Franchising code flawed: experts

…parties to a franchise are urged to deal with each other in ‘good faith’ and adopt 'fair dealing' practices. ''This creates a fiduciary relationship,'' said McFarlane, ''which goes beyond the relationship that they already have. It's not like an employer relationship.
June 23, 2008

Franchising code flawed: experts
Julianne Dowling

Some of the new changes in the Franchise Code may be difficult to implement and lead to higher costs, say franchise law specialists representing some of the leading retail brand franchises.

There's not only greater capacity for problems but more work to be done by both franchisors and franchisees.

Mandatory inclusion of commencement dates on contracts before signing may be difficult to implement in practice and leave franchisors liable for the initial upfront investments in fit-out and leasing deals, according to Michael Smith, whose legal firm, Smith Law, represents a number of well known retail and hospitality brands.

''I'm concerned laws are being passed, which are difficult to implement in practice,'' Mr Smith said.

''The Code says that a franchisee cannot be bound by a franchise agreement until the disclosure documentation, which includes this agreement, has been completed in all respects (including the commencement date).

The disclosure document must be issued to the franchisee 14 days before the agreement may be entered into and the franchisee then has a further seven days after signing to cool off.

Where premises are being fitted out, the commencement date is often only established just prior to the start of trading, Mr Smith explained.

''Given the 14 days disclosure period and the cooling off period under the Code, this leaves the franchisor holding the risk of a substantial upfront investment where the franchisee may at the last minute decide not to proceed with the franchise.

''While the recent finetuning of the Code is generally beneficial to all parties, in this instance, the practical implementation of the amendments is creating severe headaches for both franchisors and their legal advisors.''

Bruce McFarlane, key franchise partner at legal firm Hall & Wilcox, agrees that some of the Code changes are controversial while the Ketchell case creates another complication.

While large franchisors, such as Boost Juice, have had legal systems in place to cover off new changes, he said many other franchisors are scrambling to update their disclosure documents and check that they have the appropriate sign-offs from franchisees.
The Ketchell case, which is awaiting a decision in the High Court on an appeal, revolves around a franchisee arguing successfully that their agreement was unenforceable and illegal because Franchising Code clause 11 had not been met. This governs the requirement for a franchiser to be told or to obtain independent advice and to receive, read and understand the disclosure document and the Code.

While Hoy Mobile vrs Allphones Retail rejected the Ketchell decision, Civic Video Pty Ltd. V Garfield Nominees applied the Ketchell case. Lawyers are hoping that the Ketchell appeal, which is being funded by the Franchise Council of Australia, will provide clarity.

''This franchisee (in the Ketchell case) got away with money unpaid because of the breach,'' McFarlane said.

He said windfalls in property leasing, where the tenant didn't have to pay rent if they hadn't signed the disclosure document, had been stopped and this reflected a similar situation.

''I just don't think a franchisee should get a windfall for a gain through a technical breach … it's unfair,'' he added.

McFarlane said in his experience, franchisees fit into two categories: the job buyers and the entrepreneurs.

''Both relationships create challenges.''

Another conflict point, McFarlane argues, is good faith negotiations, a policy endorsed by the joint meeting of Small Business Ministers in May this year. Here, parties to a franchise are urged to deal with each other in ‘good faith’ and adopt 'fair dealing' practices.

''This creates a fiduciary relationship,'' said McFarlane, ''which goes beyond the relationship that they already have. It's not like an employer relationship. You're expected to do your own due diligence and run the business and be fully informed of the risks.

''The Code clearly says you need independent legal and financial advice. So if the franchisee speaks to their lawyer and accountant then why should the franchisor have an additional duty to look out for them?''

''We're a well regulated industry and Australian systems have been successful internationally and other systems have come here because of that.

''To create another level of regulation is counter-productive and will curtail growth of the industry in a market that's already affected. Trying to attract good franchisees is already hard because of the war for talent.''

Now, the industry and its advisors are waiting to see what the draft Federal Government bill will contain in light of recent State Government inquiries.

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