Legal restrictions on franchise contracts and the relationship between the parties

Franchise relationship laws

Are there specific laws regulating the ongoing relationship between franchisor and franchisee after the franchise contract comes into effect?

The Code regulates the ongoing franchise relationship as follows:

  • The parties must act towards each other in good faith.
  • Disclosure is required prior to renewal or any extension of term or scope of the franchise agreement.
  • Annual disclosure of financial statements (and if applicable, an audit report) for any marketing or cooperative fund is required. The franchisor must also maintain the fund as a separate account.
  • An updated disclosure document must be provided if requested (see question 20).
  • The occurrence of materially relevant facts must be disclosed (see question 20).
  • The franchisor must notify the franchisee, in writing, whether the franchisor intends to extend the franchise agreement or enter into a new agreement. The notice must be given at least one month before expiry for agreements with a term of less than six months and at least six months before expiry for longer agreements.
  • The Code regulates franchisee transfers including by providing the franchisor may not unreasonably withhold consent.
  • The Code limits the franchisor’s ability to require franchisees to incur significant capital expenditure.
  • The Code limits the purposes for which marketing and advertising fees can be expended.
  • A franchisor must not restrict or impair association of franchisees.
  • A franchise agreement must include a dispute resolution provision that complies with the Code including by providing for mediation.

Other than the Code (and regulations applicable to South Australian franchise participants, which provide for dispute resolution), there are no laws specifically regulating the franchise relationship.

Operational compliance

What mechanisms are commonly incorporated in agreements to ensure operational compliance and standards?

Franchisors will often require online access to sales and other financial information relating to the franchise business including access to franchisee point of sale and bookkeeping systems. The franchise agreement will also typically require regular reporting of financial and other business information relating to the franchise.

A franchisor will typically be entitled access to the franchisee’s business records for the purposes of auditing and confirming compliance with the franchise agreement. If an inspection or audit reveals non-compliance, the franchisor will usually be entitled to reimbursement of the costs of that inspection or audit.

Franchisees are usually required to use and supply products approved by the franchisor and to use suppliers approved by the franchisor.

Amendment of operational terms

May the franchisor unilaterally change operational terms and standards during the franchise relationship?

The franchisor commonly alters system standards and the content of operations manuals from time to time. Relevant legal considerations in making such changes include:

  • the exercise of discretion by the franchisor under the franchise agreement may be subject to the obligation of the franchisor to act in good faith;
  • the ability to make unilateral changes to the terms of the franchise agreement and previous such changes must be disclosed in the disclosure document. This will only be relevant if the change to operational terms and standards constitutes a unilateral change to the terms of the franchise agreement; and
  • the limits on the franchisor requiring franchisees to undertake significant capital expenditure.
Other laws affecting franchise relations

Do other laws affect the franchise relationship?

Other laws which affect the franchise relationship include laws relating to:

  • taxation;
  • intellectual property;
  • workplace laws including health and safety; and
  • anticompetitive conduct laws under the CCA.

Industry-specific laws may also be relevant.

Policy affecting franchise relations

Do other government or trade association policies affect the franchise relationship?

Certain industry associations have adopted policies applicable to their members which may be relevant to the franchise relationship depending on the industry to which the franchise relates.

The Franchise Council of Australia has adopted minimum standards of conduct for its members.

Termination by franchisor

In what circumstances may a franchisor terminate a franchise relationship? What are the specific legal restrictions on a franchisor’s ability to terminate a franchise relationship?

Termination is governed by Division 5 of Part 3 the Code. If a franchisee is in breach of the franchise agreement and the franchisor proposes to terminate the agreement the franchisor must:

  • give to the franchisee reasonable notice, in writing, that the franchisor proposes to terminate the franchise agreement because of the breach;
  • tell the franchisee what the franchisor requires to be done to remedy the breach; and
  • allow the franchisee a reasonable time (which need not exceed 30 days) to remedy the breach.

