Business overview

Types of vehicle

What forms of business entities are relevant to the typical franchisor?

The typical franchisor in Australia will be a corporate entity formed under the provisions of the Corporations Act 2001 (the Corporations Act). There are no restrictions on using other vehicles, and the interposition of trustees as shareholder entities is not unusual.

A company acting as a franchisor may be a limited liability company forming part of a consolidated group that separates out the intellectual property holding entity and the commercialising entity (the franchisor). The law recognises that large proprietary companies will have increased reporting obligations. The threshold for these entities has changed from 1 July 2019. For small Pty Ltd companies:

  • revenue must be less than A$50 million;
  • controlled consolidated gross assets for it and associated entities must be less than A$25 million; and
  • employees of it or controlled entities must be 100 or fewer.

All are determined at the end of the financial year.

Of late there has been active consolidation of franchise systems under the umbrella ownership of publicly listed companies, but there has also been criticism of this trend given the emphasis attributed to shareholder profit and executive bonuses, suggesting a weakening of the culture many franchise systems promoted in their formative stages.

Private equity funds have been active as franchise system aggregators.

A trend for some systems is the entering into of incorporated joint venture franchises with the franchisor taking significant control of administrative functions and direct profit access.

Regulation of business formation

What laws and agencies govern the formation of business entities?

The Corporations Act regulates the creation and ongoing conduct of corporate franchisors. Enforcement of the Act is the responsibility of the Australian Competition and Consumer Commission (ASIC).

The Corporations Act also deals with important subsets of company behaviour such as director’s duties, fundraising and solvency matters. Audit requirements are expected of large proprietary companies and public companies, which, if listed on the stock exchange (ASX), must comply with listing requirements.

Partnerships are the province of State and Territory legislation. Trust structures are, for regulation and dispute issues, subject to the Supreme Courts of each State and Territory through their Equity Divisions.

Registration of business names is dealt with at the Commonwealth level.

Requirements for forming a business

Provide an overview of the requirements for forming and maintaining a business entity.

Tax considerations are relevant to the choice of entity for commercialisation of a franchise system. These, once understood, provide a clear path for commercialisation and support activity.

If a company structure is chosen, it must have at least one Australian resident director. A registered office and a principal place of business must be nominated and there must be at least one shareholder who need not be an Australian resident. There are annual lodgement and reporting requirements and ongoing fees payable to maintain registration.

It will be necessary for trading purposes to secure an Australian Business Number (ABN) and, if goods and services taxes apply, to secure registration for both reporting, payments and refunds.

The requirements placed on a large proprietary company or a public company, whether listed on the ASX or not are more onerous including audit obligations.

All companies must maintain financial records for seven years and may be the subject of an Australian Taxation Office (ATO) audit.

Restrictions on foreign investors

What restrictions apply to foreign business entities and foreign investment?

All entities trading in Australia must comply with the general law. This applies even should the choice of laws and governing law provisions of a franchise agreement provide an alternate jurisdiction. Where relevant, Australian courts will try and uphold the requirements of the contractual choice of laws.

Mediation must be affected in the jurisdiction where the franchisee carries on its business. Mediation in a franchise dispute is compulsory if invoked and each party must bear their own costs.

Applicable double tax treaties will impose withholding tax regimes as may the relevant capital gains tax laws.

The ATO is vigilant in reviewing any instances of suspected profit shifting between jurisdictions.

There may be occasions where Foreign Investment Review Board Approval is required for certain foreign entity acquisitions; however, the type of transaction for which this is required is limited and the monetary threshold is high.

Taxation

Briefly describe the aspects of the tax system relevant to franchisors. How are foreign businesses and individuals taxed?

There are taxes at all levels of government in Australia. Real property-focused systems may make direct landholders contend with possible stamp duty, registration fees, land tax, council rates and taxes, and others.

All franchises systems engaging employees must provide workers compensation cover and may be liable to state payroll tax. They must deduct and remit employee income tax and superannuation contributions.

The corporate tax rate is generally 30 per cent (with lower rates for small businesses below certain turnover thresholds) and there may be local jurisdiction offsets once dividends are in the hands of shareholders. Applicable withholding tax will apply to income remissions (royalties) depending on double tax arrangements.

Trading in goods and services will incur a 10 per cent GST though this will not be charged on dealings with offshore entities.

Income tax generally (including capital gains tax and corporate tax) is the province of the Commonwealth.

Labour and employment

Are there any relevant labour and employment considerations for typical franchisors?

Convention disassociates the trading activities of franchisees from any liability of the franchisor.

This distinction has been removed on the rights and entitlements of employees of franchisees and now a franchisor can be responsible for the wrongful actions of its franchisees in not honouring those entitlements.

This has come about as franchisors have an enhanced look through ability of their franchisees’ business activities, audit powers and right to give directions.

In Australia a form of vicarious liability for relevant failures can rest with franchisors though it is not yet clear that a foreign franchisor will be liable for lack of oversight by a master franchisee.

The Fair Work Act 2009 (Commonwealth) (FWA) was amended in 2017 by the Protecting Vulnerable Workers Amendment to potentially attribute liability to franchisors where there has been ‘deliberate and systematic exploitation of workers’. Higher maximum penalties for (serious contraventions) were also introduced.

Broadly-speaking, the FWA makes a ‘responsible franchisor entity’ liable for prescribed contraventions committed by a ‘franchisee entity’ in circumstances where they either knew, or should reasonably have been aware of the contraventions, and could reasonably have taken action to prevent such contraventions from occurring.

The FWA provides a franchisor a right of indemnity against the employer franchisee where the franchisor contravenes the relevant provisions and is ordered to compensate for unpaid employee entitlements.

