The Franchising Code of Conduct (Code) provides important protections to franchisees that aim to reduce the perceived inequality of bargaining power and asymmetry of information in franchising agreements. Fundamental to the Code is the definition of franchise agreement. Only agreements falling within this definition are subject to the rigorous disclosure regimes and termination procedures prescribed by the Code.
The recent decision in Workplace Safety Australia v Simple OHS Solutions Pty Ltd NSWCA 84 demonstrates the importance of considering whether or not an agreement is in substance a franchise agreement due to the consequences that can arise if it is and compliance has not occurred.
Workplace Safety Australia (WSA) provided online subscriptions packages designed to assist businesses to meet their obligations under the relevant occupational health and safety legislation. On 19 September 2011, WSA and Simple OHS Solutions Pty Ltd (Simple) entered into an agreement (Distribution Agreement), whereby Simple agreed to act as distributor of WSA’s subscription packages on the terms contained in the Distribution Agreement. Amongst other things, the Distribution Agreement required Simple to:
- Pay WSA a Distributorship Fee and Customer List Fee. Under the Customer List Fee, $150,000 was payable upon completing initial training, with the balance payable in quarterly instalments;
- Subscribe 15 new customers to subscription packages each per month. If this was not met, WSA had the right to immediately terminate the Distribution Agreement; and
- Submit to WSA a detailed business plan setting out it intended to fund and operate its business in the territory.
The Distribution Agreement was unsuccessful and WSA terminated the contract on the grounds that Simple had failed to pay one of the quarterly instalments and had additionally failed to meet the customer subscription requirement of the Distribution Agreement.
WAS THERE A FRANCHISE AGREEMENT?
The main issue was whether the Distribution Agreement amounted to a franchise agreement within the meaning of the Code. The Code at the time defined a franchising agreement as an agreement:
- Which is a written, oral or implied agreement;
- Where a person (the franchisor) grants to another person (the franchisee) the right to carry on the business of offering, supplying or distributing goods or services in Australia under a system or marketing plan substantially determined, controlled or suggested by the franchisor or an associate of the franchisor;
- Under which the operation of the business will be substantially or materially associated with a trade mark, advertising or commercial symbol owned, used or licenced by the franchisor (or associate of the franchisor); and
- Under which, before starting or continuing the business, the franchisee must pay or agree to pay to the franchisor an amount including, for example, an initial capital investment fee, payment for goods and services, a royalty fee or training fees (clause 4(1)(d)).
The dispute was only concerned with whether the Distribution Agreement satisfied clause 4(1)(b) of the Code.
The first element requires the court to decide was whether WSA had granted Simple the right to carry on the business of offering, supplying or distributing goods or services in Australia. The court highlighted that the Distribution Agreement conferred on Simple the exclusive right to market and sell subscription packages, comprising of educational material and access to WSA’s legal advisors and research department, in the relevant territory. Accordingly, this fell within the definition of services in theCompetition and Consumer Act (the Act) and satisfied the first element.
The second element required by clause 4(1)(b) was whether the business was carried on under a system or marketing plan. In interpreting the word ‘system’, Bathurst CJ adopted the interpretation of the Full Federal Court in Rafferty v Madgwicks as being a ‘co-ordinated method or procedure, or scheme whereby goods or services are sold.’ His Honour also reemphasised that the system or marketing plan does not have to be specifically spelt out in the franchise agreement, but rather can create rights and obligations which allow the franchisor to determine, control or suggest that the business be conducted under a system or marketing plan. Accordingly, the court found that the Distribution Agreement provided for the business to be carried out under a system or marketing plan, which was the business plan that Simple was required to submit to WSA under the Distribution Agreement, despite no express reference being made to the marketing of products. Rather, the court held that this would be required to be included based on a broad interpretation “operate the Distributors business” in the relevant clause.
Other clauses in the Distribution Agreement also included requiring:
- WSA standard forms to be used when marketing and selling packages and products; and
- WSA was empowered to provide a manual in respect of marketing and selling the packages (although the court did not take into account the actual contents of the manual).
The cumulative effect of these matters was that the business was operated under a system or marketing plan. Importantly, for this element Bathurst CJ noted that it was not relevant that the business plan was prepared by Simple rather than WSA.
The final element that needed to be satisfied, was that the system or marketing plan substantially determined, controlled or suggested by WSA.
The court focused on the question of control, which must be determined by reference to practical and commercial considerations. The court held that although Simple was required to produce the business plan, WSA had the power, in a practical sense, to control its content by virtue of the cumulative effect of the Distribution Agreement, and specifically, WSA’s power under the Distribution Agreement to give directions which Simple was required to comply.
Accordingly, the Court found there was a franchise agreement within the meaning of the Code, and accordingly WSA was not entitled to terminate without complying with the relevant provisions of the code. Consequently, WSA’s termination was wrongful.
Section 82 of the Act entitles a person who suffers damage by the conduct of another person to recover the damage. The court held that WSA had contravened section 51AD of the Act, by failing to comply with the Code, for example, as the Code’s mandatory disclosure regime was not complied with. Accordingly, Simple was entitled to recover the loss suffered as a result of entering into the agreement in circumstances where it was conceded that it would not have done so had there been compliance.
This decision demonstrates the importance of considering the substance of the agreement and not the form or name given to it, prior to entering into the contract. Particularly, contracting parties need to be aware of definition of franchise agreement, so that if the effect of the agreement is that it falls within the definition, the ‘franchisor’ satisfies the regime set out in the Code. Failing to do so, means that there has been an automatic contravention of s 51AD of the Competition and Consumer Act entitling the ‘franchisee’ to remedies under that Act.