The franchisor may terminate a franchise agreement in the absence of breach if provided for in the franchise agreement. The franchisor must give reasonable written notice of the proposed termination, and reasons for it, to the franchisee.

Immediate termination is permitted if the agreement gives the franchisor the right to terminate the agreement should the franchisee:

  • no longer hold a licence that the franchisee must hold to carry on the franchised business;
  • become bankrupt, insolvent under administration or a Chapter 5 body corporate;
  • in the case of a franchisee that is a company - become deregistered by the Australian Securities and Investments Commission;
  • voluntarily abandon the franchised business or the franchise relationship;
  • be convicted of a serious offence;
  • operate the franchised business in a way that endangers public health or safety; or
  • act fraudulently in connection with the operation of the franchised business.
Termination by franchisee

In what circumstances may a franchisee terminate a franchise relationship?

A franchisee may ‘cool off’ within seven days after the earlier of:

  • entering into the agreement; and
  • making any payment (whether of money or of other valuable consideration) under the agreement.
Renewal

How are renewals of franchise agreements usually effected? Do formal or substantive requirements apply?

The franchisor must provide notice of its intentions regarding renewal (see question 27) and, at least 14 days prior to renewal, provide disclosure. The franchise agreement will typically set out the conditions for renewal. If the franchisee has satisfied these requirements, the parties will sign a new franchise agreement on or prior to the expiry of the current term.

Refusal to renew

May a franchisor refuse to renew the franchise agreement with a franchisee? If yes, in what circumstances may a franchisor refuse to renew?

The franchisor is not obliged to include a renewal right in the franchise agreement. If included the franchisor may refuse to renew the agreement if the franchisee has not complied with the requirements for renewal.

Transfer restrictions

May a franchisor restrict a franchisee’s ability to transfer its franchise or restrict transfers of ownership interests in a franchisee entity?

The Code prohibits a franchisor from unreasonably withholding consent to transfer of a franchise agreement. It provides that a franchisor may reasonably withhold its consent if:

  • the proposed transferee is unlikely to be able to meet the financial obligations that the proposed transferee would have under the franchise agreement;
  • the proposed transferee does not meet a reasonable requirement of the franchise agreement for the transfer of the franchise agreement;
  • the proposed transferee does not meet the selection criteria of the franchisor;
  • the proposed transferee does not agree, in writing, to comply with the obligations of the franchisee under the franchise agreement;
  • the franchisee has not paid or made reasonable provision to pay an amount owing to the franchisor;
  • the franchisee has not remedied a breach of the franchise agreement;
  • the franchisor has not received from the proposed transferee a written statement that the transferee has received, read and had a reasonable opportunity to understand the disclosure document and the Code.

This is a non-exhaustive list.

Transfers of ownership interests in the franchisee may be subject to the same terms of the franchise agreement that govern transfers of the agreement.

Fees

Are there laws or regulations affecting the nature, amount or payment of fees?

Generally, no (see question 38).

Usury

Are there restrictions on the amount of interest that can be charged on overdue payments?

Agreed damages provisions and provisions for payment of late fees and interest should be drafted so as the ensure that they are not unenforceable penalties. The amount payable should be a genuine estimate of the loss that the non-defaulting party will incur as a result of the default.

Franchisees may also challenge such provision on the basis that they are void unfair terms under the Australian Consumer Law (see question 42).

Foreign exchange controls

Are there laws or regulations restricting a franchisee’s ability to make payments to a foreign franchisor in the franchisor’s domestic currency?

A franchisee may be required to withhold tax from royalties paid to a foreign franchisor and remit that tax to the Australian Taxation Office. Otherwise there are no restrictions on franchisees making payments to foreign franchisors in the franchisor’s domestic currency.

Confidentiality covenant enforceability

Are confidentiality covenants in franchise agreements enforceable?

Generally, yes.

