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Franchise law

i Legislation

On 1 January 2015, the Competition and Consumer (Industry Codes – Franchising) Regulation 2014 entitled 'Franchising Code of Conduct' (the Code) replaced the former Trade Practices (Industry Codes – Franchising) Regulation 1998 (the Old Code). This is the primary franchise-specific law in Australia.

The Code is a prescribed mandatory industry code under the Competition and Consumer Act 2010 (Cth) and is underpinned by that Act by virtue of that Act providing that a person must not, in trade or commerce, contravene an applicable industry code.

The stated underlying purpose of the Code is to regulate the conduct of participants in franchising towards other participants in franchising.

The Code applies to conduct occurring on or after 1 January 2015 (other than to discharge an outstanding obligation that arose under the Old Code) in relation to a franchise agreement entered into on or after 1 October 1998. The application of the Code is dependent upon the existence of a franchise agreement. The Code acknowledges that a franchise agreement may be wholly or partly in writing, wholly or partly oral, or wholly or partly implied.

Hence, in determining Code applicability, one must look at the entire relationship between parties and necessarily ignore the title given to any document. When looking at that entire relationship one must positively answer all the following questions for the relationship to be considered a franchise agreement:

  1. Does one person (the franchisor) grant to another person (the franchisee) the right to carry on a 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?
  2. Is the operation of the business substantially or materially associated with a trademark, advertising or commercial symbol owned, used or licensed by the franchisor or an associate of the franchisor or specified by the franchisor or an associate of the franchisor?
  3. Is the franchisee obliged to pay money to the franchisor under its arrangement with the franchisor?

Then, having received positive answers to the above questions, one must consider whether the relationship falls under any of the exceptions. These are:

  1. where the only money payable by the franchisee to the franchisor under its arrangement with the franchisor is either:
    • payment for goods and services on a genuine wholesale basis;
    • repayment of loans from the franchisor to the franchisee;
    • payment for goods taken on consignment on a genuine wholesale basis; or
    • payment of market value for purchase or lease of real property, fixtures, equipment or supplies needed to start the business or to continue the business under the franchise agreement; and
  2. employer–employee relationships, partnership relationships, landlord and tenant relationships, mortgagor and mortgagee relationships, lender and borrower relationships, the relationship between members of a cooperative registered and operating under various state and territorial laws and 'fractional franchises'.

The Code imposes obligations on franchisors:

