Australia Set to Recognise a Statutory Duty of Good Faith in Franchising

In a recent Franflash we reported on recent developments in the approach taken by the English courts to the concept of good faith.

Summary

In a recent Franflash we reported on recent developments in the approach taken by the English courts to the concept of good faith in certain types of long term commercial relationships, including franchising. We concluded that whilst it is too early to say that English law recognises a general duty of good faith, English law may be "swimming against the tide" as an increasing number of foreign (including common law) jurisdictions look to recognise a general duty of good faith in certain circumstances. Please click here to review the franflash and briefing paper.

Following the completion of a review of Australia's franchise law, it appears likely that our cousins "down under" will be swimming with the tide, as the Australian Government has decided to introduce a statutory duty of good faith.

Background

Australia has a mandatory Franchising Code of Conduct (the "Code") which has been prescribed under the Competition and Consumer Act 2010 ("CCA"). The Code regulates the conduct of parties to franchising arrangements.

Early this year, the Australian Government appointed Mr Alan Wein, an experienced franchising legal adviser, to conduct an independent review of the Code as part of an initiative by the Australian Government to support Australia's $130 billion franchising sector. In particular, Mr Wein was asked to look at:

• good faith in franchising;
• the rights of franchisees at the end of the term of their franchise agreements; and
• the operation of the provisions of the CCA as they relate to enforcement of the Code.

In gathering evidence to support findings for the final report, Mr Wein undertook consultation with industry and interested stakeholders. The report contained a number of recommendations to amend the Code in light of industry best practice. After a further period of consultation with the public, the Australian Government announced their responses to Mr Wein's report, which accepted most of the recommendations.

The most notable recommendation that was accepted was the legalisation of the unwritten concept of good faith. Once the Code is amended, franchisors and franchisees will have a statutory obligation to act in good faith towards one another, including during the negotiation of the franchise agreement. The Australian Government accepted Mr Wein's regulatory proposals on good faith in part, but acknowledged the necessity of a clear regime so that businesses can understand the extent of their obligations.

The Government also recognised the need for better education on good faith principles which should be introduced alongside the legislative change. The education would also need to address the potential confusion between "good faith" and "unconscionable conduct" which is already set out in the CCA.

What's else is new?

Other recommendations accepted by the Australian Government include:

• increased protection for franchisees and their ability to trade after termination or expiry of the franchise agreement;
• a right for franchisees to terminate the franchise agreement following the appointment of an administrator for the franchisor and recognition of franchisees as unsecured creditors; and
• a prohibition on franchisors imposing unreasonable significant unforeseen capital expenditure on franchisees.

Some of the recommendations have been accepted "in principle" and it is now the task of the legislators to provide some much needed clarity on how some these provisions will work in practice.

What does this mean for Franchisors?

The Code applies to all franchisors doing business in Australia, regardless of whether the franchisor is based outside of Australia and whether the franchise agreement is subject to a choice of the foreign law and jurisdiction. Where a party falls foul of the Code, the Australian Competition & Consumer Commission is delegated the authority to impose pecuniary penalties and/or infringement notices. It is unclear what the maximum penalty will be set at, but the review recommended a maximum of AUS$50,000.

The Australian Government has stated that the legislation enabling the changes will be introduced 'as soon as feasible', but the very recent election and subsequent change in government in Australia may well delay and/or alter implementation. It is expected that the changes to the Code will only affect franchise agreements entered into after the implementation of the legislation.

If you would like more information on this topic, please contact your usual franchise team member or Gordon Drakes (Senior Associate) or David Bond (Partner).