Franchising Focus

May 2010

Contacts

Bill threatens South Australian franchising

by Stephen Giles

Against a background of the recently concluded comprehensive Federal review of franchising, and in the context of a universally endorsed trend towards harmonisation of State laws and reduction in red tape and bureaucracy, South Australian backbencher Tony Piccolo is still championing his private member’s bill, introduced in December 2009 into the South Australian parliament and entitled the Franchising (South Australia) Bill 2009 (the Bill). If enacted, the Bill is likely to have a very negative impact on franchising in South Australia, and potentially throughout the country.

The main features of the Bill are:-

  • an extraordinarily broad ambit, with the Bill purporting to apply well beyond the confines of South Australia, and having the potential as currently drafted to apply to all Australian franchise agreements
  • a new definition of statutory good faith requiring parties “to act fairly, honestly, reasonably and in a cooperative manner”. This definition goes far beyond the accepted legal definition of “good faith”, and ignores the fact that there is already likely to be an existing and indeed different duty of good faith and fair dealing implied into most franchise agreements
  • a new regulator, the Commissioner of Franchises, is proposed with a new State bureaucracy to handle investigations, registration, prosecutions and enforcement, determination of franchising disputes, and the provision of advice to the relevant Minister. The Commissioner is given extraordinary powers of information gathering, operation and delegation. Fines of up to $20,000 can apply for failure to provide information, and there are none of the usual safeguards on information gathering
  • power to the Commissioner to make binding determinations in relation to disputes arising out of unsuccessful mediations, but without the normal judicial processes to ensure the truth, accuracy or admissibility of evidence. The potential to undermine mediation, and for perverse decisions, is obvious. The Bill also purports to severally restrict legal representation in a clear denial of natural justice
  • the creation of a public Franchising Register that enables the Commissioner to publicise current investigations in a manner that implies guilt until proof of innocence. The Commissioner also has a broad discretion to put on the Register such other information as the Commissioner chooses, and
  • sweeping new powers for the District Court to order compensation and pecuniary penalties of up to $100,000 per infringing act, and $10,000 for individuals aiding, abetting or being in any way knowingly involved in a breach of the Bill.

If the Bill is enacted, South Australian franchisors and others coming within the broad scope of the Bill will be subject to a new regulatory regime on top of the current comprehensive Federal regime. Mr Piccolo has sought to engage with the franchise sector to “fine tune” his Bill, but the flaws in the Bill are so fundamental, and the implications for the South Australian franchise sector so significant, that the Bill cannot be supported in any form. The Franchise Council of Australia has conveyed their views to Mr Piccolo, and prepared a detailed written submission outlining the fundamental flaws in the Bill which it will be discussing with Mr Piccolo and other relevant decision makers in the hope that the Bill is withdrawn. For more information contact Norton Rose partner Stephen Giles, who has been representing the Franchise Council of Australia in negotiations with Mr Piccolo and others.

Franchising Code changes imminent

by Stephen Giles

The Federal Government has moved quickly to implement its response to the recent parliamentary inquiries concerning franchising and unconscionable conduct, with amendments to the Code likely to be announced shortly. It is expected the changes will take effect from 1 July 2010 to facilitate efficient amendment to disclosure documents by franchisors with a June 30 financial year.

The Government has already flagged the nature of the amendments, with most being procedural or clarifying existing drafting ambiguity, referencing or formatting. It is expected that the most important new requirements will be:-

  1. Franchisors will need to include specific information concerning renewal of the agreement, and end of term arrangements.
  2. Franchisors will be required to disclose any significant capital expenditure requirements relating to end of term arrangements.
  3. Franchisors will need to give a franchisee advanced written notice (possibly at least six month’s in advance) of the franchisor’s decision either to renew or not renew the franchise.
  4. Franchisors will be required to disclose the circumstances in which the franchisor has unilaterally varied a franchise agreement in the past, and the likely future circumstances in which unilateral variations may occur.
  5. Additional disclosure will be required in relation to whether the franchisor will require the franchisee to undertake significant (and not otherwise undisclosed) capital expenditure during the franchise agreement.
  6. Details will need to be provided of any confidentiality requirements included in the franchise agreement.

