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Global Trends in Franchise
Regulation and the Australian
Experience:
Lessons for New Zealand.
Andrew Terry
School of Business Law and Taxation
Australian School of Business UNSW
Franchise Law Reform Symposium
New Zealand Governance Conference
University of Auckland
25 June 2009
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The Regulatory Debate
The increasing influence of franchising has beenaccompanied by an increasingly vigorous international
debate as to the regulatory environment for franchising.
Does an effective legal environment for franchising
require a regulatory regime dedicated to the franchising
sector?
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In a perfect world we would not have
franchising at all because I think they are allnonsense
J R Rau MP
Member of the Economic and Finance
Committee of the Parliament ofSouth Australia, Franchising Inquiry,
Hansard, 10 October 2007
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The Regulatory Issues
Franchises are not ordinary commercial contracts.
These were not ordinary commercial
contracts but contracts giving rise to longterm mutual obligations in pursuance of
what amounted in substance to a joint
venture and therefore dependent upon
coordinated action and cooperationPrivy Council in Dymocks
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Relational and standard form characteristics.
The extra-legal norms which explain relational
contracting are less compelling in the context of the
typical business format franchise which is characterisedby both an information imbalance and apower
imbalance.
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The Relational Dimension
the business context.
Empirical studies by Macaulay(US 1960s) / Beale
and Dugdale(UK 1970s) suggest that:
Detailed negotiated contacts interfere with the creation of good
business relationships. Businessmen largely operate in a contractual vacuum and do not
behave as classical contract theory would lead us to believe.
People engaged in business often find that they do not needcontract planning and contract law because of relational
sanctions. Even discrete transactions take place within a setting of
continuing relationships and interdependence. The value of theserelationships means that all involved must work to satisfy eachother. Macaulay
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the legal context
Increasing recognition that traditional contract doctrineunsuitable for relational contracting.
Law and Economics School took up challenge of adopting modern
Contract Law to commercial reality (Macneil 1978, Goetz and
Scott 1981, Hadfield 1990) Relational contract theory developed to explain adequately the
nature and function ofrelational contracts and how they differ
from more standard contacts. (Goetz and Scott)
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Contractual Analysis
Traditional Classical Contract
Theory Relational Contract Theory
Important terms of the
contract are reduced to well-
defined obligations which areinterpreted and enforced
without reference to
associated but external legal
norms
Obligations arise not only from
written document but from thenorms of the ongoing relationship
which supplement the written
terms
Delivers predictability and
certainty albeit at cost of
disregarding legitimate
business expectations
Parties should be accorded
reasonable security for the
protection of justified expectations
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What is a relational contract?
the existence of a business relationship between the parties and the need to
maintain that relationship
the difficulty of reducing important terms to well defined obligations
the impossibility of foretelling all the events which may impinge upon the
contract
the need to adjust the relationship over time to provide for unforeseen factors
or contingencies which cannot readily be provided for in advance
the commitment, likely to be extensive, which one party must make to the
other, including significant investment;
incomplete in failing to allocate, or allocate optimally, the risk between the
parties in the event of certain future contingencies.
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Relational Factors:
relationship (rather than mere exchange or transaction)
continuing and long term
interdependence
cooperation
communication
mutual trust/confidence
respect
flexibility
reliance
highly interactive
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A relational contract is one which involves not merely an
exchange but a relationship between the contractual parties. The
parties are not strangers in the accepted sense and much oftheir interaction takes place off the contract requiring a
deliberate measure of communication, co-operation, and
predictable performance based on mutual trust and confidence.
Expectations of loyalty and interdependence mark the formation
of the contract and become the basis for the rational economic
planning of the parties.
Thomas J, dissenting, in Bobux Marketing Limited v Raynor Marketing Limited[2002] 1 NZLR
506, 516 (Court of Appeal) adopted by Bolland J in Gough & Gilmour Holdings Pty Limited vCaterpillar of Australia Limited (No 11) [2002] NSW IR Comm 354 (NSW Industrial Commission)
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Is Franchising a Relational Contract?
Franchising presents as the archetypal example of a relationalcontract.
