Franchisors and franchisees should make legal and Code compliance central to franchising plans. In recent years, we have seen:
- changes to the Franchising Code of Conduct (Code)1
- changes to consumer protection legislation2
- proposals for additional state based franchising regulation in Western Australia,3 South Australia4 and possibly Queensland5
- confirmation that the definition of ‘franchise agreement’ in the Code can capture arrangements that parties did not necessarily themselves consider to be franchises,6 and
- heightened interest by the ACCC in the franchise sector.7
For the majority of franchisors and franchisees who have high standards of conduct, those parties are not likely to need to change their conduct to comply. But all franchisors and franchisees will need to pay more attention to being able to evidence that compliance. Franchisors should also ensure that their agreements and practices comply with the amendments to the laws.
Take extra care when terminating
While not groundbreaking, D'Arling One Pty Ltd v Eagle Boys Dial-a-Pizza Australia Pty Ltd,8 highlights that termination is one area where it is vital to be on solid ground. Eagle Boys and D’Arling had entered into settlement agreements, under which Eagle Boys agreed to purchase D’Arling’s franchise for an agreed sum, should D’Arling not be able to find a purchaser. D’Arling’s draft sale pack describing D’Arling’s franchise to potential purchasers contained a statement concerning the term of the lease which was incorrect (that the lease was in an option period, rather than on a month to month basis). Ultimately, that sale pack was never provided to potential purchasers.
Eagle Boys sought to rescind the settlement agreement and thereby avoid its obligation to purchase D’Arling’s franchise. Eagle Boys also sought to terminate D’Arling’s franchise for fraud. Eagle Boys did this on the basis of the misstatement in D’Arling’s draft sale pack, relying on the terms of the franchise agreement and the Code.
The court found that D’Arling’s misstatement did not amount to fraud, because D’Arling had been assured by the real estate agent that it would be able to exercise the option if it wanted to.
The court also found that:
- although D’Arling had provided the sale pack to Eagle Boys for sign off before sending out to potential purchasers, the statement concerning the lease was not a representation to Eagle Boys, rather it would have been a statement to potential purchasers, and
- even if it had been a representation, it was not one on which Eagle Boys relied.
That meant that Eagle Boys had no contractual grounds for terminating either the franchise or the settlement agreement. Ultimately, the court awarded just under $100,000 to D’Arling for the loss suffered due to being unable to transfer the franchise to Eagle Boys as agreed under the settlement agreement.
Highlight changes – and make them clear
Franchisors are now obliged under the Code to specifically list those areas where they may unilaterally change the terms of their franchise agreements. Following Australian Maintenance and Cleaning Pty Ltd V AMC Commercial Cleaning (NSW) Pty Ltd,9 franchisors should also be reviewing to what extent changes to their operating manuals may also need to be highlighted—and terms of the franchise agreement clarified.
For more details, see our article ‘Contract interpretation: A franchise to grant franchises to grant franchises?’.10
WA Franchising Bill
A Western Australian Parliamentary Committee report11 has recommend against the adoption of the Franchising Bill 2010 (WA) (Bill), in favour of regulating franchising in all states and territories under the Code. The Bill proposes changes including a statutory duty on the franchisor to act in good faith and a power for the court to renew a franchise agreement where a franchisor has not acted in good faith in deciding not to renew a franchise agreement.
The Committee’s recommendation appears to make it less likely the Bill will be passed. If passed the Bill would apply in addition to the Code.
Franchisors and franchisees need to be careful in how they behave towards one another. Before you take any steps to enforce or terminate a franchise agreement, you should:
- review the terms of your franchise agreement, disclosure document and the Code to confirm you are acting within the terms of your contract
- review the terms of your operating manual to check for variations
- consider what representations have been made by you or the other party, to what extent they can be substantiated, and to what extent they have been relied upon, and
- consider the special impact of any other circumstances in which your franchise system or franchise is operating.