Franchising Bill defeated by WA Parliament
Last Thursday, 3 November 2011, the Western Australian parliament rejected the Franchising Bill 2010 (WA), which was originally introduced as a private members bill by Mr Peter Abetz MP in December 2010. The defeat of the bill came about today when parliament refused to agree to a third reading of the bill, meaning it did not reach a vote.
In light of recent developments in South Australia, which are discussed in the article below, it is anticipated that there will be support in Western Australia to introduce a Small Business Commissioner with power over the franchising sector. If supported by the WA government, there will be a greater chance of success than Mr Abetz's private members bill.
This article was written by Bruce McFarlane, Partner and Nick Rimington, Lawyer.
New South Australian laws to impact on franchising sector
On 20 October 2011, the upper house of the South Australian parliament passed the Small Business Commissioner Bill (Bill), which paves the way for state-based franchising regulation in South Australia. The new legislation will create the office of Small Business Commissioner (SBC), who will have powers to investigate contraventions of the Franchising Code, designed to operate in concert, and potentially in conflict, with the Australian Competition and Consumer Commission (ACCC)'s enforcement powers, meaning franchisors could be subject to scrutiny from a number of bodies.
Opposition to the Bill
State-based franchising legislation has been widely opposed throughout the franchising sector. The Franchise Council of Australia campaigned tirelessly over many months in an effort to defeat the Bill and similar proposed new laws in Western Australia. Federal Small Business Minister Nick Sherry has also voiced his opposition to state-based franchising laws.
In the days leading up to the passing of the Bill, the Liberal Party Opposition and several other non-government MPs campaigned strongly in favour of several amendments to the Bill. Those campaigning against the Bill had expressed concern that it could put South Australian franchisors at a disadvantage compared to other states and may discourage franchisors basing their operations and opening stores in South Australia.
In spite of strong opposition from the franchising community, the Bill was passed with only one amendment. The sole amendment was an important one, as it dictates that the rules of franchising in South Australia cannot be changed without the Government first undertaking a 60 day mandatory consultation period with relevant stakeholders. If this procedure is not followed, a ‘disallowance motion’ can be put forward in respect of the proposed changes. The amendment means that in the short term, the franchising sector will not be subject to dual regulatory frameworks in South Australia.
Key features of the Bill
The Bill provides, amongst other things, for the Franchising Code of Conduct (Code) to be adopted into South Australian law as a prescribed code under the new legislation, to be known as the Small Business Commissioner Act 2011. The new legislation will create the office of SBC, who will have powers to investigate contraventions of the Code, compel people to provide information in connection the exercise of its powers and impose on-the-spot civil penalties for contraventions of the Code. This framework will operate in concert, and potentially in conflict, with the ACCC’s enforcement powers in respect of the Code. In particular, both the State and the Commonwealth will have the power to prosecute for failure to comply with the Code, which may result in confusion in the sector.
It is important to note that any new laws that conflict with Commonwealth laws, such as rewriting the dispute resolution provisions in the Code, are likely be constitutionally challenged. However, the Commonwealth would be powerless to prevent changes that extend the scope of the Code, such as the introduction of a general obligation of good faith, which the Minister has foreshadowed.
Who is affected by the new laws?
The new laws will apply to any franchise granted in South Australia. Also, franchisors that are based in South Australia will be subject to the new laws in respect of their operations Australia-wide. This means that all franchisors, and particularly those based in South Australia, must become familiar with the implications of the new laws.
Request for information
The SBC will have the power to serve a notice compelling a person to supply information and/or documents to the SBC within a reasonable timeframe, as specified in the notice. Failure to comply with such a notice from the SBC may result in a fine of up to $20,000. The recipient of the notice may only refuse to supply the information and/or documents where they would incriminate the person or where they are subject to legal professional privilege. Subject to certain restrictions, the SBC has the power to publicly release information gathered in this way, which could lead to a ‘name and shame’ policy.
