July 2008

SENATE TO REVIEW OPERATIONS OF FRANCHISING CODE OF CONDUCT

New Committee Review launched

The Parliamentary Joint Committee on Corporations and Financial Service has announced the launch of an inquiry into the operation of the Franchising Code of Conduct. The report, to be released by 1 December 2008, will cover:

1. The nature of the franchising industry, including the rights of both franchisors and franchisees;
2. Whether an obligation for franchisors, franchisees and prospective franchisees to act in good faith should be explicitly incorporated into the Code (having regard to its presence as an element in paragraph 51AC(4)(k) of the Trade Practices Act 1974);
3. Interaction between the Code and Part IVA and Part V Division 1 of the Trade Practices Act 1974, particularly with regard to the obligations in section 51AC of the Act;
4. The operation of the dispute resolution provisions under Part 4 of the Code; and
5. Any other related matters. 1

The Committee will accept submissions until 12 September 2008, which can be lodged at corporations.joint@aph.gov.au [2] .

Current Case Law

The inquiry comes amid the High Court hearing of the controversial Master of Education Services v Ketchell case. The Franchise Council of Australia (FCA) has financially supported the appellant due to concerns over the consequences of the previous decision in the New South Wales Court of Appeal in August 2007 [3] . The Court of Appeal held that non-compliance with clause 11(1) [4] of the Code resulted in an illegal, unenforceable contract [5] .

The future scope of operation of the Code hinges upon the High Court appeal. However the Federal Court decision in Hoy Mobile Pty Ltd v Allphones Retail Pty Ltd [2008] FCA 810, delivered on 30 May 2008, has paved the way for a reversal of the NSWCA Ketchell decision. Justice Rares in Allphones did not follow the Ketchell decision on the basis that its construction of clause 11 contradicted the Code's intention to 'place an obligation on a franchisor by setting a norm of conduct with which it is to comply' [6] . Adoption of a similar approach by the High Court or Parliamentary Committee, may provide a means for franchise agreements in breach of clause 11 to be varied, rather than making them void.

Previous Reviews: Matthews Committee and WA and SA Parliamentary Committees

Recent amendments to the Code, effective as of 1 March 2008 were aimed at 'increasing the transparency, quality and timeliness of disclosure of information by the franchisor to existing and prospective franchisees' [7] . The Code and guidelines to assist franchisors and franchisees are available from the ACCC website [8] . The recommendations made by the October 2006 report from Matthews Committee to the then Minister for Small Business and Tourism, Fran Bailey MP, influenced the amendments to the disclosure provisions of the Code. The 2007 changes also affected foreign franchisors and marketing funds [9] .

The Howard government had rejected the Matthews' Committee recommendation that franchisors, franchisees and prospective franchisees be obliged to deal with each other fairly and in good faith. However, there is renewed pressure to review the Code with respect to the inclusion of a 'good faith' clause. Reports received by the West Australian [10] and South Australian [11] Parliaments in April and May respectively, have further emphasised the need for such a clause and called for a greater involvement of the ACCC.

Summary

Given the current climate, it is likely that the outcome of the High Court Ketchell appeal and the findings of the Western and South Australian reports, will be considered by the Parliamentary Joint Committee on Corporations and Financial Service's inquiry into the operation of the Code.

Stephens Lawyers & Consultants have a high level of expertise in trade practice and franchise law. Our lawyers represent leading companies in both litigious and commercial matters, and have significant experience in writing submissions to government on behalf of clients.

For further information contact:

Stephens Lawyers & Consultants

Level 3, 530 Lonsdale Street

Melbourne VIC 3000

Phone: (03) 8636 9100

Fax: (03) 8636 9199

Email: stephens@stephens.com.au

Website: www.stephens.com.au

All Correspondence to:

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Melbourne VIC 8010

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Disclaimer: This newsletter is not intended to be a substitute for obtaining legal advice. © Stephens Lawyers & Consultants. July 2008 Researched and written by Colette Downie, edited by Katarina Klaric

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