While franchisees may feel let down by the GovernmentÍs rejection of the recommendation of the Opportunity not Opportunism report for a standalone obligation of good faith to be included in the Franchising Code of Conduct there is much in the reform package to compensate. The Government agreed in principle with the views expressed in the report that franchisors and franchisees undertake their business in good faith but, in my opinion sensibly, decided to deliver improvements in a more certain and targeted way.

A standalone good faith obligation was rejected because of concerns over its precise meaning and application. In the words of Judge Posner in a case from Wisconsin which has legislated a good faith obligation, the cases are ñcryptic as to its meaningî. The Government decided that the extra uncertainty that would be created by a general, undefined good faith obligation could be expected to have adverse commercial consequences for franchisees including increased risk and increased business costs as well as potentially jeopardising small business funding.

The reform package announced in November 2009 instead targets ñbad faithî through addressing specific conduct issues and providing for stronger enforcement. Both initiatives are significant.

Specific behavioural reforms announced include disclosure of the process that will apply in determining end-of-term arrangements including whether or not there is a right of renewal beyond the term of the agreement. The Government notes that ñany exit arrangements should give due regard to the potential transferability of equity in the value of the business as a going concernî although the manner in which this sentiment is legislated for is not specified.

The Government is also acting on ñopportunisticî conduct although the manner and extent of reform in this area will depend on the recommendations of an expert panel which has been appointed to report on unconscionable conduct in general as well as particular issues: unforeseen capital expenditure, unilateral contract variation, attribution of legal costs, confidentiality agreements, and franchisor-initiated changes to franchise agreements when a franchisee is trying to sell the business.

Improved enforcements

The announced improvements to the enforcement of the Code are particularly significant. The ACCC will be given power to conduct random audits of franchisors and a naming and shaming power will be available under which the public will be alerted to rogue or unscrupulous franchisors.

The ACCC will be empowered to issue substantiation notices under which franchisors must provide information to substantiate claims they have made. And civil penalties (of up to $1.1 million for franchisor companies and $220,000 for individuals) for engaging in misleading or unconscionable conduct will be provided for.

Mediation under the Code will be refined to make it more effective. The enhanced power of the ACCC as the sector regulator is a feature of the reform package.

The full extent of the package will not become clear until the expert panelÍs recommendations on unconscionable and opportunistic conduct are available. The panelÍs terms of reference require it to consider the need to introduce a list of examples of unconscionable conduct, or a statement of principles in relation to unconscionable conduct, into the Trade Practices Act.

This is a very challenging, but potentially valuable, exercise. The current unconscionability provisions have had little direct impact on the franchising sector because of uncertainty as to the scope of the prohibition and its application to commercial practices in franchising. This indeed is the main reason why the good faith recommendation was not accepted by the Government.

Provisions of uncertain scope and application benefit lawyers but provide little practical guidance to franchisors and franchisees. A statutory list of franchise-sector specific practices constituting unconscionable conduct may not meet with universal approval but in providing a greater degree of certainty it would be a worthwhile initiative.

These are all potentially very significant reforms which franchisees _ both prospective and existing _ can take great comfort from.

Andrew Terry, Professor of Business Regulation, Sydney University and Consultant to DC Strategy