Civil penalties
The SBC will have the power to issue on-the-spot fines, known as ‘civil expiation notices’, to any person who contravenes, attempts to contravene or is involved in a contravention of the Code. The Minister for Small Business will determine the relevant penalties by regulation, although they must not exceed $6,000 for bodies corporate and $1,200 for individuals. Upon receiving a penalty notice, the recipient can pay the fine or defend the matter in the Magistrates’ Court.
Moving forward
The Minister for Small Business, Tom Koutsantonis has indicated in the past that he is intent on broadening the regulatory framework governing the franchising sector, so it may not be long before the 60 day mandatory consultation period is tested.
Hall & Wilcox will continue to keep you updated with developments on this issue in South Australia.
This article was written by Bruce McFarlane, Partner and Nick Rimington, Lawyer.
ACCC Industry Codes Investigation Powers
At the recent National Franchise Convention 2011, Dr Michael Schaper, Deputy Chairman of the ACCC, presented on the ACCC’s new powers of investigation in connection with industry codes, such as the Franchising Code of Conduct (Code).
Dr Schaper explained the changes in the law but more importantly, shed light on how the ACCC will approach the use of their new powers and their general role in overseeing the franchising sector. Some of Dr Schaper’s insights are summarised below.
Criteria for prioritising investigations
Dr Schaper revealed that the ACCC receives around 200,000 contacts each year, which means that the ACCC needs to prioritise the complaints it chooses to pursue. Some of the factors that the ACCC will use to assess a complaint include the public interest value in pursuing the matter, the detriment suffered by the consumer, the blatancy of the conduct in question and whether pursuing the matter will have a deterrent effect within the sector.
Investigation powers
When introduced early this year, the Competition and Consumer Act 2010 (Cth) included a new section 51ADD. The new section gives the ACCC the power to compel a franchisor to provide information or produce documents that it is required to keep under the Code.
This will typically include current and past disclosure documents, disclosure document receipts, professional advice statements, franchise agreements and marketing fund audited accounts. The franchisor must provide the requested documents to ASIC within 21 days of the notice, unless granted an extension by the ACCC.
Triggers for use of the investigation power
Dr Schaper told the National Franchise Conference that the ACCC intends to undertake five audits every month. In considering which franchise systems to target, the ACCC will focus on franchisors with a history of non-compliance, a large volume of complaints or in industry sectors which appear to have general compliance issues.
Dr Schaper responded to concerns by the franchising sector by inviting the Franchising Council of Australia (FCA) legal committee to submit queries regarding the use of the audit powers to the ACCC. We will keep you updated on the ACCC’s response to the FCA queries.
Tips for franchisors
The ACCC’s newly acquired investigation power makes it even more critical for franchisors to comply with the Code. In particular, franchisors must diligently maintain all required records. All relevant records must be well organised and easily accessible so that franchisors can provide documents to the ACCC within the 21 days of receiving a notice under section 51ADD.
This article was written by Bruce McFarlane, Partner and Nick Rimington, Lawyer.
Video replay – Deemed renewal of franchise agreement
In the recent case of Civic Video Pty Limited v Yogies Pty Limited [2011] NSWSC 1107, the NSW Supreme Court considered outlined the circumstances in which a franchise agreement can be deemed to have been renewed for a further term despite the franchisee not signing new franchise documents.
Background
In July 2000, Civic Video Pty Limited (franchisor) and Yogies Pty Limited (franchisee) entered a franchise agreement, under which the franchisee was granted the right to operate a Civic Video franchise for a term of five years. The franchise agreement also gave the franchisee an option to renew for a further term of five years, subject to fulfilment of certain criteria, including that the franchisee sign the then current Civic Video franchise agreement.
Leading up to the expiry of the original franchise agreement in 2005, the franchisee attempted to sell its business. The franchisee was unable to sell the franchise prior to the expiry of the term and requested that the franchisor allow it to continue the franchise on a month-to-month basis until it found a buyer. The franchisor refused the franchisee’s request and insisted that if the franchisee wished to continue operating the franchise it must enter into their current form of franchise agreement.
The new franchise agreement differed from the original franchise agreement in significant ways, including that the term would be for ten years rather than five, as contemplated in the original franchise agreement. Further, the royalty payable under the new franchise agreement would be calculated on total turnover rather than gross turnover and there was now an advertising fee of 2% of total turnover.
