December 2009

Trade Practices Update: Franchising Code of Conduct and Unconscionable Conduct Review - December deadline for submissions to Expert Panel

Overview

On 27 November 2009, the Minister for Small Business Dr Craig Emerson announced the creation of an expert panel on franchising and unconscionable conduct, as part of the ongoing inquiry into reforming these areas of trade practices law. The proposed reforms aim at providing increased protections for small business from anti-competitive conduct by more powerful and unscrupulous businesses.

The Panel will advise the Government on how to respond to the issues raised by the recent parliamentary inquiries into the unconscionable conduct provisions in the Trade Practices Act 1974 and the Franchising Code of Conduct tabled earlier this year. [1]

The Panel has been asked to:

  • inquire into the need to include a list of examples of specific behaviours in the Franchising Code of Conduct that constitute inappropriate conduct in a franchising arrangement. This list of behaviour may include:
    • unforeseen capital expenditure;
    • unilateral contract variation;
    • attribution of legal costs;
    • confidentiality agreements;
    • franchisor-initiated changes to franchise agreements when a franchisee is trying to sell the business;
  • consider the need to introduce a list of examples or statement of principles which constitute 'unconscionable conduct' into the Trade Practices Act; and
  • consider the content and legal effect of introducing statutory lists of examples or a statement of principles. [2]

The Government has also released an Issues Paper entitled 'The nature and application of unconscionable conduct regulation' to assist the Panel in formulating its advice, and provide guidelines for businesses wishing to submit comments to the Panel. [3]

The Panel is currently seeking submissions from stakeholders; interested parties, such as businesses operating in the franchise or retail tenancy industries should consider submitting their views on the merits of including a list of inappropriate behaviours which may breach the Franchising Code of Conduct, and a list of examples or principles to define the limits of unconscionable conduct in the Trade Practices Act.

Submissions to the Panel are due by the 18 December 2009. The Panel will report in January 2010 and draft amending legislation is expected to come before Parliament in early 2010. [4]

Background to Current Inquiry Process

Franchising Code of Conduct

The Franchising Code of Conduct is a mandatory industry code, prescribed under the Trade Practices Act and is administered by the ACCC. [5] The code regulates all participants in the franchising industry by ensuring that:

  • franchisors disclose relevant information and documents to prospective-franchisees;
  • franchisees are aware of their rights under franchise agreements; and
  • appropriate and cost-effective dispute resolution mechanisms are available to franchisees and franchisors. [6]

As the Code forms part of the Trade Practices Act, failure to comply with the Code, amounts to a breach of the Act under section 51AD and could result in substantial penalties, including injunctions to stop conduct, orders to provide compensation and damages, or orders setting aside relevant contracts. [7]

On November 5 2009, the Government released its response to the Commonwealth Parliamentary Joint Committee on Corporations and Financial Services 2008 inquiry into improving franchising conduct in Australia. The Government's proposals for reform include:

  • enhancing the ACCC's powers to conduct random audits of franchisors to encourage compliance with the Code;
  • enabling the ACCC to alert the public of franchisor misconduct by issuing public warnings where franchisors breach the Code; and
  • permitting the ACCC to seek redress on behalf of franchisees, where large numbers of franchisees have been affected by a franchisor's non-compliance with the Code. [8]

Whilst opting not to include a specific good faith requirement in the Code, the Government has acknowledged the relevance of good faith obligations in preventing appropriate conduct in franchising, by inserting a new provision in the Code stating that nothing in the Code limits any common law requirements of good faith in relation to franchise agreements.

Further amendments will expand the disclosure requirements, forcing franchisors to provide franchisees with at least 6 months notice regarding the renewal of franchise agreements. New provisions will also provide guidance on the types of behaviour which is expected when parties engage in dispute resolution processes. [9]

Unconscionable Conduct

Unconscionable conduct in trade or commence is currently governed under Part IVA of the Trade Practices Act, which contains three substantive provisions prohibiting unconscionable conduct:

  • Section 51AA : prohibits conduct that is unconscionable within the meaning of the unwritten law of the States and Territories;
  • Section 51AB: prohibits engaging in conduct in connection with the supply of goods or services to a person, that is in all the circumstances, unconscionable; and
  • Section 51AC: prohibits conduct that is in all the circumstances, unconscionable, in connection with the supply or acquisition of goods or services, to or from a corporation. [10]

In its December 2008 inquiry into 'the need, scope and content of a definition of unconscionable conduct for the purposes of Part IVA of the Trade Practices Act', the Senate Standing Committee on Economics encouraged Parliament to clarify the types of conduct that should be proscribed under section 51AC, but did not recommend the introduction of a statutory definition. It should be noted that the current legislative provisions include a range of factors the court may consider in assessing unconscionability, including the conduct of the parties.

