Goodwill and good faith: 7-11 Short changes the Australian Franchise Systems
One of Australiaās largest and oldest franchise systems has been rocked t with revelations of underpayment of wages by its franchisees and allegations of dubious reporting. 7/11 brand reputation has been bruised and battered amidst franchisee discordance and scrutiny by Australian regulators.
This signals that financial reporting and governance systems should be prevalent throughout the franchise system to minimise risk of breaching the Code. The investigation of 7/11 and subsequent public outcry heralds the increased risk to the franchise sector of being sniffed out by the corporate watchdog and sounded off by whistle-blowers for non-compliance with the Code.
The dramatic developments with 7/11 remind Australian franchisors and franchisees of their putative obligations of good faith now required by the Code. Amended since January 2015 the Code includes ācivil penalty provisionsā which empower the Australian Competitor and Consumer Commission (ACCC) to fine franchisors up to $54,000 per breach of each civil penalty provision. A timely warning for those playing in Australiaās $144 billion franchise sector.
Good faith requires parties to exercise their powers reasonably and not arbitrarily. Certain conduct may lack good faith if one party acts dishonestly, or fails to consider the legitimate interests of the other party. The 7/11 controversy has raised the lid on the compliance toolbox of other franchise systems to unveil possible breaches of these good faith provisions.
Former ACCC head, Allan Fells suggests that wage and financial reporting goes further than just the 7/11 franchise. In my view, the biggest issue (at least in the short-term) is the fact that āgood faithā is not defined by the Code which leaves it capable to wide interpretation. This inevitably leads to uncertainty when these conditions exist, there is risk. Arguably franchisors and franchisees understand the exposure of entering a business relationship, and have expectations about certain outcomes. However, it seems to me that uncertainty creates the most risk for both parties.
In the context of the good faith provisions, uncertainty is created by the lack of a guiding definition of the term and the potential reach of the āgood faith net. This is of particular concern because the provision applies to pre-contract conduct as well as conduct during the relationship and possibly after (with regards to non-compete provisions, non-disclosure obligations etc.). While it is too early to measure and evaluate changes in conduct of either franchisor and franchisee, it is becoming increasingly apparent (at least anecdotally) that franchisors are making changes to their contractual, relational and operational approach when dealing with franchisees, based on advice from their legal advisors. As for franchisees, I donāt believe much has changed. They either donāt see the change as an issue or donāt have the preparedness or the financial resources to seek legal advice.
Even though the outcome of the 7/11 wage price scandal appears to focus fault on the franchisees, future franchisors could be accused of breaching their good faith obligations under the Code if they single out a particular franchisee.
The recent amendments to the Code makes it clear that investigation around good faith can be reviewed in every circumstance. Every franchisor should take time to ensure that its obligations of good faith have been met under the new rules, as the wash up of the 7/11 wage price controversy may broaden compliance with Australiaās 79,000 Franchise units in operation in Australia.
Rather than improving the symbiotic relationship between franchisor and franchisee, the initial impact of the good faith provisions appears to be unintentionally driving a bigger wedge between the parties fueled by the need to āmanage riskā. This means more systems, more procedures, more disclaimers and acknowledgments to sign, more risk management and less risk sharing. Goodwill requires good faith on both sides of the franchising divide.
If in doubt about your compliance obligations under the franchising Code of Conduct, always seek the advice of a specialist to ensure a healthy culture of compliance in your organization.
Dr Maurice Roussety is a Consulting Strategist for DST Advisory and Lecturer in Small Business, Franchising and Entrepreneurship at Griffith University in Queensland, Australia. He has worked with leading organisations such as Queensland Transport, IAG, Westpac, Australia Post, Coles Myer, Red Rooster, Commonwealth Bank, ACCC, and Optus. Maurice holds a PhD in Intellectual Property and Franchise Goodwill Valuation. He also holds a Masterās degree in Leadership and in Business Administration. He is available for consulting and public speaking engagements and can be contacted further at maurice@dstadvisory.com or you can visit him at www.mauriceroussety.com.au