The franchisee sent the franchisor a notice exercising its option to renew the franchise agreement for a further term. On that basis, the franchisor prepared a new franchise agreement, which was mailed to the second defendant, Mr Munchik, a director of the franchisee. The documents were never signed and were not returned to the franchisor.
In his evidence, Mr Munchik claimed that he never opened the envelop containing the new franchise agreement. Mr Munchik argued that he had neither read nor agreed to the terms of renewal and therefore the franchisee should not be bound.
The franchisee argued that the new franchise agreement differed so greatly from the old franchise agreement that it could not be called a renewal. The franchisee claimed that the different terms in the new franchise agreement were unconscionable as they departed so substantially from the original franchise agreement.
The Court’s decision
The Court found that it was open for the new franchise agreement to be called a renewal of the old franchise agreement because it was largely on the same terms. The changes in the new franchise agreement were as a result of changes in the video rental market. For example, when the franchisee entered into the original franchise agreement, franchisees derived most of their revenue from video rentals, but gradually this changed to the sale of videos, drinks and confectionary.
The Court held that this was not a case where the variations between agreements were so great that the resulting agreement should be regarded as a totally new one nor were the new terms unconscionable.
The Court held that the fact that Mr Munchik did not read or sign the new franchise agreement did not mean that the franchisee had not agreed to renew on those terms. The franchisee gave the franchisor notice exercising its option to renew, received the new franchise agreement, said nothing to the franchisor before the expiration of the original franchise agreement to suggest that he had not read it and continued to pay invoices from the franchisor without complaint. Therefore objectively, he was taken to have read and agreed to the new franchise agreement.
The Court ordered the franchisee and Mr Minchuk to pay a total of $138,989 in damages to the franchisor in respect of the revenue lost by the franchisor, plus the franchisor’s legal costs.
Key learnings for franchisors
Franchisees could be found to have constructively read and understood a new franchise agreement if it is in their possession, if they have been given sufficient time to read it and obtain advice on its content, and if they continue to perform as a franchisee past the expiry date of the last franchise agreement. However, franchisors should always insist on their franchisees properly exercising the renewal of the franchise agreement and signing new documents (if applicable).
Simply because a term in a renewal is less advantageous to a franchisee does not mean that it will be construed as unconscionable, as long as changes can be justified, for example, through distinct changes in the market. Variations to an agreement must be so great that it should be regarded as a totally new agreement, rather than the renewal of an old one.
This article was written by Bruce McFarlane, Partner and Annalise Farquhar, Law Clerk.
Sparring partners – Injunction granted to prevent termination by franchisee
In the recent case of SPAR Licensing Pty Ltd v MIS Queensland Pty Ltd (No 1) [2011] FCA 1054 the Federal Court considered what happens when a franchisee terminates a franchise agreement where they have no right to do so under the franchise agreement. The decision indicated that the Courts may be willing to prevent wrongful termination of franchise agreements where there is no express right for the franchisee to terminate and where a franchisor may suffer immeasurable damages from the loss of the franchisee.
In particular, the Court considered whether a franchisor can restrain the franchisee from terminating the agreement and commencing with a competitor of the franchisor.
Background
SPAR Licensing Pty Ltd and SPAR Australia Limited (franchisor) were wholesale suppliers of groceries to the ‘cut-price’ supermarket market. MIS Queensland Pty Ltd (franchisee) operated a cut-price supermarket as a SPAR franchisee. The franchise agreement between the parties obliged the franchisee to acquire its wholesale groceries from the franchisor. On 19 August 2011, the franchisee wrote to the franchisor purporting to terminate the franchise agreement.
The franchisor commenced proceedings in the Federal Court to prevent the franchisee from:
(a) terminating its existing franchise agreement with the franchisor; and
(b) commencing a new franchise agreement with Metcash, a direct competitor of the franchisor.