It exists in a world of contractual incompleteness and relationalcomplexity in which
the parties are not strangers; much of their interaction
takes place off the contract, mediated not by visible terms
enforceable by a court, but by a particular balance of co-
operation and coercion, communication and strategy
Hadfield
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Consequences of relational categorisation
controversial
contractual obligations are often modified, supplemented or completelyoverridden by the norms of the on-going relationship
doctrinal tool relied upon to bring the resolution of franchise disputes inline with realities of the franchise relationship is invariably the implied
term of good faith.The norms of the ongoing relationship, of necessity, tend tosupplement the express contractual obligations. Good faith isrequired to ensure that the requisite communication, co-operationand predictable performance occurs for the advantage of bothparties. In short, the obligation seeks to hold the parties, to the
promise implicit in a continuing, relational commercial transaction.Thomas J in Bobux
a work in progress
regulation necessary to free parties from the dubious mercy of classical
bi-lateral contract law (Hammond J in Dymocks) 13
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The Standard Form Dimension
information imbalance
power imbalance
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The Regulatory Challenge
Entrepreneurship and business creation in a free societynecessarily includes an element of risk and it should certainly notbe the role of Government to remove risk. Nevertheless inparticular circumstances of franchising there are elements quitedifferent to normal business development because of the control ofthe franchisor which can be an overriding risk for the other thanpurely business or commercial reasons.
Those special additional risks arising in part because of the balanceof power in the franchising relationship should be minimised whileleaving the commercial risks and decision to be handled by theparties concerned
Council of Small BusinessOrganisations in Australia,
Submission on First Exposure Draft of
1986 Franchise Agreements Bill
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franchising is a unique and proven model for business
development
entrepreneurship involves risk
not the role of government to remove risk
But in the particular circumstances of franchising: Are there elements quite different to normal business
development because of the control of the franchisor which can
be an overriding risk for other than purely business or
commercial reasons?
How can these additional risks be minimised while leaving the
commercial risks to be handled by the parties?
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The Regulatory Strategies
Registration
Prior disclosure
Regulating conduct in the relationship
Dispute resolution
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Registration
from full audit to mere filing/recording
applies in various jurisdictions to either franchisor, franchisee,
franchise contract, or franchise activities
annual reporting requirement common
disadvantage of imprimatur of competence
advantage of statistical data base
annual filing of disclosure document?
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Prior disclosure
No law can, or should, act to prevent the holding or seeking of high
aspirations, however unlikely to be satisfied. However, it has been a longstanding philosophy of free enterprise government that it is a legitimate
role of government to provide, or cause by law to be provided, an
accurate informational framework within which individual aspirations
are formulated .
Trade Practices Consultative Committee 1979 adresses the information imbalance
facilitates due diligence
UNIDROIT Model Disclosure Law 2002
wide acceptance
uncontroversial
not a restriction on business but a common sense and firm basis for doing business
within the peculiarly close relationship of a franchise and in accordance with normal
business practice.
extent/degree of disclosure contentious
compliance costs 19
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Regulating conduct in the relationship
more controversial fairness and allocation of risk in entrepreneurial activity
encroachment of freedom of contract
uneven acceptance
no universal precedent
function of disclosure to warn of unduly onerousobligations
variety of approaches prescribed rights and obligations
general standards of conduct
specific standards of conduct
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Dispute resolution
generally required to be addressed in agreement or via priordisclosure
mediation process as prerequisite to litigation or arbitration
except in limited circumstances
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The international regulatory experience
voluntary self-regulatory Codesof Practiceadopted by national franchise associations
franchise specificregulation
Mandatoryregulation by law
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The regulated sectors internationally
23Note: Year is of first franchise regulation.
Note: Little uniformity in nature, extent, scope and comprehensiveness of regulation
Albania 1994
Australia 1998
Barbados 1975
Belarus 1998Belgium 2006
Brazil 1994
Canada
Model Law 2005
Alberta 1980
Ontario 2001New Brunswick 2007
PEI 2007
China 1997
Croatia 2003
Estonia 2002
France 1991Georgia 1997
Indonesia 1997
Italy 2004
Japan 1983
Kazakhstan 2002
Korea (South) 1997
Kyrgyzstan 1998
Lithuania 2000
Macau, China SAR 2000Malaysia 1998
Mexico 2001
Moldova 1997
Romania 1997
Russia 1996
Saudi Arabia 1992
Spain 1996
Sweden 2006
Ukraine 2004
Taiwan 1999
USA
federal 1979
state 1970
Venezuela 1992
Vietnam 2006
Unidroit Model Law 2002
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The regulatory models
Disclosure
Belgium
Brazil
France
Japan
Sweden
Taiwan
Disclosure & Conduct
Albania
Canadian provinces
Georgia
Italy
Romania
Disclosure & Registration
Indonesia
Mexico
Spain
Disclosure, Registration & Conduct
China
Macau
Malaysia
Moldova
Vietnam
Disclosure, Conduct & DisputeResolution
Australia
Korea
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25
Registration
Croatia
Barbados
Registration & Conduct
Belarus
Kazakhstan
Kyrgyzstan
Saudi Arabia
USA
Disclosure: federalConduct: federal (auto/petrol) and
most states (general, sectoror issue specific)
Registration: state (14 states)
Conduct
Estonia
Lithuania
Russia
Ukraine
Venezuela
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The regulatory experience in Asia
26
regimes
Australia
China
Korea
Malaysia
Vietnam
minimalist regulatory regimes
Indonesia
Japan
Kazakhstan
Kyrgyzstan
Macau SAR
Russia
Saudi Arabia
Taiwan
sector self regulation
Hong Kong
India
New Zealand
Philippines
Singapore
regulation imminent?
