Strengthening statutory unconscionable conduct and the Franchising Code of Conduct

4 March 2010

Strengthening statutory unconscionable conduct and the Franchising Code of Conduct, the report of the expert panel asked by the Government to consider whether two specific proposals for amending the law of unconscionable conduct provisions would assist in clarifying its effect, has received widespread support. The panel was also asked to examine particular behaviours of concern in the franchising sector.

The Report's findings had 'regard to the place of this process in the broader context of the fair trading debate'. The panel found that 'there are no easy answers to the issues raised by stakeholders, as the history of the debate shows'.

Unconscionable Conduct

The Report recommends that an interpretive statement of principles, accompanied by enhanced national guidance by the regulators, would assist in addressing business certainty, stakeholder understanding and community confidence in statutory unconscionable conduct.

It further recommends that the principles should recognise that section 51AC (and, arguably, section 51AB) of the TPA and equivalent provisions of the ASIC Act are intended to go beyond the scope of the equitable and common law doctrines of unconscionability, and are not confined by them.

It found that the following principles may also be distilled from relevant case law and the policy intention of previous and current governments:

the court may consider the terms and progress of a contract;
the provisions may apply to systems of conduct or patterns of behaviour; and
the identification of a special disadvantage is not necessary to attract the application of the provisions.

It considers that given that there will a single national law with respect to statutory unconscionable conduct under the Australian Consumer Law, with penalties and increased enforcement powers for regulators, it is timely for the ACCC, ASIC and state and territory regulators to develop uniform national guidance on the provisions, along similar lines to the guidance being prepared for the new unfair terms regime.

Further recommendations include:

Regulators should pursue further test cases to inform their guidance material, over time. These test cases should draw on conduct in diverse industries, and should be used to assist in the understanding of the interpretative principles recommended by the panel.
As part of the process for introducing statutory unconscionable conduct into the Australian Consumer Law, the Government should consider harmonising or unifying sections 51AB and 51AC.
The efficacy of the changes to statutory unconscionable conduct currently being introduced, and of any changes introduced as a result of this report, should be assessed after three to five years.

The Government has announced that the unconscionable conduct provisions of the TPA would be clarified to assist courts with interpretation, regulators with enforcement and the community understanding of correct practice.

Franchising Code of Conduct

The panel considered whether further amendments to the Code were necessary to address five specific behavioural issues. These were:

unilateral variation by the franchisor;
unforeseen capital expenditure required of the franchisee;
franchisor-initiated changes to the franchise agreement when a franchisee is attempting to sell the business;
clauses that attribute legal costs;
confidentiality agreements.

The panel holds the view that the range of measures it has recommended will encourage greater understanding among franchisees and prospective franchisees of the nature of the business model they are part of, and foster improvements in franchisor attitudes to the concerns of franchisees.

It considers that legitimate commercial reasons exist for the unilateral variation of franchise agreements, particularly (but not solely) through amendments to the operations manual. For this reason, it is not appropriate to prohibit unilateral contract variation in the franchising sector.

The panel broadly supports franchisor disclosure of:

the circumstances in which unilateral variations to their agreement may take place; and
the circumstances in which the franchisor has unilaterally varied a franchise agreement in the past three financial years.

The panel also broadly supports disclosure under the Franchising Code of the possibility of unforeseen capital expenditure by the franchisee, particularly as a result of a franchisor amending the operations manual. This could also require disclosure of whether significant capital expenditure would be a factor to be considered in deciding to renew the franchise agreement.

In the instance where the franchisee is seeking to sell its business, the panel considered that there may be legitimate commercial and regulatory reasons for the franchisor to amend the franchise agreement. As a result, it did not consider it appropriate to prohibit this behaviour.

The panel considers that the provisions of the Code relating to the transfer of a franchise agreement could be extended to cover novation of a franchise agreement. There is broad support for up front disclosure of the possibility that a franchise agreement may be amended, even when the franchisee is seeking to sell the franchise.

The Report notes that clauses attributing legal costs may be used for a variety of legitimate business purposes. Such clauses may also be used for inappropriate purposes. Clauses attributing legal costs irrespective of the outcome are of particular concern. Where a weaker party is coerced into accepting such terms, the unconscionable conduct provisions of the TPA may apply.

The panel also recommends that the issue of cost-attribution during dispute resolution should be considered as part of an over-all approach to enhancing and harmonising dispute resolution facilities available to small business.

Further there is scope to clarify, in the Franchising Code, the meaning the Government intends to attach to 'costs of mediation', and the circumstances in which parties may agree otherwise than to bear their own costs.

There is broad support for improved disclosure up front of the cost-attribution of dispute resolution, to enable franchisees to better weigh the risks and rewards of entering a particular franchise system. Confidentiality agreements may be used to advance a number of legitimate commercial interests.

There is also broad support for disclosure alerting prospective franchisees to the categories of information that cannot be discussed with existing and former franchisees.

A short, simple, 'Plain English' document should be produced which would be provided to prospective franchisees before they are psychologically, financially and legally committed to entering a franchise agreement.

Finally, the Government and the ACCC should initiate processes including empirical research to provide a detailed examination of the problems associated with the five behaviours. The findings would ultimately inform guidance material for the franchising sector.

The Government has agreed with expert panel's views and recommendations regarding the Franchising Code of Conduct.

For further information, please contact:

Andrew Nicholson | Partner
Mullins Lawyers
t +61 7 3224 0261
f +61 7 3224 0333
anicholson@mullinslaw.com.au