FRANCHISOR FAILURE: AN ASSESSMENT OF THE ADEQUACY OF REGULATORY RESPONSE Jennifer Mary Buchan LLB (Otago), LLM (Melbourne) Submitted in fulfilment of the requirements for the degree of Doctor of Philosophy School of Law Faculty of Law Queensland University of Technology August 2010 i Keywords administration, asymmetry, Australia, bankruptcy, benchmark, best practice regulation, business consumer, consumer protection, contracts, Corporations Act 2001 (Cth), cost benefit, disclaim, disclosure, due diligence, education, executory contract, exploitative contract, fail, franchise agreement, franchisee, Franchising Code of Conduct, franchisor, incomplete contract, insolvency, ipso facto clause, lease, liquidator, onerous contract, policy, premises, receivership, regulation, relational contract, Retail Leases Act 1995 (NSW), remedies, stakeholder, standard form contract, Trade Marks Act 1995 (Cth), Trade Practices Act 1974 (Cth), unconscionable conduct, winding up. Franchisor Failure: An Assessment of the Adequacy of Regulatory Response i ii Abstract Franchisor failure is one of the most problematic areas of the franchise relationship. It impacts negatively on landlords and other suppliers, but the contracting parties that are currently without legal rights to respond when a franchisor fails, and thus without consumer protection, are its franchisees. In this thesis I explore the current contractual, regulatory and commercial environment that franchisees inhabit, within the context of franchisor failure. I conclude that ex ante there are opportunities to level the playing field through consumer protection legislation. I also conclude that the task is not one solely for the consumer protection legislation; the problem should also be addressed ex post through the Corporations Act. ii Franchisor Failure: An Assessment of the Adequacy of Regulatory Response iii Table of Contents Keywords ................................................................................................................................................. i Abstract .................................................................................................................................................. ii List of Figures ........................................................................................................................................ vi List of Tables ....................................................................................................................................... vii List of Abbreviations ........................................................................................................................... viii Statement of Original Authorship ........................................................................................................... x Acknowledgments .................................................................................................................................. xi CHAPTER 1: INTRODUCTION ....................................................................................................... 1 1.1 Effective protection for franchisees whose franchisor fails ......................................................... 3 1.2 Challenges for the law ................................................................................................................. 8 1.3 Aim of the research .................................................................................................................... 10 1.4 Outline of thesis ......................................................................................................................... 11 1.5 Information base ........................................................................................................................ 13 1.5.1 Empirical research on the facts ....................................................................................... 14 1.5.2 Research on the current law ............................................................................................ 16 1.6 Limitations ................................................................................................................................. 17 1.7 Matters beyond the scope of this thesis ...................................................................................... 17 CHAPTER 2: WHAT IS THE PROBLEM AND HOW BIG IS IT? ............................................. 19 2.1 Research into franchisor failure ................................................................................................. 19 2.1.1 Australian franchisor failure data ................................................................................... 21 2.1.2 Evidence of failed franchisors ........................................................................................ 30 2.1.3 Why franchisors fail ....................................................................................................... 43 2.1.4 Early warning signs ........................................................................................................ 48 2.2 Franchisor failure from other perspectives ................................................................................ 52 2.2.1 Franchisor’s perspective ................................................................................................. 52 2.2.2 The government’s and the regulator’s perspective ......................................................... 52 2.2.3 Industry organisations’ and commentators’ perspectives ............................................... 54 2.3 Franchisor failure from franchisees’ perspective ....................................................................... 55 2.3.1 Additional implications for franchisees structured like a commission agency ............... 67 2.4 Franchisees from the franchisor liquidator’s perspective ........................................................... 68 2.4.1 Franchisee as creditor ..................................................................................................... 69 2.4.2 Franchisee as debtor ....................................................................................................... 71 2.4.3 Franchisee as potential litigant ....................................................................................... 73 2.4.4 Challenges facing the liquidator ..................................................................................... 73 2.5 Conclusion ................................................................................................................................. 75 CHAPTER 3: THE PROBLEM IN CONTEXT .............................................................................. 79 3.1 Development of business format franchising ............................................................................. 80 3.2 Components of 21st century franchise networks ........................................................................ 81 3.2.1 Franchisor ....................................................................................................................... 83 3.2.2 Trade marks .................................................................................................................... 90 3.2.3 Leases ........................................................................................................................... 102 3.2.4 Franchisees ................................................................................................................... 112 3.2.5 Franchisees not traditional suppliers ............................................................................. 122 Franchisor Failure: An Assessment of the Adequacy of Regulatory Response iii iv 3.2.6 Franchisees or employees? ........................................................................................... 123 3.3 The franchise agreement .......................................................................................................... 146 3.3.1 Addressing the failure of the franchisor’s business ...................................................... 148 3.3.2 The desirability of certainty in contracts ...................................................................... 149 3.3.3 Parties to commercial and consumer contracts act in their own interests ..................... 150 3.3.4 A standard form business consumer contract ............................................................... 153 3.3.5 Relational contract ........................................................................................................ 157 3.3.6 Incomplete contract ...................................................................................................... 159 3.3.7 Exploitative contract ..................................................................................................... 161 3.3.8 Breach of contract ......................................................................................................... 162 3.3.9 Contract and quasi-contract based remedies ................................................................. 166 3.3.10 Contract-related complications ..................................................................................... 167 3.3.11 Conclusion .................................................................................................................... 169 3.4 Asymmetry issues .................................................................................................................... 173 3.4.1 Information asymmetry ...............................................................................................