India
New Zealand
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Registration
27
Australia China Korea Malaysia Vietnam
registrationrequirement
filing/recording onsubmission of
documentation
audit andregistration
annual reporting
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Prior disclosure
28
Australia China Korea Malaysia Vietnam
franchisee priordisclosure
franchisor priordisclosure
franchisorcontinuingdisclosure
days pre contract /payment
14 30 5 10 15
prescribeddisclosuredocument
warning/advice tofranchisee
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Prior disclosure items
29
Australia China Korea Malaysia Vietnam
contract issues
reference to / summary of key
contract obligations
non contract issues
franchisor information /experience / litigation
start-up costs
general sector information
existing franchise network
non-renewals / terminations /
transfers / buy-backs, ceasingoperation
material
litigationandarbitration
termination
earnings claimsjustify if
given
justify ifgiven
franchisor financial
statements
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Conduct
30
Australia China Korea Malaysia Vietnam
general
standards ofconduct
good faith good faith
best business
practice
termination notice
term / renewalterm (3 years
minimum)renewal (noticeof non renewal)
transfer
other
franchiseeright toassociate
prohibition ofgeneralrelease of
liability marketing
funds
copy ofassociatedlease
confidentiality dutiesconsolidated
Unilateralamendment
confidentiality
post terminationrestraints
conduct notreasonable toprotectlegitimatebusinessinterests
dutiesconsolidated
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Franchise agreement
31
Australia China Korea Malaysia Vietnam
Mandatory content *
Cooling off
Certification reindependent advice
* prior disclosure of specific contractual obligation
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Dispute resolution
3
Australia China Korea Malaysia Vietnam
Mediation as pre-requisite to litigation /arbitration
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Other pre-conditions to franchising
33
Australia China Korea Malaysia Vietnam
none
two stores/one year
operation for one year
general discretion to
refuse registration
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increasing recognition that in the special circumstances of franchising
there are elements sufficiently different to normal businessdevelopment to justify regulation clear trend to regulation no consistent regulatory strategy no consistency within a particular strategy prior disclosure laws widely adopted
no meaningful franchisor constituency for not supporting pre-sale disclosureUnidroit Model Lawsymbolicalmost universal acceptancelittle uniformity in extent of disclosure
conductlaws increasingly common and surprisingly uncontroversial registration laws most common in developing sectors (US the
exception) no horror stories no standard form template for regulation
policy objectives in developing economies
The international experience
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The Australian Regulatory Experience
The Australian regime is draconian, too wide ranging in itsapplication, costly in terms of compliance and often ineffective in
terms of providing relevant protection to franchisees and
potential franchisees.
FANZ, ORFR para 19
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The new Australian regulation makes Australia the leastdesirable destination in the world for franchise systems .
[Franchisors] should avoid Australia until they have nowhere
else to go and even then it would be a close call.
Martin Mendelsohn 1999
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Australian
franchise
sector
Commercial laws
of general
application
General regulation
through legislative
prohibition of
misleadingandunconscionable
conduct
Specific regulationunderFranchising Code
of Conduct
General regulation
through term ofgood
faith implied at law asa necessary incident
of a franchise
contract
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The Franchising Code of Conduct
mandatory prior disclosure prior disclosure document containing over 200 items of information
continuing disclosure of key information
no recording / vetting / registration
mandatory regulation of particular conduct / relationship issues:
7 day cooling-off period
freedom to associate with other franchisees
prohibition on any general release of the franchisor from liability
disclosure requirements regarding marketing funds
freedom for the franchisee to transfer franchise
restrictions on the franchisors right to terminate
mandatory mediation
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Misleading or deceptive conduct
A corporation shall not, in trade or commerce, engage inconduct that is misleading or deceptive or likely to mislead
or deceive
s52 Trade Practices Act1974 (Cth)
(and state/territory equivalents) the quiet achiever in franchise regulation
liability cannot be excludedbut increasingly innovative use of
contractual devices topreventmisleading conduct arising or to
preclude reliance cure not prevention
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Unconscionable conduct
A corporation must not, in trade or commerceengage inconduct that is in all the circumstances, unconscionable
s51AC(1) Trade Practices Act 1974 (Cth)
a more liberal unconscionability regime freed from the
limitations of the equitable doctrine unconscionability not defined but determined having regard
to the discretionary unconscionability factors.