The Government rejected calls to include a new statutory good faith obligation, but it is expected that additional guidelines will be issued in relation to behaviour when engaging in dispute resolution under the Code.

In summary, the amendments are likely to be non-contentious and improve the quality of disclosure to franchisees in the areas of end of term arrangements, future capital expenditure requirements and unilateral contract variation in a manner which is pragmatic and cost-effective. If introduced within the next few weeks the timing will minimise the additional compliance cost.

When the Government announces the changes a detailed update will be provided to all of our clients. For more information in the meantime contact Stephen Giles.

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The Bribery Act 2010 (UK)

By Lindsay Houghton

The Bribery Act 2010 ( UK ) was passed by the UK Parliament on 8 April 2010 and is expected to progressively come into force from May. Because of its extraterritorial operation, it may have serious ramifications for Australian corporations which conduct some business activities in the UK. The offence of failing to prevent bribery applies to conduct of corporations outside the UK if the corporation (or partnership) carries on a business or part of its business within the UK even if that part of the business has no connection with the circumstances under which the bribery may have occurred.

The main offences under the Bribery Act are:

  • Direct or indirect offers of financial or other advantage intended to secure improper performance by any person of private or public functions and activities.
  • Requests for, or the improper acceptance of, financial or other advantage to secure improper performance by any person of private or public functions or activities (Ss1-5).
  • The bribery of a foreign official (which includes officials of a public international organisation). This offence is not dependent on improper performance. Instead, the key elements of the offence are: an intention to influence a foreign official in his official capacity; an intention to obtain/retain business, or to secure an advantage in the conduct of business; and the relevant act or omission is not permitted by local written law (or the rules of a public international organisation) S.6.

    A commercial organisation’s failure to prevent Bribery by an associated person providing it with services is made a strict liability offence subject to a defence that adequate procedures were put in place to prevent that conduct (Ss.7-8). It is not necessary that an associated person should have been prosecuted (S.7 (3)). The meaning of services falls to be determined by reference to all the relevant circumstances (s8 (4)), but an employee will be presumed to be providing services for an employer. (s.8 (5)) Guidelines are to be published about procedures that should be put in place to ensure prevention (S.9) but there remains considerable uncertainty about what would constitute an adequate procedures defence, especially in cases involving conduct of an agent, distributor, sub-contractor or joint venturer. Officers of a company may commit an individual offence in respect of corporate offences (S.14).

It is vital that a corporation which conducts business in the UK ensures that it subscribes to and enforces anti-bribery policies that are sufficient to satisfy the "adequate procedures" requirements of the Act. In practice, this will require those corporations to show that they have carried out appropriate due diligence such as regular auditing and monitoring of agents, distributors, joint venturers, subcontractors and franchisees. Clients should therefore consider:

  • the adequacy of their codes of conduct and compliance programs
  • their anti-corruption supervisory and reporting lines - do they have an internal anti-corruption committee with reporting responsibilities aboard
  • their communication and training
  • their due diligence - selection and appointment of third parties
  • their due diligence - mergers and acquisitions
  • their whistle blowing systems
  • their remuneration structures
  • the implementation of their policies on gifts and corporate hospitality (not limited to foreign public officials)
  • their disciplinary procedures
  • their investigation protocols.

For more information contact Lindsay Houghton.

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Australian Consumer Law: Unfair Contract Terms - What does it mean for business?

By Fiona Wallwork

The new national regime governing unfair contract terms will commence on 1 July 2010. All Australian and foreign businesses operating in Australia will need to carefully scrutinise their standard form consumer contracts to ensure that these contracts do not contain unfair contract terms.

Overview

The new laws dealing with unfair contract terms are contained in the Trade Practices Amendment (Australian Consumer Law) Act 2009.