Wrongful termination
The franchisor claimed that the franchisee had no right to terminate the franchise agreement and should be restrained from doing so. The termination clauses in the franchise agreement allowed the franchisor to terminate the franchise agreement but did not confer any rights of termination on the franchisee. This meant that the franchisee had no entitlement to terminate unless the franchisor repudiated the franchise agreement or breached one of its conditions (neither of which were found to have occurred).
To succeed in preventing the franchisee from terminating the agreement, the franchisor needed to demonstrate to the Court that without an injunction, it would suffer injury for which damages would not be adequate compensation. The Court heard evidence that the closure of the particular the store would present great difficulties for the franchisor.
Exclusive supplier
The franchisor also sought orders requiring the franchisee to resume sourcing its products exclusively from the franchisor as provided in the franchise agreement.
The franchisee argued that the clause of the franchise agreement as it was drafted, only required the franchisee to purchase goods from the franchisor whilst it was conducting the franchise. The franchisee submitted that given it was no longer conducting the franchise, it was no longer required to purchase its goods from the franchisor.
The Court’s decision
The Court decided that, in a market substantially controlled by Metcash, if the franchisor’s fourth largest store was to defect to Metcash, this would be a significant commercial event which would considerably affect the ability of the franchisor to find and retain franchisees. The Court considered that allowing this to occur would cause significant damage to the entire SPAR brand, which could not be compensated by damages.
The Court found that the franchisee’s interpretation of the exclusive supplier clause in the franchise agreement would allow it to evade the clause by breaching its obligation under the agreement to conduct the franchise. The Court ruled that this interpretation would contradict the fundamental contractual principle that a contract must not be construed so as to permit a party to benefit from its own wrongdoing or to deprive the other party of the benefit of the contract through its conduct.
The Court granted an injunction restraining the franchisee from terminating the franchise agreement and requiring it to continue purchase its products from the franchisor.
Key learnings for franchisors
The Courts may be willing to grant injunctions preventing wrongful termination by a franchisee where there is no express right for the franchisee to terminate in the franchise agreement (provided the franchisor has not repudiated or breached the franchise agreement).
However, the Court emphasised that the injunction was granted due to the unique factual scenario, in that the potential damage to the franchisor was so severe that it could not be remedied by damages. The Court’s decision may have been different in other circumstances.
This article Bruce McFarlane, Partner and James Bull, Lawyer.
‘Tis the season..…for workplace claims
More than ever, employers are dealing with issues arising from workplace conduct, including discrimination, harassment, sexual harassment and bullying. As the Christmas season looms, this franchisors should be aware of their obligations as employers but also be pro-active in ensuring their franchisees are putting processes in place to prevent any brand-damaging claims.is a worrying trend for franchisors, who typically have difficulty in overseeing the daily conduct of their franchisees’ employees.
Under State and Federal anti-discrimination legislation, employers can be vicariously liable for employee behaviour which constitutes harassment, sexual harassment or discrimination and which is committed ‘in the course of employment.’ In almost all cases, conduct that is ‘in the course of employment’ will include employee behaviour at employer-sponsored events, like Christmas parties.
For franchises, inappropriate behaviour at Christmas parties can be particularly damaging because it affects not only the individual employees and franchisees involved, but also has flow-on consequences for the franchisor and the reputation of its brand.
However the good news is that generally speaking, an employer will not be liable under State and Federal anti-discrimination legislation for the actions of its employees where it can show that it took ‘reasonable steps’ to prevent the discrimination, harassment or sexual harassment from occurring.
Therefore to reduce the risk of claims being brought against franchisees, and to ensure the wellbeing of all employees, franchisors should ensure that their franchisees have taken appropriate steps to ensure that inappropriate behaviour at work parties doesn’t occur.
For example, this could include:
reminding franchisees and their employees of their obligations under discrimination, harassment and sexual harassment legislation and policies, and also that these obligations exist at staff Christmas parties or other employer-funded events;
ensuring that franchisees and their employees are adequately trained in these policies (including by undertaking ‘refresher’ courses if required); and
at work parties, ensuring that there are limits on supplied alcohol and that alcohol is served responsibly.
This article was written by Alison Baker, Partner and Piers Mitchem, Lawyer.