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The discretionary unconscionability factors The relative strengths of the parties bargaining positions
Whether conditions not reasonably necessary for the protection of thelegitimate interests of the stronger party were imposed
Whether the weaker party was able to understand relevant documents
Whether undue influence or pressure, or any unfair tactics, were used
Whether and on what terms equivalent goods or services could have beenacquired from or supplied to other persons
Whether the stronger parties conduct was consistent with its conduct insimilar transactions
The requirements of any applicable industry code
The requirements of any other industry code if there was a reasonable beliefthat it would be complied with
Whether the stronger party unreasonably failed to advise of intended
conduct that could have a detrimental affect Whether there was a contractual right to vary unilaterally a term or condition
of the contract
The extent to which the stronger party was willing to negotiate contract terms
The extent to which the parties acted in good faith
41
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ACCC v Simply No Knead (Franchising) Pty Ltd
(2000) FCA 1365
The operation of the franchise depended on the supply of products from
the franchisor and group advertising for the franchise as a whole. Theallegation of unconscionable conduct was based on the following conduct:
Refusing to deliver franchise system products to franchisees.
Refusing to negotiate with franchisees and to discuss matters ofconcern to franchisees.
Deleting franchisees telephone numbers from Telstras 013Telephone Directory Assistance Service without consent or theknowledge of the franchisees.
Producing and distributing advertising and promotional materialwhich omitted the names of the franchisees and their franchisedbusinesses.
Selling and offering to sell its products in the territories of thefranchisees and in areas proximate to their territories; and
Refusing to provide current disclosure documents to franchisees inresponse to written requests
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Having regard to the discretionary unconscionability criteria
and the circumstances of the case, the franchisors behaviour
disclosed an overwhelming case of unreasonable, unfair,
bullying and thuggish behaviour in relation to each franchisee
that amounts to unconscionable conduct by SNK for thepurpose of s51AC
Sunberg J
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s51AC and the franchise sector
potential application to a range of circumstances at all stages in therelationship
little judicial guidance as few actions litigated
limited to extreme conduct which can be seen in accordance with the
ordinary concepts of mankind to be so against conscience that a court should
intervene good conscience does not require parties to contractual negotiations to
forfeit their advantages or neglect their own interest-that is the stuff of
ordinary commercial dealings
distinction between adopting an opportunistic approach to strike a hard
bargain and acting unconscionably
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Senate Standing Committee on Economics, The need, scope andcontent of a definition of unconscionable conduct for the purposes
of Part IVA Trade Practices Act 1974, December 2008
s51AC has fallen short of its legislative intent
addresses unconscionable conduct in theprocess of contractingrather than in the substantive bargain struck
regulator and courts have not pursued critical test cases lack of clarity and guidance
statutory definition not recommended
replacing unconscionable with unfair not recommended
target particular instances to clarify unconscionability
franchise sector should produce list of clear examples ofunconscionable conduct
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Consultation on Draft Provisions of Unfair
Contract Terms, May 2009
an unfair term of a standard form contract is void
power to prohibit terms considered to be unfair
a term is unfair if it
would cause significant imbalance in the parties rights andobligations
is not reasonably necessary to protect legitimate interests
considerations the court must take into account
specified B2B transactions including franchising included
negotiation removes a transaction from the scope ofthe provisions
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Good faith
implied in facton an ad hoc basis based on the presumedintention of the parties
implied in lawas legal incident of the relationship
wide, allbeit not unanimous, support
The precise boundaries of the standard have evaded the
grasp of precise judicial statementJobern [2007] FCA
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Meaning of good faith uncertain
the antithesis of bad faith
honesty
fairness
absence of opportunistic conduct/extraneous orulterior purposes
legitimate interests
reasonable expectations
community standards
reasonableness
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Limitations
inconsistent contract provisions
exclusion?
independent source of obligations?