In summary:

  • The unfair contract terms provisions apply to standard form consumer contracts.
  • The laws only apply to business to consumer contracts – that is, contracts for the supply of goods or services to an individual whose acquisition is wholly or predominantly for personal, domestic or household use or consumption.
  • A contract between businesses does not fall within the scope of the provisions, except potentially in respect of a ‘sole trader’ who may have common business and personal interests (but only to the extent that the contract relates to goods and services acquired wholly or predominantly for the consumer’s personal, domestic or household use).
  • The laws also only apply to ‘standard form contracts’ – this is not defined, but in broad terms will typically be a contract that has been prepared by the business and is offered to the consumer on a ‘take it or leave it’ basis.
  • The unfair contract terms provisions will apply to all standard form consumer contracts entered into on or after 1 July 2010. They will also apply to standard form consumer contracts that are renewed, or terms of a standard form consumer contract that are varied after 1 July 2010.
  • Terms in standard form consumer contracts will be open to review against a test of unfairness. Unfair terms will be void. (What is an ‘unfair term’ is considered in more detail at the end of this article).

Consequences of regulation

The new laws do not prohibit or prevent the use of standard form consumer contracts. The new laws are also not concerned with giving consumers additional protection where they have made a poor choice or struck a bad bargain.

The aim of the unfair contract term provisions is to provide a measure of protection for consumers who are ‘at the mercy’ of businesses who are in a stronger bargaining position. The new laws afford consumers a measure of protection against risks that may be unfairly allocated to them by virtue of their weaker bargaining position

What should businesses do now?

Businesses need to think carefully when preparing or relying on standard form consumer contracts. Businesses need to consider whether inclusion of each term in the contract is necessary to protect legitimate business interests.

Businesses should consider the following:

  • Review contracts to check for terms (particularly those that preserve discretionary or unilateral rights) that may be regarded as unfair, and assess whether these terms should be varied or removed from the contract.
  • Ensure that contracts are clear and well structured - all terms should be expressed in plain language, be legible and presented clearly.
  • Any terms that are weighted towards the business should be checked to ensure that they are not disproportionate to the need to protect legitimate business interests.
  • Ensure that contracts contain severance clauses, to allow any unfair term to be severed from the contract.
  • Keep detailed reasons why terms were included in contracts to provide the necessary justification for the term.
  • Consider incorporating outlines and acknowledgments as to why certain terms are included in the contract in pre-contract disclosure and the contract itself.
  • If there is an opportunity for the consumer to negotiate contract terms, ensure any negotiations are recorded and undertaken in good faith.

What do the new laws mean for franchisors?

Thankfully (after substantial lobbying) the unfair contract terms provisions only apply to business to consumer contracts, not business to business to business contracts. Therefore franchise agreements are generally outside the scope of the new provisions.

However, franchisors still need to be aware of these new laws, as they will apply to standard form consumer contracts used by the franchisor and the franchise network.

What are “Unfair Terms”

If a contract is a standard form consumer contract, a term of that contract will be void if the term is unfair. The contract will continue to bind the parties to the extent that the contract is capable of operating without the unfair term.

A term in a standard form consumer contract is unfair if:

  • it would cause a significant imbalance in the parties’ rights and obligations arising under the contract, and
  • the term is not reasonably necessary to protect the legitimate interests of the party who would be advantaged by the term, and
  • it would cause detriment (whether financial or otherwise) to a party if it were to be applied or relied upon.

Relevant to this determination is:

  • a consideration of the contract as a whole, and
  • the extent to which the term is transparent – that is, whether it is:
    • expressed in reasonably plain language
    • legible
    • presented clearly
    • readily available to the party affected by the term.

The new law provides some examples of terms that may be regarded as unfair in appropriate circumstances. These examples are merely intended to give statutory guidance on the types of terms that are regarded as warranting caution, rather than being prohibited outright or creating a presumption that they are unfair.

The examples include terms that:

  • Permit one party (but not the other) to:
    • avoid or limit performance of the contract
    • terminate the contract
    • vary the terms of the contract
    • vary the upfront price payable under the contract without the consumer being able to terminate it
    • renew or not renew the contract
    • vary the characteristics of the interest in land sold or granted under the contract
    • unilaterally determine whether the contract has been breached or to interpret its meaning
    • limit vicarious liability for its agents
    • assign a contract to a third party to the detriment of the other party without their consent
    • limit the right of one of the parties to sue the other party
    • limit the evidence that one party can adduce in proceedings relating to the contract or to impose the evidential burden on one party in proceedings.
  • Penalise a party for breach or termination of the contract. In this context arguably even a genuinely compensatory provision (like default interest) will be of the nature of a penalty for non-performance.

