Hon Judi Moylan

COMPETITION AND CONSUMER LEGISLATION AMENDMENT BILL 2010

Mrs MOYLAN (Pearce) (5:52 PM) —I thank the Deputy Speaker for facilitating this opportunity for me to speak on this bill. My comments on the Competition and Consumer Legislation Amendment Bill 2010 will focus on schedule 2 of the bill. I entirely agree with the member for Dunkley, my colleague, that this does not really take us any further than we have been for a very long time. It just tinkers around the edges. The provisions of schedule 2 before the House arise from the Strengthening statutory unconscionable conduct and the Franchising Code of Conduct report delivered to the government in February this year. To frame my remarks, I will say that despite the report’s name the recommendations regarding franchising and unconscionable conduct—especially in regard to ‘good faith’—do little to strengthen the statutory regime. It is very disappointing. Since I first came to this place—and I was shadow minister—successive governments have talked about strengthening the provisions and there have been some changes made—we made some when we first came into government in 1996—but they have proven not to be satisfactory in cases where there does not seem to be good faith bargaining between the parties in the franchise sector. The response by the government was an opportunity that has been missed, especially given the importance of franchising in Australia’s business sector. The importance of franchising was recently highlighted by the Minister for Small Business, Independent Contractors and the Service Economy in March this year when he spoke at a BRW conference in Sydney. He said that buying a franchise was an increasingly popular way of getting into business. He is right about that, with 71,000 franchise agreements in place across the nation. It is true that most of them operate fairly successfully. He went on to say: Australian franchises employ more than 400,000 people and turn over $130 billion a year—that’s a lot of jobs, and a lot of money. When a franchising agreement works well, it can be a great way for people to break into business. I agree with him about that and I agree with a number of commentators who rightly say that most of these agreements work reasonably smoothly but we do get a few rogue elements within the sector. Because it is such an important sector within the business community, we need to make sure that the integrity of the franchising sector is retained. We can only do that by making sure in this place that we have laws that are meaningful and laws that are fair to both parties in these agreements. The minister’s focus on the entry into a franchising agreement is echoed in the reforms presented in this bill, but little attention has been paid to the ongoing relationship between the franchisee and the franchisor, which sets the franchising model apart from other types of business systems. As the minister’s own figures show, franchises employ a vast number of people and generate a significant amount of money. That is exactly why the conduct surrounding agreements must be framed with greater certainty. False analogies are often drawn between franchises and retail leases. Retail leases are a simple quid pro quo—a business pays money for space to sell their wares. The relationship between the parties is quite distinct. In contrast, franchises are characterised by a cooperative, symbiotic nature. The franchisor’s part of the bargain is to provide value through trademarks and the system of operation, while the franchisee’s part of the bargain is to earn the net profits from which a royalty is paid in recognition of the value of the trademark and system. Obviously it is also incumbent upon them to run the business according to the agreement. The differences affect how the business is run. Retail tenants organise their finance to ensure it is repaid at the end of the term. The franchisee model promotes investment in the business with the aim of growing and expanding the business over time. This fact is not only recognised but promoted by John O’Brien, the CEO of PoolWerx and chair of the Franchise Council of Australia. The PoolWerx website informs would-be franchisees: A … franchise is not a ‘job’, but rather a path to success through careful growth strategies. I have always been somewhat at a loss to know why the peak industry body, of which Mr O’Brien is currently the CEO, has been implacably opposed to introducing a good faith provision to ensure that there are sensible agreements between franchisors and franchisees. As franchising focuses on growth and expansion through the term of the agreement, attention should be paid to both the precontractual disclosure and the end-of-term conduct and that does not happen. But the provisions of this bill focus only on precontractual disclosure. The rationale is stated by the minister in his press release of 4 June this year, is that: By requiring disclosure upfront, potential franchisees have the information they need to decide whether the franchise is the right business for them. What the minister does not take into account is that many potential franchisees face a ‘take it or leave it’ standard contract which does not recognise the value of the growth of the business through the franchisee’s hard work and business acumen. A potent example of that is the case of Competitive Foods Australia and Yum! Restaurants International. It is a well-publicised, well-documented case. Competitive Foods operates 46 KFC outlets, primarily in Western Australia, on a franchise agreement. In 2007 the Rockingham KFC was forced to close after Yum! decided not to renew the franchise agreement. The remaining stores are all expected to close progressively as their 10- to 20-year contracts expire. It was reported on Channel 7 in Western Australia at that time that Yum! had told Competitive Foods that they wanted to take over the Western Australia KFC outlets. They offered to buy the physical facilities of the restaurants at their depreciated book value, with no ongoing concern value even though they are $2 million-a-year stores. Over the years of the contract, Competitive Foods diligently worked to build the business to the point of turning over $2 million a year. If the company were to agree to Yum!’s proposal, they would essentially be handing over all of the goodwill that their hard work, along with the franchisor, had developed, with no compensation or monetary recognition of the built-up value. It is a no-win situation for Competitive Foods, frankly. They cannot onsell the business, because their franchise rights have expired, and they are left holding leases to buildings branded with KFC’s logos. The logical buyer is therefore the franchisor who has a vastly superior bargaining position. Essentially, Yum! can offer to buy the established sites—if they do not already own them—but if their terms are not agreed to they can simply enter into a new franchise agreement with another party and leave the new franchisee to find suitable sites. Competitive Foods has no bargaining leverage in this case. But, if, hypothetically, the franchise was just breaking profit, the franchisor’s interests might best be served by renewing the franchise, because they would still receive the royalty for using the trademarks and system. The decision is in the hands of the franchisor. The point is highlighted by the evidence given by Mr Bryden on behalf of Yum! to the 2008 Parliamentary Joint Committee on Corporations and Financial Services which produced the Ripoll report, in which Mr Bryden, speaking about the reasons