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2008 Federal Opportunity not Opportunism report
notes concerns because of the continuing absence of an
efficient overarching standard of conduct for parties entering a
franchise agreement
recommendation for a new clause in FCC:
Franchisors, franchisees and prospective franchisees
shall act in good faith in relation to all aspects of the
franchise agreement
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The concept of good faith has gained traction as the solution to all realand imagined ills within the franchising sector. For those agitating for reformit has assumed symbolic significance and, if introduced, would be argued toaccommodate circumstances beyond any appropriate sphere of influence.Good faith is a seductive concept for franchisees and for the franchiseregulators but it will not be interpreted by the courts to provide theuniversal solvent the knights of good faith seek. The Aussie mantra of a fairgo is a beautiful thing but the operation of good faith will be interpretedmuch more narrowly. The perception that good faith is the universalsolution is both misleading and dangerous, but is given life by the equatingof good faith with ethics. A principle of good faith must presumably accord
with ethical standards and community values, but this is not, and should notbe, a concept the content of which is defined by them.
While an understanding of good faith as requiring a fair go would beenthusiastically received as a panacea for both the real and imagined ills ofthe sector, the reality of good faith as a legal concept is quite different. If
franchisor opportunism is a problem warranting legislative intervention thisshould be addressed by carefully crafted legislative responses rather than bydefaulting to an undefined and overarching standard of indeterminatescope and application.
Terry and Di Lernia, Franchising and the Quest for the Holy Grail: good faith or good intentions?2009 MelbourneUniversity Law Review, forthcoming
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NZ perceptions of Australian regime
FANZ
draconian
too wide ranging in application
too costly in terms of compliance
often ineffective in providing relevant protection to
franchisees and potential franchisees
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Minister Simon Power
numerous inquiries and reviews resulting in several
amendments creating onerous and complex disclosure requirements leading to increasing compliance costs for franchisors and
information overload for franchisees (para 24)
small number of franchising complaints to ACCC with concerns
often arising due to a failure to take proper precautions prior toentering the contract (ACCC) (para 25)
unrealistic expectations (DIISR)(para 26)
significant lobbying pressure to amend the Code (para 26)
regulatory uncertainty for franchisors (para 26)
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Other
the wording of the code has caused many
headaches
regulation encourages disputation
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draconian
Our members believe the Code has had a beneficial effect on the franchisingsector. There is overwhelming support for the existence of a Code and thefranchise sector does not seek to revise the Code from a policy perspective.
Franchise Council of Australia
At a time when most businesses are seeking a lessening of the regulatoryburden imposed by government, the franchising industry has been preparedto accept regulatory measures to protect the image and credibility of theindustry.
The Franchising Policy Council is of the view that the Code has been asuccessful initiative for small business in Australia. There is strong supportfrom most participants in the franchising industry for the mandatoryFranchising Code of Conduct
Franchise Policy Council
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too wide ranging in application
There is a significant amount of debate about how to define a franchise.Legal definitions of a franchise in countries that have introduced legislationhave been criticised for being too narrow, allowing people to structure theirbusiness to avoid regulation, or too wide, capturing businesses which are notfranchises. (para 5)
. a risk arises that any definition would either be too narrow, allowingpeople to structure their business so as to avoid legislative requirements, ortoo wide, capturing business structures that are not franchises. (para 34)
the definition used in Australia has been criticised as being too broad,capturing a wide range of business structures and creating uncertainty forother businesses who are unsure whether they have to comply with the Codeor not. (para 35)
20% of *US franchise lawyer Rupert Barkoffs] work as a franchisepractitioner is in advising clients on how to design their business model sothat it did not fall under the definition of franchise. (para 35)
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Code definition incorporates:
brand
system or marketing plan
payment
specific inclusions/exclusions
franchising v licensing/distributorships
ACCC v Kyloe [2007] FCA
clarify the relationships to be regulated and draft the definition
little scope for contracting around the definition
business dependency as a key element
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too costly in terms of compliance
regulation imposes an initial and ongoing financial andadministrative burden
FANZ Code disclosure obligations impose compliance costs
the Australian experience
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Regulation originally impacted on sector growth
Franchise systems Outlets
1998 693 38,500
1999 708 41,000
2002 700 44,000
2004 850 50,600
2006 960 61,850
2008 1,100 71,400
But:
exit/discouragement of inappropriate franchisors
encouragement of new franchisees
presumption of strong and sustained growth
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Often ineffective in terms of providing relevantprotection to franchisees and potential franchisees
The overwhelming success of franchising has attracted anumber of unscrupulous operators looking to capitalise on therapid growth in the sector, by deceiving potential small businessowners with offers of bogus or unworkable franchisingopportunities.
