA 36.

[40]. Australian Competition and Consumer Commission v Baxter Healthcare Pty Limited [2007] HCA 38.

[41]. [2007] HCA 38, paragraph 46.

[42]. Master Education Services Pty Limited v Jean Florence Ketchell [2008] HCA 36, paragraph 39.

[43]. Section 80 of the Trade Practices Act 1974.

[44]. Section 82 of the Trade Practices Act 1974.

[45]. Section 86C of the Trade Practices Act 1974.

[46]. Subsection 87(2) of the Trade Practices Act 1974.

[47]. Small Business Development Corporation, op. cit., p. 31.

[48]. Submission by Deanne de Leeuw to the Economic and Finance Committee, p. 9.

[49]. Damien Lynch, ‘Reform franchising sector, but don’t overdo it’, Australian Financial Review, 15 July 2008, p. 54.

[50]. Small Business Development Corporation, op. cit., p. 31.

[51]. Section 7 of the Trade Practices (Industry Codes – Franchising) Regulations 1998

[52]. Section 10 of the Trade Practices (Industry Codes – Franchising) Regulations 1998

[53]. Section 6 of the Trade Practices (Industry Codes – Franchising) Regulations 1998

[54]. Economic and Finance Committee, op. cit., p. 70.

[55]. Economic and Finance Committee, op. cit., p. 38 and Small Business Development Corporation, op. cit., p. 46.

[56]. Small Business Development Corporation, op. cit., p. 18.

[57]. ibid., p. 19.

[58]. ibid.

[59]. Submission by Jenny Buchan to the Economic and Finance Committee, 6 February 2008, p. 3.

[60]. ibid.

[61]. Submission by Associate Professor Frank Zumbo to the Economic and Finance Committee, February 2008, p. 3.

[62]. Submission by the Franchise Council of Australia to the Economic and Finance Committee, 21 January 2008, p. 22.

[63]. Small Business Development Corporation, op. cit., p. 17.

[64]. ibid., p. i.

[65]. Commercial Bank of Australia Ltd v Amadio (1983) 151 CLR 447.

[66]. The law of equity is a separate body of law developed in the Court of Chancery.  It supplements, corrects and controls the rules of common law.

[67]. (1956) 99 CLR 362 at 405.

[68]. For example: Australian Competition and Consumer Commission v VCG Berbatis Holdings Pty Ltd [2003] HCA 18, 9 April 2003.

[69]. The amendments were included in the Trade Practice Amendment (Fair Trading) Act 1998.  However this insertion of section 51AC was not in accordance with the terms of recommendation 6.1 of the Finding a Balance report which sought the amendment of existing section 51AA to proscribe unfair conduct in commercial transactions.

[70]. Economic and Finance Committee, op. cit., p. 43.

[71].       These examples would be different from the list of matters which the Court may take into account   as already listed in subsection 51AC(3) of the TPA.  There is a growing trend in legislation to    insert notes and examples to help readers understand the effect of provisions.  For instance they     are       used widely in the Income Tax Assessment Act 1997.  In addition, section 15AD of the Acts   Interpretation Act 1901 provides that Where an Act includes an example of the operation of a    provision the example shall not be taken to be exhaustive and if the example is inconsistent with       the provision, the provision prevails.

[72]. Frank Zumbo, ‘Promoting ethical business conduct: the case for reforming section 51AC’, Trade Practices Law Journal, vol. 16, 2008, pp. 132–141 at p. 132.

[73]. ibid., p. 136.

[74]. Liam Brown, op. cit. p. 613.

[75]. Hoy Mobile Pty Ltd v Allphones Pty Ltd (No. 2) [2008] FCA 810 at paragraphs 410–418.

[76]. Economic and Finance Committee, op. cit., p. 58.

[77]. Economic and Finance Committee, op. cit., p. 60.

[78]. Therese Hanna, ‘Court of Appeal rejects tortious duty of good faith’, Law Society Journal, vol. 45, no. 10, November 2007, pp. 78-79 at p. 78.

[79]. [2007] NSWSC 789 (24 July 2007).

[80]. ibid., paragraph 27.

[81]. Independent Committee, Review of the Disclosure Provisions of the Franchising Code of Conduct, op. cit., p. 46.

[82]. [1999] FCA 903.

[83]. ibid., paragraphs 37 and 46.

[84]. Brendan Bailey, Trade Practices Amendment (Fair Trading) Bill 1997, Bills Digest no. 55, Parliamentary Library, Canberra, 1997-98.

[85]. ‘Unfair contract terms’ are terms which disadvantage one party and which are not reasonably necessary to protect the legitimate interest of the other.

