In brief

  • The Franchising Code will apply to any agreement which falls within the definition of a ‘franchise agreement’, regardless of the name given to the agreement.
  • In particular, business partner arrangements under which goods or services are offered by one party on behalf of the other may be subject to the Franchising Code where there are amounts payable or income sharing arrangements between the parties.
  • Businesses, especially those in the financial services sector, should seek legal advice to ensure that their arrangements with business partners are not unintentionally caught under the Franchising Code.  

Summary

In Alpha Centauri Enterprises Pty Ltd v Mortgage House of Australia Pty Ltd [2010] NSWCA 188,1 the New South Wales Court of Appeal found that a ‘Business Partner Agreement’ between providers of financial services was subject to the Franchising Code of Conduct (Franchising Code).

Implications from the decision

This decision highlights the need for businesses, particularly those that provide financial services, to be aware of the risk that the Franchising Code may apply to their arrangements with business partners. This risk is enhanced if those arrangements allow the business partners to offer goods or services on behalf of the business, and provide for amounts to be paid by the business partners to the business or for income to be shared between the parties.

If an agreement with a business partner is regarded as a ‘franchise agreement’ for the purposes of the Franchising Code, the business will be required to comply with a number of obligations as a franchisor, such as providing a disclosure document that contains certain prescribed information and complying with various restrictions and notice requirements in relation to the renewal, transfer, novation or termination of the agreement.

If businesses do not want their arrangements with business partners to be subject to the Franchising Code, they must ensure that those arrangements are structured and implemented in such a way as to fall outside the definition of a ‘franchise agreement’.

Background

Mortgage House of Australia Pty Ltd (Mortgage House) operates a mortgage broking business under which it provides various financial services to members of the public, primarily loans secured by mortgages over real property. These services are offered to the public through a network of branch offices operated by a number of business partners with whom Mortgage House has made certain arrangements. One such business partner was Alpha Centauri Enterprises Pty Ltd (Alpha Centauri), who entered into a series of ‘Business Partner Agreements’ (BPA) with Mortgage House between 2001 and 2005.

The proceedings arose after the final BPA was terminated in April 2005.

One of the issues before the court concerned whether the BPA should be regarded as a ‘franchise agreement’ and therefore was subject to the application of the Franchising Code.

The Franchising Code

The Franchising Code applies to agreements deemed to be ‘franchise agreements’ under the Franchising Code and imposes certain obligations on the franchisors under those agreements in relation to their arrangements with franchisees. An agreement will be regarded as a ‘franchise agreement’ for the purposes of the Franchising Code if it meets certain requirements, regardless of the name given to the agreement. These requirements are:

  1. there must be a written, oral or implied agreement,
  2. the franchisor must grant 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 controlled by the franchisor,
  3. the operation of the business must be associated with a trade mark, commercial symbol or advertising of the franchisor, and
  4. before starting or continuing the business, the franchisee must agree to pay to the franchisor certain fees (such as a franchise service fee, initial capital investment fee or training fee) or a payment for goods or services (subject to certain exceptions, including where the payment is for goods or services at or below their usual wholesale price or for supplies needed to start or continue the business at market value) (payment requirement).  

Was the BPA a ‘franchise agreement’?

The parties did not dispute that the BPA satisfied the first three requirements in the definition of a ‘franchise agreement’ under the Franchising Code. In particular, it was accepted that the offering of financial services to the public by Alpha Centauri on behalf of Mortgage House involved the supply of goods or services under a system controlled by Mortgage House for the purposes of the second requirement.

In relation to the payment requirement, the BPA did not expressly require Alpha Centauri to pay any fees to or to purchase any goods or services from Mortgage House. However, Alpha Centauri relied on the following terms in the BPA to argue that the payment requirement was nevertheless satisfied:

  1. Alpha Centauri was required to use only stationery supplied by Mortgage House at Alpha Centauri’s cost,
  2. if Alpha Centauri sold any part of its business, it was required to pay Mortgage House one third of the sale price, and
  3. in relation to the $600 application fee collected by Alpha Centauri from prospective customers, Alpha Centauri was required to account to Mortgage House $375 of that fee for each loan that settled.

Obligation to use Mortgage House’s stationery

Justice Hodgson (with President Allsop agreeing) found that the obligation to use Mortgage House’s stationery effectively imposed an obligation on Alpha Centauri to pay Mortgage House for goods supplied by Mortgage House without any restriction that those goods be supplied at a wholesale price or market value. This fell within the payment requirement, notwithstanding the fact that the BPA left open the possibility that Mortgage House might require Alpha Centauri to pay an independent provider instead.

Justice Basten disagreed that the payment requirement was intended to cover such small incidental expenses, which arguably fell within the exception for a payment at market value for supplies needed to start or continue the business in the absence of evidence to the contrary.

Payment on sale of business

Justice Hodgson (with President Allsop agreeing) also found that the obligation to pay one third of the sale price also satisfied the payment requirement, even though the payment was only required in the event of a sale of Alpha Centauri’s business. This was because Alpha Centauri had to agree to the payment of this amount in such circumstances as a condition for starting or continuing the business.

Justice Basten again disagreed, finding that the payment should be understood as a payment for the discontinuation of the part of the business sold rather than as a payment made as a condition for starting or continuing to operate the remainder of the business.

Account of part of application fee

All of the judges agreed that the $375 payable to Mortgage House in respect of the application fee fell within the payment requirement. While this amount was not in the nature of a payment for goods or services supplied by Mortgage House, on the evidence before the court, it was a fixed amount which might properly be described as a franchise service fee equal to 62.5% of the application fee.

Accordingly, the court was unanimous in concluding that the BPA was a ‘franchise agreement’ for the purposes of the Franchising Code.

It should also be noted that the court commented on the possibility that the commission sharing arrangement under which income from customers was divided between Mortgage House and Alpha Centauri could also involve a payment from Alpha Centauri to Mortgage House that satisfied the payment requirement, but did not express a conclusion on this matter.

Consequences of the BPA being a ‘franchise agreement’

As the BPA was a ‘franchise agreement’ under the Franchising Code, Mortgage House’s obligations as a franchisor required it to provide a disclosure document in accordance with the Franchising Code to Alpha Centauri prior to entering into the BPA. Mortgage House’s failure to do so constituted a breach of the Franchising Code.

Mortgage House would also have been required to provide a notice of intention to terminate before any termination of the BPA. However, the court accepted the trial judge’s conclusion that Mortgage House had not terminated the BPA in breach of this requirement because Alpha Centauri had voluntarily abandoned the business first.

In any case, Alpha Centauri was ultimately unsuccessful as it was not able to establish that it had suffered any loss or damage as a result of any failure by Mortgage House to comply with its obligations as a franchisor under the Franchising Code.