Good-faith obligation

Is there a general legal obligation on parties to deal with each other in good faith during the term of the franchise agreement? If so, how does it affect franchise relationships?

The common law imposes a requirement to act in good faith on the parties to the franchise agreement. It is particularly relevant to the exercise of discretions of the franchisor given under the franchise agreement.

The Code extends the common law obligation of good faith to also apply to persons who propose to enter into a franchise agreement.

The Code provides that, without limiting the matters to which a court may have regard for the purpose of determining whether a party to a franchise agreement has contravened the obligation, the court may have regard to whether the party acted honestly and not arbitrarily; and whether the party cooperated to achieve the purposes of the agreement.

Franchisees as consumers

Does any law treat franchisees as consumers for the purposes of consumer protection or other legislation?

The Australian Consumer Law prohibits unfair terms in standard form small business contracts. These laws will apply to some franchise agreements. If these provisions apply, the franchise agreement should be reviewed to limit the risk of terms being found unenforceable as unfair terms.

The Australian Consumer Law provides consumer purchasers of goods and services with guarantees, including guarantees that the goods or services are of acceptable quality, fit for purpose and meet their description. Franchisees may have the benefit of these guarantees with respect to certain goods or services acquired for their franchise businesses.

Language of the agreement

Must disclosure documents and franchise agreements be in the language of your country?

Yes.

Restrictions on franchisees

Describe the types of restrictions placed on the franchisees in franchise contracts.

Franchisees are generally required to:

  • operate only from an approved site and or within an approved territory;
  • operate and market the business in accordance with the franchisor’s standards and policies;
  • acquire, use and supply only goods and services approved by the franchisor;
  • use suppliers approved by the franchisor;
  • devote full or a prescribed amount of time and attention to the business or employ a manager to do the same; and
  • not engage in competing businesses, or solicit employees from the franchise system, during and following ending of the franchise.
Competition law

Describe the aspects of competition law in your country that are relevant to the typical franchisor. How are they enforced?

Part IV of the CCA regulates anticompetitive conduct and generally restricts the conduct of franchisors as follows:

  • Franchisors are generally not permitted to require franchisees to maintain minimum prices for resupply of goods or services (ie, ‘resale price maintenance’).
  • Price fixing between competitors is prohibited. This is particularly relevant to promotional pricing where the franchisor operates company owned franchise units.
  • Exclusive dealing includes the supply of goods or services by a franchisor on the condition that the franchisee acquire other goods or services from a third party (eg, a supplier approved by the franchisor). This conduct is prohibited if it has the purpose, or has or is likely to have the effect, of substantially lessening competition.

These forms of anticompetitive conduct can be sanctioned by the ACCC by the processes of notification and authorisation.

Courts and dispute resolution

Describe the court system. What types of dispute resolution procedures are available relevant to franchising?

Franchise agreements must include a dispute resolution provision which complies with the Code including by providing for mediation. Franchise matters are often resolved by this dispute resolution process.

The Federal Court has jurisdiction to hear matters involving breaches of federal laws such as the Code. The state and territory courts can also hear franchise matters. Limits on the quantum of the claim will apply in the lower state and territory courts. The Supreme Court in each state and territory and the federal court are courts of appeal. The highest court of appeal is the High Court.

Arbitration – advantages for franchisors

Describe the principal advantages and disadvantages of arbitration for foreign franchisors considering doing business in your jurisdiction.

The principal advantage of arbitration is confidentiality. Arbitration is not necessarily more expeditious or less expensive than litigation in Australia.

Arbitration is not common in franchise agreements between Australian parties but is often included in international agreements. The Code prohibits clauses in franchise agreements that require a party to bring proceedings outside of Australia. This prohibition must be considered when drafting venue clauses in international agreements.

National treatment

In what respects, if at all, are foreign franchisors treated differently from domestic franchisors?

Foreign franchisors are not treated differently under Australian franchise laws.