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Buchan, Jenny --- "Franchises need friends, too" [2008] MonashBusRw 39; (2008) 4(2) Monash Business Review 49

Franchises need friends, too

Jenny Buchan

Has the Australian Government’s regulatory response been effective asks Jenny Buchan?

Australian business has embraced the franchising business model and in doing so has exposed new challenges for the law. Franchising is a classic case study of a challenge to the system of precedent. The franchisee is significantly different to an employee or an agent and the purchase of a franchise is more than a straight business purchase as it represents the beginning of a long-term relationship between franchisor and franchisee.

Since 1991 the Australian Government has responded to the needs of the franchise sector through a series of reviews and incremental changes to the law.

A decade ago it was recognised that the then current federal regulatory framework was ineffective at addressing disputes that arose because of the franchisor’s post-contractual misconduct. In 1998, after extensive consultation with the stakeholders, regulatory responses were introduced. The hitherto voluntary Franchising Code of Practice was updated and became a mandatory Code of Conduct (the Code) under section 51AD of the Trades Practices Act (TPA), and the notion of ‘unconscionable conduct’ in the context of a ‘business consumer’ was introduced with the enactment of section 51AC TPA.

Section 51AC recognised that unconscionable conduct could occur between big business (e.g. a franchisor) and small business, and aimed to provide protection for the business consumer (e.g. a franchisee). Section 51AD, in recognition of the increasing value of industry codes of conduct as a regulatory tool, states: “A corporation must not, in trade or commerce, contravene an applicable industry code.” Section 51AE provides the machinery for linking industry codes to the TPA – and thereby making the sanctions and remedies available under the TPA available to the parties to the Code.

The regulatory response has now been law for 10 years. The Australian Competition and Consumer Commission (ACCC), the federal consumer protection regulator, had prosecuted 15 cases alleging breaches of sections 51AC and/or 51AD by franchisors to 2006. All 15 involved successful claims that the Code had been breached but only five of the 15 also alleged unconscionable conduct by a franchisor. Because of the low success rate for establishing unconscionable conduct, the ACCC stated a new resolve in July 2007: “We are pushing the boundaries on matters of unconscionable conduct, pushing more cases to test the law and firm up definitions that assist traders.”

There have been numerous mediations conducted under the Code. Franchisees have also prosecuted franchisors for alleged breaches of s 51AC.

The first part of this paper is a brief summary of the current law that governs franchising in Australia. Then the writer assesses whether the regulatory response has been effective. The conclusion is that in relation to in-term disputes, it has not been effective in preventing unconscionable conduct of the type that motivated the legislature to enact s 51AC, but it has been successful in relation to identifying franchisors and compelling them to provide disclosure to franchisees as required by the Code. Some of the problems that arise for consumer protection policy when numerous disputes are resolved behind closed doors through mediation or a pre-judgment settlement are raised. The writer concludes with a discussion about possible improvements to the regulation of unconscionable conduct.

To view this academic paper in full, see www.buseco.monash.edu.au/industry

Cite this article as

Buchan, Jenny. 'Franchises need friends, too'. Monash Business Review. 2008.; Monash University ePress: Victoria, Australia. http://www.epress.monash.edu.au/. : 49–49. DOI:10.2104/mbr08039

About the author

Jenny Buchan

Jenny Buchan is from Business Law and Taxation, Australian School of Business, at the University of New South Wales.


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