The terms of a contract that cannot be considered to be unfair are terms that:

  • set the upfront price payable under the contract, or
  • define the main subject matter of the contract, or
  • are terms required, or expressly permitted, by a law of the Commonwealth or a State or Territory.

Certain shipping contracts are excluded from the unfair contract terms provisions, including shipping contracts, contracts which are constitutions of companies, managed investment schemes or other kinds of bodies, and certain insurance contracts.

Note on new Australian Consumer Law

The new laws dealing with unfair contract terms are part of a broader national approach to consumer law.

The Trade Practices Amendment (Australian Consumer Law) Act 2009 is the first stage of the introduction of a single national consumer law known as the Australian Consumer Law.

In addition to the unfair contract term provisions, the first stage of the new Australian Consumer Law also includes new enforcement powers for the ACCC to protect consumers. These powers include the ability to seek or issue:

  • civil monetary penalties
  • banning orders
  • substantiation notices
  • infringement notices
  • refunds for consumers, and
  • public warnings.

For further information please contact Fiona Wallwork

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New National Business Name Registration System

By Hannah Hopper

The State/Territory based business name registration system is to be replaced by a new streamlined national system. This is expected to commence in April 2011, provided that legislation is passed in all Australian jurisdictions.

As part of the regulatory reform agenda of the Council of Australian Government, the State and Territory Governments have agreed to refer their powers for business name registration to make way for the national system.

Like the current system, businesses must register a business name if they carry on business within Australia under a name that is different to their own entity name. This allows for the person or company behind a business name to be easily identified.

However, the purpose of the proposed new system is to provide for a uniform online registration process for both business names and ABNs , and offer other business information services (eg trade mark and domain name searches) to help reduce the burden on business.

Key features of the new system

  • The new system will be managed by ASIC (in association with other organisations such as ABR and IP Australia).
  • Businesses will only be required to register a business name once, regardless of how many States or Territories those businesses operate in.
  • To register a new business name, businesses will be required to either:
    • have an ABN, or
    • be in the process of applying for an ABN and not have been refused an ABN.
  • The system will provide for online registration in conjunction with ABN registration. So, businesses will be able to register a business name:

Similar to the existing system, there will also be a paper based application form.

  • The fees for registration and renewal will be the uniform and lower (except in the Northern Territory) and there will be options for one or three year registration periods only. The costs for new business names and renewals will be:
    • One year: $30
    • Three years $70

This replaces the current fractured system which has different fee structures and registration periods.

  • In terms of selecting and searching for names:
    • there will be an online test applied to determine registrable names. For example, a name will not be registered if it is:
      • identical or nearly identical to a registered business name, company name or a name on the National Names Index (i.e. names of cooperatives, associations and limited partnerships etc), or
      • inappropriate, misleading, offensive or deceptive
    • the system will allow businesses to conduct trade mark searches during the application process. It will still be the business’ responsibility to ensure that the business name does not infringe any trade mark, and
    • some ownership and business contact details for business names currently registered in Australia will be accessible online for free at www.asic.gov.au. More detailed information (including the business address for home-based businesses) will be available for purchase.

Impact on franchise systems

If a franchisor requires its franchisees to trade under a specific franchise/business name, then the franchisee will still need to register that name. Typically, this name would incorporate the franchisor’s brand and a particular suburb or region.

The key change is that franchisees will no longer need to provide ASIC with written consent from the franchisor for the registration of the new franchise name. But, franchisees will need to ensure that they have the right in their franchise agreement to trade under that name. Applicants will be reminded of this during the application process.

Reminder!

Registration of a business name does not in itself provide a business with any proprietary rights to that name. This can only be achieved by registering a trade mark.

We will continue to update you the progress of the proposed new system via Franchising Focus.

For further information please contact Hannah Hopper 1.


1 The article is based on information provided by the Australian Government's Department of Innovation, Industry, Science and Research in one of its recent Consultation Forums and also the website of COAG

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