In response, the Government has introduced amending legislation into Parliament under the Trade Practices Amendment (Australian Consumer Law) Bill 2009, to enhance the enforcement mechanisms for regulating unconscionable conduct and increase punitive consequences for engaging in unconscionable conduct. The new provisions include:

  • Pecuniary penalties of up to $1.1 million for corporations and $220,000 for individuals for contraventions of the unconscionable conduct provisions;
  • Increasing the ACCC's powers to issue infringement notices for contraventions of the Trade Practices Act, and public warning notices where it has reasonable grounds to believe corporations have breached the unconscionable conduct provisions; and
  • Allowing the Courts to ban those involved in a contravention of the unconscionable conduct provisions from managing corporations. [11]

As part of the ongoing inquiry process, the Government is seeking industry feedback on the options that it has isolated as possible models for reforming unconscionable conduct laws; these include:

  • Introducing a list of examples to provide practical guidance to courts concerning the types of conduct that Parliament considers to be unconscionable;
  • Set out a statement of principles which could direct the court's attention to issues it must consider in making a finding of unconscionable conduct; or
  • Pursue non-legislative measures to improve clarity and understanding about the scope and application of the law governing unconscionable conduct. [12]

The Government is encouraging stakeholders to suggest other alternatives to help improve the clarity of unconscionable conduct regulation. Interested parties should note that the existing provisions regulating unconscionable conduct are comprehensive and allow courts to consider parties' conduct having regards to all the circumstances of the case. Inserting definitions or lists of specific conduct may result in an actual limitation of the types of conduct caught by the statutory provisions.

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:
PO Box 13286
Melbourne Law Courts
Melbourne VIC 8010

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Disclaimer: This newsletter is not intended to be a substitute for obtaining legal advice.

© Stephens Lawyers & Consultants December 2009.

Researched and written by Colette Downie, edited by Katarina Klaric.


[1] Minister for Innovation, Industry, Science and Research, Media Release: 'Government Appoints Expert Panel on Franchising and Unconscionable Conduct', 27 November 2009, at http://minister.innovation.gov.au/Emerson/Pages/GOVERNMENTAPPOINTSEXPERTPANELONFRANCHISINGANDUNCONSCIONABLECONDUCT.aspx.

[2] Minister for Innovation, Industry, Science and Research, Media Release: 'Government Appoints Expert Panel on Franchising and Unconscionable Conduct', 27 November 2009, at http://minister.innovation.gov.au/Emerson/Pages/GOVERNMENTAPPOINTSEXPERTPANELONFRANCHISINGANDUNCONSCIONABLECONDUCT.aspx.

[3] The Issues Paper is available from the Treasury website at: http://www.treasury.gov.au/contentitem.asp?NavId=037&ContentID=1676.

[4] Submissions related to the Department of Treasury's Unconscionable Conduct Issues Paper, can be submitted to: unconscionableconduct@treasury.gov.au or Unconscionable Conduct Issues Paper, Competition and Consumer Policy Division, Treasury, Langton Crescent, Parkes ACT 2600.

[5] Section 51AE Trade Practices Act 1974.

[6] For more information on the operation of the Franchising Code of Conduct please visit ACCC website, 'Franchising Code' at http://www.accc.gov.au/content/index.phtml/itemId/6118/ .

[7] For more information on non-compliance with the Franchising Code of Conduct please visit ACCC website, 'Franchising Code: What if you don't comply?' at http://www.accc.gov.au/content/index.phtml/itemId/816436 .

[8] Minister for Innovation, Industry, Science and Research, Media Release, 'Government to Strengthen Franchising Code of Conduct and Unconscionable Law', 5 November 2009, at http://minister.innovation.gov.au/Emerson/Pages/GOVERNMENTTOSTRENGTHENFRANCHISINGCODEOFCONDUCTANDUNCONSCIONABLECONDUCTLAW.aspx .

[9] ' Additional Information on Franchising Code and Unconscionable Conduct reforms', November 2009, available at: http://minister.innovation.gov.au/Emerson/Documents/Additional%20information%20on%20Franchising%20Code%20and%20Unconscionable%20Conduct%20reforms.pdf

[10] For more information on unconscionable conduct for the purposes of these reforms, please see: Department of Treasury, 'The nature and application of unconscionable conduct regulation - can statutory unconscionable conduct be further clarified in practice? Issues Paper', November 2009, at http://www.treasury.gov.au/contentitem.asp?NavId=037&ContentID=1676.

[11] Department of Treasury, 'The nature and application of unconscionable conduct regulation - can statutory unconscionable conduct be further clarified in practice? Issues Paper', November 2009, at http://www.treasury.gov.au/contentitem.asp?NavId=037&ContentID=1676.

[12] Department of Treasury, 'The nature and application of unconscionable conduct regulation - can statutory unconscionable conduct be further clarified in practice? Issues Paper', November 2009, at http://www.treasury.gov.au/contentitem.asp?NavId=037&ContentID=1676.

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