[86]. Productivity Commission, Review of Australia’s Consumer Policy Framework, Productivity Commission Inquiry Report, Nno. 45, vol. 2, 30 April 2008, p. 149.

[87]. ibid.

[88]. ibid., p. 151.

[89]. ibid.

[90]. ibid., p. xi.

[91]. [2004] NSWCA 15 (20 February 2004).

[92]. ibid., at paragraph 192.

[93]. Angelo Capuano, ‘Not keeping the faith: a critique of good faith in contract law in Australian and the United States’, Bond Law Review, vol. 17, no. 1, 2005, pp.29-48 at p. 32.

[94]. Watseka First International Bank v Ruda 135 2d 140 (Ill, 1990).

[95]. Elizabeth Peden, ‘When common law trumps equity: the rise of good faith and reasonableness and the demise of unconscionability’, Sydney Law School Legal Studies Research paper,no. 06/57, University of Sydney, November 2006, p. 1.

[96]. For a detailed discussion of the legal meaning of ‘goodwill’ see the decision of the         High     Court in Commissioner of Taxation (Cth) v Murry [1998] HCA 42; 193 CLR 605;       155 ALR 67;    72 ALJR 1065 (16 June 1998) at paragraphs 12–52.

[97]. Inland Revenue Commissioners v Mull and Co’s Margarine Ltd [1901] AC 217 at 223.

[98]. A. Terry and PD Giugni, ‘Freedom of Contract, Business Format Franchising and the Problem of Goodwill’, Australian Business Law Review, vol. 23, no. 4, August 1995, pp. 241–258 at p. 242.

[99]. Inland Revenue Commissioners v Mull and Co’s Margarine Ltd [1901] AC 217 at 223–224.

[100]. Jenny Buchan, Oral Evidence to the Economic and Finance Committee, Parliament of South Australia Hansard, 19 March 2008 p. 112.

[101].     A. Terry and PD Giugni, op. cit., p. 242.

[102]. (1989) 91 ALR 251.

[103]. ibid. at 257-258.

[104]. Economic and Finance Committee, op. cit., p. 71.

[105]. A. Terry and PD Giugni, op. cit., p. 244.

[106].  Small Business Development Corporation, op. cit., recommendation 3.2, p. iv.

[107]. Economic and Finance Committee, op. cit., p. 75.

[108]. Warwick Konopacki, Managing Director, The Cheesecake Shop, Submission to Parliamentary Joint Committee on Corporations and Financial Services, 16 September 2008.

[109]. Economic and Finance Committee, op. cit., p. 47.

[110]. Subclause 29(6) of the Code.

[111]. Small Business Development Corporation, op. cit. p. 13.

[112].     Economic and Finance Committee, op. cit., p. 47.

[113].     ibid., p. 48.

[114].     Economic and Finance Committee, op. cit., p. 54.

[115].     ibid., p. 53.

[116].     Paul Venus, ‘Court directed compulsory mediation – attendance or participation?’ Australian     Dispute Resolution Journal, vol. 15, 2004, pp. 29–37 at p. 29.

[117].     ibid., p. 32.

[118].     [2001] NSWSC 209.

[119]. [2001] NSWSC 427.

[120]. Remuneration Planning Corporation Pty Limited v Fitton [2001] NSWSC 1208, para. 3.

[121]. For example Kilthistle No. 6 Pty Ltd and Ors (Receiver and manager appointed) v Austwide Homes Pty Ltd and Ors, Federal Court of Australia, No. 9. of 1996, 1383 of 1997, 28 November 1997.

[122]. See for example, rule 329 of the Uniform Civil Procedure Rules (Qld).

[123]. Paul Venus, ‘Court directed compulsory mediation – attendance or participation?’ op. cit., p. 34.

[124]. ibid.

[125]. Capolingua v Phylum Pty Ltd (as Trustee for the Gennoe Family Trust) (1991) WAR 137 at 140.

[126]. Paul Venus, ‘Court directed compulsory mediation–attendance or participation?’ op. cit., p. 34 .

[127]. Richard Evans, ‘ARA: let new franchising enquiry ‘be the last’ – peak retail body slams ‘political posturing’’, Media Release, Australian Retailers Association, Sydney, 11 July 2008.

[128]. House of Representatives Standing Committee on Industry, Science and Resources, Finding a Balance: Toward Fair Trading in Australia, Canberra, May 1997, p. 86.

[129]. Stephen Giles, ‘Multiple organisations’, Business Review Weekly, 10 July 2008, pp. 44–45.

 

 

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