The ACCC enforcement actions have been successful indiscouraging these operators and it may be observed that the
introduction of the Code and its administration by the ACCC hasdissuaded a large number of illegitimate and dubious franchisesystems from operating in Australia
ACCC
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Onerous and complex disclosure requirements
increased compliance costs
information overload for franchisees
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Small number of franchising complaints
arising, primarily, from failure to take proper
precautions
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Franchising Complaints to ACCC
Franchising Council of Australia Legal Symposium
ACCC report card on franchising issues
John Martin, Commissioner
11 October 2007, Melbourne
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Breakdown of the ACCC investigatedfranchising
complaints outcomes 2006/2007
Resolution Number
No breach 11
Insufficient evidence 12
Referred to other agency 2
Guidance / information provided 24
Administrative resolution 1
No action 3
Active investigations 53
Total 106
ACCC
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Three main categories of franchising disputes
unconscionable conduct in business transactions; and
misleading and deceptive conduct/misrepresentations or
disputes around the terms of franchising agreement
These concerns generally fall into three broad categories:
scams, frauds or outright exploitation;
issues arising from structural market pressures; and/or
poor relationship management
ACCC
It is the ACCC experience that franchising complaints usuallyallege problems in at least one of two areas under the Trade
Practices Act 1974
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The most challenging complaints to deal with for the ACCC areallegations and disputes resulting from the remaining two
categories structuraland/orpoor relationship managementissues.
These generally manifest as persistent complaints ofunconscionable conduct, harassment and coercion and/ormisleading and deceptive conduct and present as a complexweb of interlinking accusations and claims, requiring timeconsuming investigations to untangle.
However, despite the painstaking analysis these matters rarelyuncover breaches of the Code or theAct.
ACCC
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unrealistic expectations
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constant review and regulatory uncertainty
Code will need to remain dynamic and subject to
review as the franchising sector evolves.
Opportunity not opportunism report
Franchising Code of Conduct Options Paper released
for industry consultation on 21 June 2009
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Opportunity not opportunism recommendations
Disclosure
Clear statement of liability/consequences to
franchisees in event of franchisor failure
process that applies in determining end of
term arrangements having due regard to the
potential transferability of equity in the value
of the business as a going concern
69
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Registration
Simple online registration system requiringfranchisors to lodge statement
Confirming nature and extent of franchise
network annually Providing guarantee of meeting obligations
under the Code and TPA
70
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Standards
Franchising parties to act in good faith in
relation to all aspects of a franchise
agreement
Government to explore avenues to better
balance rights and liabilities of franchisors and
franchisees in event of franchisor failure
71
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Enforcement
Pecuniary penalties for Code breaches
Pecuniary penalties for TPA unconscionability
and misleading conduct breaches
Broader ACCC powers to investigate when it
receives credible information indicating that a
franchising party may be engaging in conductcontrary to Code obligations
72
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The wording of the Australian Code has caused
many headaches
Code was drafted in haste and secrecy
73
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regulation encourages disputation
74
The Australian perception of the Australian
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p p
experience
the Australian experience with regulation is overwhelmingly
positive:
wide sector acceptance discouragement of scam merchant franchisors greater confidence among prospective franchisees
greater certainty (eg termination/transfer) higher standards / best practice better and stronger relationships at all stages fewer disputes more effective dispute resolution management tool for franchisors
increased public confidence better relationships between franchise sector and media/ government focus for sector education, research, networking catalyst for strengthening role of FCA as peak sector body change in public perception/symbolism sector development
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Ironic that regulation imposed to discipline a sector has become a badgeof pride for it a recognition that franchising is important enough to
warrant its own regulatory regime
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The New Zealand Response
Overall, I do not believe that there is a need for the introduction
of franchise specific regulation at this time
Hon Simon Power,
11 June 2009
Franchisees are left to the dubious mercy of the classical bilateral
law of contractsHammond J in Dymocks
77
franchising is not unique compared to other
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franchising is not unique compared to other
commercial relationships
difficult to argue that franchising is unique enough from
other types of businesses and contracts to necessitate
specific regulation (para 70)
FANZ favours the status quo as it does not think that there are
any particular features of franchise contractswhich
