Franchise reforms could reduce disputes between entrepreneurs and chains
Published 03 April 2014 11:16, Updated 06 April 2014 21:30Former franchisee Peter Coventry has been in mediation with Wendy's this week over the closure of his two stores. He said good franchisors should not fear a new requirement for them and franchisees to act in “good faith”. “It sends the right message to big franchisors that there will be consequences for acting in bad faith and this has been sadly lacking in franchising over the past 15 years,” Coventry says.
But the sector’s industry body, the Franchise Council of Australia, which represents franchisors and franchisees in the $131 billion sector, has warned a new definition of “good faith” in proposed franchise laws could led to increased legal disputes.
Franchisor companies could be fined up to $51,000 for serious breaches of the new code and the new “good faith” clause has been included in the hope of ensuring both parties act honestly, co-operatively and not arbitrarily, Small Business Minister Bruce Billson announced on Wednesday.
The franchise system has had bad publicity recently, with franchisees in disputes with large chains such as Wendy's, Hungry Jack’s and Pie Face.
Wendy's chief executive Rob McKay welcomes the changes to the code.
“Anything that encourages and facilitates channels through which the franchisor and franchisees can work well together is good for business,” McKay says. “Wendy's has been through a detailed mediation process with Peter Coventry over an extended period and will continue to do whatever is required to protect our brand in the best interests of our network.”
This week the Country Court of Victoria has heard evidence in a long-running legal stoush between Hungry Jack’s and failed franchisee Toni Collins. The fast food chain is suing Collins for $721,000 but Collins has lodged a countersuit for $350,000 for “unconscionable and unfair conduct”.
Defining good faith
Franchise Council of Australia deputy chairman Stephen Giles says the council was happy with the government’s proposed changes but the issue of good faith was a problem.He said consultation between government and the industry had agreed on a common law duty of good faith that parties act honestly but the exposure draft instead included a new statutory duty of good faith defined as acting “not arbitrarily” or against the “purposes of the franchise agreement”.
The FCA initially rejected recommendation to introduce an obligation to act in good faith because it could lead to uncertainty and extra costs, but eventually agreed to a common law definition of good faith in order to secure a nationally consistent approach to regulation of the franchise sector.
Giles says the civil penalties of up to $51,000 through the court, and up to $8500 for infringement notices without court action, were “sensible dollar amounts”, because “they are not in the millions for mostly small businesses”.
Giles says the FCA was persuaded by the ACCC’s assurance the penalties would be used to stop “fly by night” franchise operations and scammers. “We think its a pragmatic solution.”
Council of Small Business of Australia chief executive Peter Strong says the proposed changes were positive but “I would have liked to see the penalties to be higher”. “Some of the bigger franchisors could just cop a fine to get rid of problem franchisees but of course, it would have to go to court so everybody would find out about it.”
“There are good franchisors and bad franchisors, just like there are good and bad franchisees, and the good ones shouldn’t have anything to worry about.” Strong nominated McDonald’s as a good franchisor. “If you, as a McDonalds franchisee, don’t make at least $150,000 a year, they will send in a team to work out why.”