  1. to act in good faith towards franchisees (note that an identical obligation is also imposed on franchisees) – the mutual obligation to act in good faith is dealt with in greater detail below;
  2. to create and update and maintain a prescribed disclosure document (see below as to content);
  3. to provide the disclosure document to franchisees and prospective franchisees;
  4. to refrain from entering into a franchise agreement until it has received signed certificates from the franchisee as to the obtaining or non-obtaining of legal, accounting and business advice;
  5. to provide a prescribed information statement (containing an explanation of franchising and warnings about business risks) as soon as practicable after a prospective franchisee formally applies or expresses an interest in acquiring a franchised business;
  6. to provide premises lease documents or information to franchisees, including details of any incentive or financial benefit that the franchisor or an associate of the franchisor might receive from a landlord;
  7. to provide copies of other relevant agreements, such as those relating to intellectual property, security agreements, confidentiality agreements and restraint agreements;
  8. to prepare annual financial statements of any marketing or other cooperative fund within four months of the end of a financial year and have the statements audited and to supply to franchisees a copy of the statements and audit report within 30 days of them being completed;
  9. to provide a copy of its current disclosure document to existing franchisees upon request;
  10. to provide ongoing disclosure to franchisees in relation to:
    • any more recently issued statement of solvency, financial statement and audit report relating to the franchisor;
    • changes in majority ownership or control of the franchisor;
    • certain proceedings brought by public agencies against the franchisor or a director of the franchisor;
    • judgments against the franchisor under independent contractor laws;
    • civil proceedings against the franchisor by more than 10 franchisees or 10 per cent of franchisees;
    • certain judgments against the franchisor unsatisfied for more than 28 days;
    • the franchisor becoming externally administered (for example, because of insolvency);
    • material changes to intellectual property relevant to the franchise; and
    • undertakings given to the competition regulator (the Australian Competition and Consumer Commission (ACCC)) or orders relating to such undertakings;
  11. to advise franchisees within six months of the end of the term of a franchise agreement whether or not the franchisor will extend the franchise agreement, or enter into a new franchise agreement;
  12. to keep proper records;
  13. to refrain from including in franchise agreements general releases of the franchisor from liability to the franchisee or waivers of verbal or written representation;
  14. not to include in franchise agreements litigation, arbitration or mediation venue provisions that require these processes to take place in venues outside the state or territory in which the franchised business is based;
  15. not to include in post-1 January 2015 franchise agreements clauses that require the franchisee to pay the franchisor's dispute resolution costs;
  16. not to unreasonably withhold consent to a request from a franchisee to a transfer of a franchise agreement where the request is accompanied by all information that the franchisor would reasonably require and expect to be given to make an informed decision;
  17. to specify any conditions upon which consent to a transfer of a franchise agreement is given;
  18. to specify the reasons why consent to a transfer of a franchise agreement has been refused:
    • if refused following the initial request; or
    • if revoked under a right of revocation that exists for 14 days after the consent was given;
  19. to allow a franchisee to terminate the franchise agreement within seven days of signing it and paying non-refundable money;
  20. subject to limited exceptions, not to terminate a franchise agreement because of a breach unless a breach notice has been served on the franchisee, the franchisee has been given reasonable time to remedy the breach and the franchisee does not remedy the breach within the reasonable time specified in the breach notice;
  21. to give reasonable notice to a franchisee of termination of a franchise agreement and the reasons for termination in circumstances where a franchisor exercises a contractual right to terminate where there is no breach by the franchisee;
  22. not to require a franchisee to undertake 'significant capital expenditure' in relation to the franchised business during the term of the franchise agreement;
  23. to maintain a separate bank account for marketing fees and advertising fees contributed by franchisees;
  24. to pay marketing and advertising fees in relation to units operated by the franchisor on the same basis as franchisees are required to contribute;
  25. to expend marketing and advertising fees only for expenses of the type disclosed in the disclosure document or otherwise legitimate marketing or advertising expenses, expenses agreed to by a majority of franchisees or the costs of administering and auditing the marketing fund;
  26. not to engage in conduct with the intention of influencing a former franchisee to request that his, her or its details be omitted from the disclosure document;
  27. aa not to induce franchisees not to form or participate in a franchise advisory council or like body; and
  28. to include in the franchise agreement a complaint-handling procedure that complies with the Code.

The Code also requires franchisors (as well as franchisees) to:

  1. act in good faith (see below);
  2. attempt to resolve disputes; and
  3. attend mediation through a duly authorised person.
    ii Pre-contractual disclosure

    A linchpin of the Code is the requirement for franchisors to:

    1. create (before entering into a franchise agreement) and update (within four months of the end of each financial year) a disclosure document that accords with the Code in terms of content and layout; and
    2. to give its disclosure document (and a copy of the Code and the franchise agreement in the form in which it is to be executed) to prospective franchisees (including prospective franchisees who are acquiring an existing franchised business), renewing franchisees and existing franchisees where the term or scope of the franchise agreement is being extended, at least 14 days before the relevant documents are executed by the prospective franchisee or 14 days before a prospective franchisee pays to the franchisor any non-refundable money (whichever is the earlier).

