Proposed new franchising law in SA

On 1 October 2010 Minister Tom Koutsantonis, SA Labor Government, announced the government’s intention to legislate reforms in the small business sector, establishment of a Small Business Commissioner and introduction of new laws to protect franchisees. The proposed Small Business Law will empower the Small Business Commissioner to monitor the fair treatment of small businesses in their commercial dealings with other traders, receive and investigate complaints regarding unfair market practices, mediate disputes including with franchisors and landlords.

The SA Government intends to release a draft of the legislation late this year intending to have the legislation commence in 2011(SA franchise legislation). Mr Abetz MLA which was announced on 11 October this year the introduction of the WA Franchising Bill.

The Minister has stated “What we are trying to do is empower franchisees for the first time in the history of franchising in Australia”. He said “Good faith dealings and unconscionable conduct will be put into law in SA and for the first time, if people act without good faith the franchisee will have a way of address through the laws. If a franchisee is bullied, is being coerced, because of a contract they have signed now they have some redress”.

The Minister’s press release announcements have been focused on promoting the introduction of new franchise laws which in part will be based on the lapsed Private Members Bill “Franchising (South Australia) Bill 2009” introduced by Mr Tony Piccolo MP in December 2009.

The advisor to the Minister has indicated that in drafting the new SA franchise legislation, provisions will reflect the Fair Trading Act and the Victorian Small Business Commissioner’s Act 2003. It is not clear if the SA franchise legislation will also include sections of the WA private members Franchising Bill 2010.

Aspects of the proposed legislation have received comments ranging from praise to harsh criticism. The Federal Small Business Minister Nick Sherry responded on 13 October 2010 to the South Australian announcements and is reported to have said:

“Adopting state based laws, in a country of nationwide regulation, compounds complexity and is inefficient and is just bad governance. National regulation is a simpler approach.”

During his speech at the National Franchise Convention Senator Sherry indicated that he could take appropriate action to stop the proposed South Australian legislation and keep the commitment of the Federal Government that there would be three to five years of regulatory stability within the franchise sector. No specifics were given as to how the Senator would achieve this return to a national only approach to franchising laws.

The background to the SA Government’s desire to introduce this SA franchise legislation is found within the 2008 65th Report of the Economic & Finance Committee into Franchises and Minister Koutsantonis’ acknowledgement that the franchise sector accounts for about 10% of the Nation’s economy and 96% of all private sector businesses in SA.

If the legislation is assented to, South Australia will have the first state based legislation dealing with the relationship between franchisor and franchisee. The Minister has said the legislation may also cover other relationships including that of landlord and tenant. The Small Business Commissioner will be empowered to levy fines and penalties in the enforcement of the small business laws and breaches of the Federal Franchising Code of Conduct and given the task of interpretation of a statutory definition of good faith and definition of unconscionable conduct which is to be broader than appears in the Trade Practices Act.

The wording of each of these definitions have not been released at this stage though it may reflect the Piccolo Bill which states acting in good faith is “to act fairly, honestly, reasonable and in a cooperative manner”. The WA Franchising Bill 2010 states it is “to act fairly, honestly, reasonable and cooperatively” and in the Explanatory Memorandum to the Bill states that a breach will result in civil penalties up to $100,000 but no criminal offences will apply.

The SA Minister’s Department will be reviewing other legislation such as the Federal Insurance Contracts Act 1984 which provides for “utmost good faith” and determining what if any constitutional conflicts may occur in establishing the SA legislation. To date no other legislature has passed laws to define acting in good faith which the Courts have recognised as a complex issue needing a balance between competing interests of the franchisee, franchisor, investors, other franchisees in the system, landlords, financiers, customers, section 45 Trade Practices Act (prohibiting cartels and other cooperative activities) and many other factors.

The Piccolo Bill was expressly stated to be retrospective, extraterritorial and to provide for significant monetary penalties of $200,000.00. The WA Bill expressly seeks to be extraterritorial. It is unclear whether the Small Business Laws are to commence on 1 October or the date of assent. The Minister’s advisor has stated that there is currently no intention that the legislation be retrospective but otherwise has not commented on the scope of the law.

The WA Bill introduces:

· the right of a franchisee to seek injunctions against franchisors, advisers of franchisors and others and the Court is prohibited from requiring the franchisee to give an undertaking as to damages. Consequently the number of injunction applications will increase significantly.

· The right of a franchisee to seek redress for breach through an order forcing the renewal of the franchise agreement by way of writing a new term into the old franchise agreement. In the SA it is yet to be determined whether there will be a definition of “small business” or whether, as in Victoria, the Small Business Commissioner will be entitled to review disputes of any monetary value. In Victoria a mediation fee of $195.00 per party has provided significant impetus to enable disputing parties to seek a moderator to review and consider the argument and seek out a commercially realistic outcome. Since 2003 the Victorian Small Business Commissioner has been involved in over 6,500 matters with disputes valued at over $200 million.

Details of the proposed consultation and scope of SA legislation are keenly awaited. Though Federal Minister Sherry has cast doubts on the passage of the SA Bill, Minster Koutsantonis’ strident announcements indicate that there is a high likelihood that the legislation will commence in 2011. The Labor government will need the vote of 4 of the 7 independents in the Upper House to achieve this.

Business owners in South Australia should be made aware of the anticipated powers of the Small Business Commissioner and likely civil penalties. It is to be hoped that if the legislation is introduced that it will not harm small business activities in South Australia, create uncertainty or cause interstate businesses to avoid establishing business operations in South Australia.

Franchise owners in WA will now be awaiting whether the Liberal Government will accept the private members bill as a Government Bill which could lead to is passing into law as the opposition have indicated their support.