necessitate franchise specific regulation (para 18)
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But
Franchising can differ from other ways of doingbusiness as franchise contracts are both
relational (leaving many aspects unspecified) andstandard form (take it or leave it') contracts. Thismeans they must be flexible but also cannot benegotiated. This results in a large amount of
discretion being given to the franchisor, while thefranchisee has an increased amount ofuncertainty and risk. (para 4)
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There are several aspects of this way of doing business whichdiffer from some other standard contractual relationships:
It is an ongoing relationship, rather than a single buy and sell
transaction which may typically be covered by contract law; Issues of disagreement often cannot be usefully litigated as a court
case is likely to destroy an ongoing relationship, whatever theoutcome;
There are power imbalances in many franchise agreements and,while these exist in other contractual relationships, the fact that the
franchisor controls the use of the trademark and marketing systemgives rise to particular market power imbalances. This is because afranchisee's entire business may depend on the trademark andmarketing system;
As there are usually a number of franchisees, there can beproblems of equity of treatment and there can also be difficultieswhen a franchisor operates outlets which may compete withfranchised outlets; and
Obtaining information prior to an agreement can be difficult. (para28)
80
Franchise contracts are to varying degrees both relational
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Franchise contracts are, to varying degrees, both relationaland standard form contracts, which creates some tension.Relational contracts create continuous and long-lastingrelationships. They are defined by features ofincompleteness and longevity, and must be flexible. Often ahigh level of discretion is accorded to the parties and thecontracts rely on reciprocity and trust developed over time.On the other hand, the individual terms of standard formcontracts are not generally negotiated they are presented
on a take it or leave it' basis. An imbalance of power resultsand the lack of negotiation can make it more difficult for theterms of the contract to be fully understood. Thecombination of these in a franchise contract gives a largeamount of discretion being given to the franchisor, while the
franchisee has an increased amount of uncertainty and risk.(para 29)
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little evidence of widespread problems
there is little evidence of widespread problems withinthe sector. (para 70)
FANZ favours the status quo as it does not think that thereare any widespread problems in the sector whichnecessitate franchise specific legislation. It does notbelieve that franchising should be singled out from otherforms of business. (para 18)
Contrast with Australia where a series of reports haveidentified problems within the sector
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1970s - entry of the US franchised fast food systems andadoption of the concept by local businesses
1980s - franchising emerges as a significant economicforce
1980s - bad practices, bad press and increasinggovernment scrutiny
1990s - increasing growth, bad practices and government intervention2000s - Australian franchising sector has the greatest
concentration of franchise systems per capitaamong the worlds major economies
- a mature, highly significant, diverse and dynamicsector
- includes virtually all consumer products and services- increasing influence in B2B and quasi-professionalservices
franchising development in Australia
83
1976 Swanson Report
19 9 l
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84
1979 Blunt Report
1986 Franchise Agreements Bills Consultative Papers
1990 Beddall Report
1991 Franchising Task Force Report
1995 Gardini Report
1995 Better Business Conduct Discussion Paper
1996 Franchising Code Council Disputes Review
1997 Fair Trading Report
1997 New Deal: Fair Deal Statement
2006 Matthews Report (Review of the Disclosure
Provisions of the FCC)
2007 ACCC Report Card on Franchising Issues
2008 WA Report (Inquiry into the Operation of Franchise
Business in WA)
2008 SA Report (Franchises: Final Report)
2008 Federal Report ( Opportunity not Opportunism:
Improving conduct in Australian franchising)
Pre 1981 Regulation only under the general law
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85
1981 - 1987 Quasi-regulation under the prescribed
interest/managed investment scheme
provisions of the Corporations Law
1987 - 1993 Deregulation
1993 - 1996 Self-regulation under the voluntary Franchising
Code of Practice
1997 - 1998 Deregulation
1998 - current Regulation under the mandatory Franchising
Code of Conduct
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Unfair conduct by big business towards small business is [a] majorconcern [and] has been a matter of grave concern for many years.
Not only has such conduct the potential to impact heavily on the
economic health of the small business sector and on the allocation
of resources generally, it can also involve heavy social cost.
Australian Fair Trading Report 1997
86
d
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current processes adequate
There is insufficient evidence to indicate that currentprocesses are inadequate to address any issues (para 70)
Underlying laws of general application
FANZ Code of Practice
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Underlying general laws
not as comprehensive as NZ
franchise business accounts for about 10-12% ofeconomic activity in NZ but franchisees represent
about 30% of misleading conduct actions under the
FTA
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FANZ Code of Practice
FANZ Code provides strong protection
400 franchise systems in NZ with 350 active (what
is an inactive system??)