    The disclosure document requires franchisors to make disclosure under a number of key topics and subtopics. The key topics cover:

    1. background and relevant business experience of the franchisor, its associates and key personnel;
    2. details of relevant past and current litigation, convictions for serious offences or insolvency relating to or involving the franchisor or its directors;
    3. payments to agents for the introduction or recruitment of franchisees;
    4. details of existing franchisees and key events that have occurred in the past three years;
    5. certain prescribed information as to the relationship between the franchisor (if the franchisor is a sub-franchisor) and the master franchisor;
    6. relevant information regarding intellectual property, including how and on what basis the franchisor can pass on rights to use the intellectual property to franchisees;
    7. details of exclusivity or otherwise of sites or any territory;
    8. details of franchisor's requirements for supply of goods or services to a franchisee;
    9. details of franchisor's requirements for supply of goods or services by a franchisee;
    10. rights, if any, of the franchisee to sell goods or services online;
    11. rights, if any, of the franchisor to sell goods or services online;
    12. any profit-sharing arrangement between the franchisor and franchisee in respect of online sales of goods or services;
    13. the franchisor's site or territory selection policy;
    14. circumstances surrounding past franchise businesses ceasing to operate in the territory to be franchised;
    15. payments to be made by a franchisee, including prepayments, establishment costs and other recurring or isolated payments;
    16. details relating to contributions to, expenditure from, administration and auditing, a marketing or other cooperative fund;
    17. details of any financing offered by the franchisor;
    18. details of unilateral variations to the franchise agreement in the past three years and circumstances where the franchise agreement may be unilaterally varied in the future;
    19. details of arrangements to apply at the end of the franchise agreement;
    20. details of whether the franchise agreement will be amended on a transfer or novation;
    21. any earnings information that a franchisor wishes to give and the basis for the information;
    22. a statement of solvency signed by a director of the franchisor;
    23. either financial reports of the franchisor for the past two financial years or an audit report supporting the franchisor's director's statement of solvency; and
    24. any other relevant updates pertaining to key changes that may have occurred since the disclosure document was created.

    The disclosure document must have attached to it a copy of the Code and the franchise agreement in the form in which it is to be executed by the franchisee. In addition, it must include a form of receipt for signing and return by the franchisee.

    If, after the date the disclosure document is given, the franchise agreement is amended to give effect to a request by the franchisee or otherwise by filling in required particulars or correcting mistakes or to clarify minor matters, there is no need to redisclose.

    Violations of the Code can give rise to affected parties seeking a wide range of civil remedies, such as damages, injunctions and orders setting aside or varying the franchise agreement or the regulator (the ACCC) issuing an infringement notice (A$10,500) or issuing legal proceedings seeking a civil pecuniary penalty of up to A$63,000 per offence.

    The ACCC has recently made a strong submission to the inquiry by the Parliamentary Joint Committee on Corporations and Financial Services into the operation and effectiveness of the Code that these penalties be increased significantly. At the time of writing, the findings of the inquiry had yet to be published.

    iii Registration

    There are no mandatory requirements for the registration of disclosure documents or franchise agreements in Australia. However, a number of submissions made to the above-mentioned Parliamentary Joint Committee inquiry into the Code, including one from the FCA, support the introduction of a system of registration in Australia. It remains to be seen what recommendations this Committee will make to the government, and whether they will be accepted and result in changes to the law.

    iv Mandatory clauses

    The only mandatory clauses prescribed by the Code are those relating to complaint handling and dispute resolution. These are more fully described below.

    However, in practice, franchisors mirror many of the provisions of the Code in their franchise agreements, particularly those relating to the cooling-off rights of a franchisee, termination and the procedure for considering requests for a transfer or novation of a franchise agreement.

    v Guarantees and protection

    As a general rule, guarantees given by persons to support the obligations of franchisees to franchisors are enforceable against the guarantors. The guarantee must be properly executed and it must not be procured by the fraud, undue influence or unconscionable conduct of the franchisor. Where guarantees are sought from persons who do not have equity in or a financial interest in the franchisee, prudent franchisors should insist that the guarantors obtain independent legal advice before accepting the guarantee.