Blow to push for good faith clause

Mr Emerson, who supported a good faith provision for the Franchising Code when in Opposition — subject to its parameters being defined — said he had ""noted"" recent reports from the West Australia and South Australian parliaments.

The Australian
June 12, 2008

Blow to push for good faith clause
Michael Pelly

SMALL Business Minister Craig Emerson has shut the door on moves to introduce a "good faith" provision that would protect franchisees when contracts are due for renewal.

The news came as the High Court heard an appeal by the Franchise Council of Australia on Tuesday against a decision by the NSW Court of Appeal that threatens the viability of certain franchise agreements.

According to the decision in Ketchell v Master Education Services, there can be no agreement unless a franchisee fully understands a disclosure agreement. But the council fears the ruling makes it too easy for disgruntled franchisees to avoid contractual obligations.

Hungry Jack's owner Jack Cowin has been pressing the Government to introduce a good faith clause, and has said that 62,000 franchises across Australia could be deprived of the value of goodwill in their business if franchisors chose to "play hardball".

He said he had been forced to close one of his KFC restaurants in Western Australia and that another three were under threat in coming months. He said that in each case, the franchisor — American giant Yum Restaurants International — was not prepared to recognise the goodwill established over 30 years of continuous operation.

However, following the recent Small Business Ministerial Council meeting, Mr Emerson indicated he was not ready to make further changes after the introduction of stricter pre-purchase disclosure provisions on March 1.

Mr Emerson, who supported a good faith provision for the Franchising Code when in Opposition — subject to its parameters being defined — said he had "noted" recent reports from the West Australia and South Australian parliaments.

Those reports recommended greater involvement by the Australian Competition and Consumer Commission and an update of the Franchising Code, which been in force for 10 years, to include a good faith provision.

"The Minister says he will consider the introduction of a well-defined obligation for parties to bargain and negotiate in good faith as part of the Franchising Code of Conduct," a spokesman for Mr Emerson said.

He added the minister had noted one fact to emerge from the WA and SA reports: that "the rate of non-renewal is incredibly low at 1.5 per cent to 3.7 per cent".

He also repeated earlier statements that "any changes to the code will have to not only improve the lot of franchisees, but the code overall".

Mr Cowin, who is both a franchisor for Hungry Jack's and a franchisee for Kentucky Fried Chicken, says existing laws do not reflect market practice that agreements are usually renewed.

There is also the power imbalance between franchisors and franchisees, many of who are mum-and-dad operators or retired business people.

He says a good faith provision could be retrospectively applied through the Trade Practices Act because it affects conduct, not contracts. However, the comments by Mr Emerson's spokesman appear to shut the door to such a move.


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