why Yum! may or may not grant a renewal, commented: The point is that the contract is absolutely clear. … If it is just a matter of strict reliance on contract, then our motivations, intentions, whether it is lack of trust or anything else, are absolutely irrelevant. It seems extraordinary to me that this is an issue that cannot be resolved. I know that members on both sides of this House have the goodwill to see that something is done to make these agreements fair—where you have something that talks about what happens at the conclusion of a contractual period, where it is not going to be renewed and, obviously, where the franchisee has met the conditions of their contract. In any other business agreement, in a partnership—and these are not unlike partnerships—you would have a situation where there would be some arrangement, some agreement, on how the partnership would split and who would get what out of that partnership. The assets of the business would be valued, including the goodwill, and there would be an arrangement as to an equitable split. I cannot see why it is so difficult to have those kinds of arrangements in existing franchise contracts. If the contracts remain silent on that, then we should ensure that there is an arbitration or tribunal system that makes a determination based on proper valuation of the business, including its goodwill. I have here every review about this since 1976. This matter has been reviewed and reviewed and reviewed. In 1976 it was the Swanson inquiry. In 1979 it was the Blunt inquiry. There was the Petroleum Retail Marketing Franchise Act in 1980. Service stations in that era were facing similar sorts of problems to what franchisees face today, and that was dealt with under that act—into which there was an inquiry. There were the failed exposure drafts of a Franchise Agreements Bill 1986. There was the Beddall committee report in 1990, just prior to my coming into this place and taking on the job as shadow minister. There was the voluntary franchising code of 1993 and related reports. There was the Reid committee in 1997, the franchising code and section 51AC. There was the Matthews review 2006 and code amendments, and state inquiries in both Western Australia and South Australia in 2008. Madam Deputy Speaker, I know that time is short, and I had wanted to speak to my full time because I see this as a very serious and important matter. The DEPUTY SPEAKER (Ms JA Saffin)—The honourable member can speak to her full time. Mrs MOYLAN —Thank you, but I will try to keep my speech to the minimum. If you go through some of the evidence that has been given over the years, there has been plenty of evidence to suggest that a good faith provision is a logical step forward. Professor Warren Pengilley stated in his submission: There are good grounds for inserting in the Franchising Code an obligation for parties to act in good faith. This obligation should be imposed on both parties and not on one party only … He also stated that he recommended in 1981 to the Minister for Business and Consumer Affairs that an obligation to act in good faith could be enacted, and that his belief has strengthened since then because, he said: … a franchise (properly defined) is an ongoing relationship involving the trust of one party in dealings with another. He gave evidence to similar effect again when he said: I have no objections at all to an obligation to act in good faith. I know lawyers say that the cases differ, the law is developing and so on. I have to say that it is taking an awfully long time to develop. But he goes on: It almost seems to me to be a case for saying, ‘Let’s put it in so that we know clearly where we are.’ It is not true that the concepts are unknown. There are obligations in insurance law and partnership law, for example, to act in good faith, and no doubt there are many more. I say, ‘Hear, hear!’ to that. The Law Institute of Victoria, representing 15,000 legal professionals in Victoria, recognised the need for franchisors to have certain scope to their allowable discretionary powers when dealing with franchisees, but they concluded: The LIV recognises the uniqueness of franchising in commercial relationships. They are based on a high degree of trust and universally accepted notions of goodwill. Therefore, it is important to balance this against the arguments not to regulate, which by their nature present an unworkable economic model which assumes all franchise relationships have equal power balance and remedies to resolve disputes cost effectively. This is simply not the reality in our emerging commercial markets. They go on to say: The addition of a statutory obligation on franchisors to act in “good faith” is not out of step with the approach by some courts. They give an example of a case in the New South Wales court and then go on to say: Although there is currently some uncertainty about the exact extent of the content of an obligation of “good faith”, the insertion of a statutory obligation will allow the courts to flexibly apply the concept to individual factual circumstances. My colleague the member for Dunkley mentioned Professor Zumbo, who has long argued the case for a good faith provision in this legislation and has considered this quite closely—he is probably one of the foremost experts on this matter. And he argues that enacting a statutory duty of good faith: … offers considerable potential as a mechanism for promoting ethical business conduct— and submits: Such a statutory duty of good faith should operate generally— within the franchising relationship— … including requiring the parties to resolve disputes in good faith. I do not understand why successive administrations have been so implacably opposed to doing what is really a good-sense measure in the interests of maintaining, as Professor Zumbo said, ethical business conduct and the integrity of the great franchising industry that we have in this country—there seems to be no reason in the wide world. But the South Australian government submission to the 2008 federal franchising inquiry stated: The Committee recommends that the exclusion or inadequate determination of goodwill or other such exit payments by a franchisor during negotiations with a franchisee regarding a franchise agreement constitutes “unconscionable conduct” … I agree with that. I think it is like robbing somebody. If you are working together in a partnership to build the goodwill of the business in the interests of both parties, there is absolutely no reason in the wide world why there should not be an equitable split, all things being equal, at the end of the contractual period of that agreement. To do otherwise is to continue to perpetrate what is a very, very unfair practice that prejudices the rights of the little people, the franchisees in most cases. The submission goes on: The Committee recognises that goodwill presents a challenge to the franchise industry because of the unique structure of franchise businesses, the location of brand ownership and the distribution rights and responsibilities between the parties. Yet inherent in recognising that the success of a franchise depends on both parties is the need to recognise and, where necessary, quantify the value of the franchisee efforts over the term of the contract. This cannot be too difficult. I spent many, many years in business before I came into this place and I do not understand why this cannot be done in a fair way. While an individual franchise may not succeed without the brand power and resources provided by the overarching system, the efforts—(Time expired)