FANZ membership represents 40-50% of franchise
systems limitation of voluntary sector self regulation
coverage
consequences
Australian experience
89
ti i
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perception issues
the public's confidence in the franchising sector may have been
damaged following the cases of alleged fraud. Public confidence isimportant so that quality recruits are attracted to the sector,
allowing it to continue to grow and develop. (para 13)
introducing regulation to address perception issues was raised asa concern (para 16)
regulation is introduced to address information and power imbalanceissues
public confidence and perception issues are desirable byproducts
90
addressing the information imbalance does not
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g
solve the problem
it is unclear that current arrangements which encourage duediligence are inadequate, or the extent to which the options
above would be effective in addressing information imbalances.
(para 46)
There is not strong evidence to suggest that options to address
information imbalances would result in better outcomes than
the existing processes to encourage due diligence. (para 54)
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Mandatory information disclosure may also be ineffective,
especially in targeting vulnerable groups who may notunderstand or use the information that they are given.
(para 49)
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Information disclosure only relates to the formation of the contractand not its performance, where issues would usually arise. (para
50)
93
dd i t t l i b l t i ?
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addressing contractual power imbalance - not an issue?
A second group of options relates to addressing power imbalances and
the unilateral rights conferred upon franchisors under franchise
contracts. This could be done by mandating for certain contractual
terms to be included in franchise agreements, for example good faith'
bargaining or mandatory right of renewal. (para 55)
94
addressing enhanced dispute resolution
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addressing enhanced dispute resolution
low cost dispute resolution is a generic issue for small business and there
does not appear to be anything specific about this to franchising. (para 61)
it is unclear that there is a problem [with relational disputes] with currentarrangements or the extent to which mandatory mediation would beeffective. (para 64)
Mediation is only successful if both parties cooperate and are willing towork towards a solution. Therefore, making mediation compulsory forfranchise disputes may not necessarily work and could provide anopportunity to further draw out the resolution of disputes. (para 67)
Some disputes would also not be suitable for mediation, such as thoserelating to trademarks. In some cases, parties may need interlocutory reliefto act urgently and mediation would not be appropriate. (para 67)
Thus there is not a strong case for making mediation mandatory forfranchising. (para 68)
95
difficulties in regulating for better understanding,
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g g g
proper research and due diligence
Some problems appear to be the result of a lack of education
amongst franchisees and/or a failure to carry out appropriate due
diligence before entering into a franchise contract. It is difficult to
legislate to remedy this. (para 6)
While some see an information imbalance between franchisors and
franchisees, others see a lack of understanding among franchisees
and a willingness to enter contracts without doing the proper
research or due diligence which lead to disputes. It is difficult to
legislate to remedy this. (para 71)
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97
Franchiseprotection
Regulation
Specialistadvice
Disputeresolution
Due diligenceand research
Education andunderstanding
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many of the problems that can arise do not
appear to be exclusively problems with franchising,but issues which can occur in commercial
relationships generally. (para 42)
98
risks and costs outweighs benefits
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risks and costs outweighs benefits
It is also likely that the risks and costs of regulation wouldoutweigh the possible benefits. These include the small size
of the sector in New Zealand which would suffer from
potential compliance costs and the difficulty in defining
franchise'. (para 72)
99
the small size of the sector
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100
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the dearth of red tape and low costs associated
with introducing franchising to NZ makes itattractive to franchisors, particularly those from
Australia
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regulation will not prevent Green Acres
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UK does not have regulation
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Regulation interferes with freedom of contract
104
unclear that regulation would be the answer to
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any perceived problems. (para 71)
105
Conclusion
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Conclusion Franchisees are damaged, and franchising is diminished, by the
inappropriate practices of those who trade off the reputation offranchising without the ability to deliver on the promise of franchising
Franchising is not an ordinary commercial contract
There are elements quite different to normal business developmentbecause of the control of the franchisor which can be an overridingrisk for other than purely business or commercial reasons
Regulation can address the additional franchise specific risks while
leaving the commercial risks to be handled by the parties
Regulation on its own can never be a complete answer
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The experience in Australia under the mandatory Franchising
Code of Conductprovides comfort to those franchising sectorsfacing regulation that appropriate and balanced regulation can
have a beneficial effect on the franchising sector and encourage
its orderly development for the benefit of all stakeholders.
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