Of the 11 recommendations made in Ripoll’s report, one fierce battleground stands out: the insertion of a good faith clause in the Code.
For Frank Zumbo, the idea of a “good faith” clause that would require franchisors and franchisees to act in a fair and reasonable way at all times is a no-brainer.
“This would simply implement good franchising proactively. Good franchisers do act with good faith towards their franchisees. They work cooperatively towards mutual benefit,” he says.
Zumbo says that while a number of judges have said an obligation to act in good faith is implied in franchising agreements, putting the clause into the Code would ensure that no franchisor could expressly exclude this obligation from a franchise agreement.
Andrew Robinson, a lawyer who represents the Motor Traders’ Association of New South Wales, also supports the insertion of a “good faith” clause in the Code.
“What a good faith obligation does is say: ‘You may have a negotiated a right to do something, but is it fair for you to do it that way?’”
Car dealers, like many other franchisees, argue a good faith clause would help protect franchisees when a franchise agreement comes to an end.
Franchise agreements often required dealers to invest millions on refurbishing dealerships, intellectual property and specialist tooling. But most agreements – even ones negotiated on a “rolling basis”- can be terminated with as little as a few months’ notice and without compensation. The MTA argues a “good faith” clause could help prevent incidents of unfair termination.
But Franchise Council CEO Steve Wright says this is precisely why his organisation is dead against the insertion of an explicit good faith clause in the Franchise Code.
“This remains an issue where there’s a difference between a concept and the reality of what proponents of a change actually want. What they are seeking is a change to end-of-term arrangements. And frankly that would upturn 25 years of franchising history.”
The Franchise Council’s position on good faith is a little complex.
Like Zumbo, Wright agrees that the concept of good faith has been established in case law.
“The concept of good faith in negations is something we regard as being evident in different parts of the Trade Practices Act and it’s certainly something we regard as a part of the ethical beahviour that we insist on with all our members.”
Despite this, Wright argues that inserting an explicit good faith clause into the Franchise Code would actually create confusion, because no-one would know exactly what it would mean.
He says what the proponents of good faith really want to do is use the clause to force franchisors to automatically negotiate the renewal of a franchise agreement or at least pay a franchisee whose agreement has expired an entitlement for goodwill.
“What we are opposed to is being used as a proxy for goodwill entitlements or automatic renewal of a franchise agreement.”
Wright also argues that the insertion of a good faith clause without proper definition would create uncertainty and lead to a rash of litigation.
But Andrew Robinson calls that a smokescreen. He points out many laws are based around the equally subjective idea of “reasonableness”. “And we haven’t had any problem dealing with that,” Robinson says.
Perhaps most persuasively, Robinson notes that Australia’s largest car company, Toyota, has already incorporated explicit good faith provisions into its dealer agreements.
Despite the level of feeling around good faith, industry insiders believe it is highly unlikely that this clause will be added to the Franchising Code.
The Franchise Council’s Steve Wright expects “enhancement rather than major overhaul” particularly around the areas of disclosure and mediation.
It appears likely Emerson will push for rules that will result in improved disclosure around what happens at the end of a franchise agreement and what happens in the event of franchisor failure appear likely to be brought in.
Wright says franchisors will be supportive of this. “There are just some things that can be made crystal clear from the start. Almost all franchise agreements have something in there about franchisee failure, so I don’t think it’s an outrageous request to look to have that from the franchise perspective.”
He also expects Emerson to focus on improving accessibility to and the cost of mediation. Wright says the Federal Government may look to replicate the mediation process run by Victoria’s Small Business Commissioner, which has proven to be cheaper for parties to access than the process run by the main franchising mediation body, the Office of the Mediation Adviser.
The disclosure and mediation changes are likely to be welcomed by all segments of the franchising sector. But while Wright would welcome an end to the run of government inquiries into the sector, these modest “enhancements” are unlikely to silence the vocal group of franchisers and ex-franchisees pushing for change.
“My concern is that we’ll get a minimalist response from the Minister, or worse, we’ll get no action,” Zumbo says.
“The last thing we need is window dressing. We need clear leadership. We need those recommendations from the Ripoll report implemented.”
James was the editor and publisher of SmartCompany and LeadingCompany for five years. He is now the Australian Financial Review‘s companies & markets editor, and a former BRW editor.