There are a number of related laws concerned with labour rights addressing discrimination, unfair dismissal , safe workplace conditions, accident compensation and termination and retirement entitlements.

Intellectual property

How are trademarks and know-how protected?

Trademarks should be registered in relation to relevant goods and services. There are a number of classes (described goods or services) to which registration can attach. The protection afforded by initial registration is 10 years with an ability to renew on application. Registration provides the ability to claim a broad range of protection against infringing parties and facilitates applications for registration in most overseas jurisdictions if parties to the relevant treaties. The time period for extending local registration with statutory priority to offshore jurisdictions is six months. The list of countries in which a priority registration can be claimed is determined by the signatories to the Paris Convention of 1979, as amended, with Convention countries listed in the regulations to the Trade Marks Act 1995.

There is no trade secrets or know-how legislation. There are statutory acknowledgements such as prohibitions on the improper use by employees of this information under the Corporations Act.

The phrase trade secrets or know-how means a type of confidential information associated with commercial purposes. It is ‘a device, or technique used in a particular trade or occupation and giving an advantage not generally known’.

The protection of trade secrets, though protected by equity, is always the subject of careful contractual drafting in franchise agreements. Remedies against breach are founded on allegations of breach of confidentiality (the need to establish that the information has the necessary quality of confidence, that it was conveyed in circumstances where the confidence obligation was evident and that there was unauthorised use causing detriment). There need be a nexus to a trade or occupation.

Real estate

What are the relevant aspects of the real estate market and real estate law?

Real estate acquisition and leasing issues are jurisdictional issues for the states and territories. Commonwealth law intrudes on matters of taxation (income and company) and ensures foreign entities remain liable for capital gains realisations through a withholding regime.

Each other jurisdiction has transfer legislation tied to stamp duty legislation operative on conveyances. Registration fees for notations on titles are also charged.

There are specific disclosure requirements a lessor must satisfy.

The common model of franchisors taking a head lease and sub-leasing to a franchisee is now not as prevalent due to the risk of the franchisor being left with an unoccupied site. In its stead, many franchisors negotiate ‘step-in rights’ if there is franchisee default.

Franchising in the market

How widespread is franchising in your jurisdiction? In which sectors is franchising common?

Australia is a highly franchised country. The level of sophistication is high, and the contribution to the gross domestic product of the country is about 10 per cent, well ahead of many other industry sectors.

Franchise laws are well entrenched and are the subject of regular review, including a just released Senate Report which may, if adopted, enhance the current Code through enhanced disclosure and higher penalties.

Of late there has been prominent growth in the services sector (fitness systems, accounting, child and elderly care ). The food sector remains strong, but retail, especially for clothing, is precarious due to online sales.

Laws and agencies regulating the offer and sale of franchises

Legal definition

What is the legal definition of a franchise?

The concept is an absolute. It is not influenced by the title given a document or relationship nor, by the intentions of the parties.

If an arrangement complies with the definition (with one exception through the statutory inclusion of motor vehicle dealership agreements) then it is a franchise for the purposes of the Franchising Code of Conduct (2014) as amended (the Code). Where exclusions are noted they are limited.

Clause 5 of the Code provides four necessary elements:

  • there must be a written, oral or implied agreement;
  • there is the grant of a right to carry on the business under a system or marketing plan substantially determined, controlled or suggested by the franchisor or an associate;
  • the business must be substantially or materially associated with a trademark, or symbol, owned or licensed and specified, by the franchisor or an associate; and
  • there must be a form of payment before or during the conduct of the business (excluding some specified exchanges such as payment for items supplied on a genuine wholesale basis).

The courts take a keen interest in providing definitional guidance. The elements are supplemented by the inclusion of other arrangements intended to be caught by the Code. These arrangements are regarded as preparatory, in a real sense, to the entry into of a formal franchise agreement and need the same informed consideration and protection. These ‘agreements to enter franchise agreements’ are drawn into the pre-contractual disclosure regime created by the Code.

Franchise laws and agencies

Which laws and government agencies regulate the offer and sale of franchises?

There are laws of general application at both the Commonwealth and state level.

At the Commonwealth level, attention must be paid to the proscribed behaviours contained in the Competition and Consumer Act 2010 (CCA) noting the need to avoid unacceptable behaviour, such as deceptive and misleading conduct in the sale process.

The Australian Consumer Law provides that unfair terms in standard form small business contracts are unenforceable. Franchise agreements are at risk of its application, and franchisors need be mindful of drafting and may choose to demonstrate some willingness to negotiate on a document’s terms to avoid application of these laws.

At the state level there are laws providing standards in the advertising of businesses, and processes for a business sale (franchise turnover or corporate unit sales). There may be state disclosure requirements on prior business performance and cooling off rights.

At the heart of the franchise offer and sale process is the Code.

It is the specific disclosure, relationship and dispute guide compulsorily applied to franchise dealings. Its strictures and behavioural requirements are supplemented by the obligation to act in good faith, applicable to all parties before, during and after the franchise relationship.

Supervision and oversight of Code compliance sits with the Australian Competition and Consumer Commission (ACCC). It is charged to ensure that the provision of appropriate and sufficient information to enable franchisees to make informed decisions is provided and that there is ongoing good behaviour and adherence to the Code. The ACCC can issue penalty notices to a fixed amount per event and bring prosecutions before courts to seek further redress.

Principal franchise requirements

Describe the relevant requirements of these laws and agencies.

The Code is comprised of four Parts and two Annexures intended to achieve the Code’s purpose:

The purpose of this code is to regulate the conduct of participants in franchising towards other participants in franchising.

The Parts and Annexures are:

  • Part 1: Introduction;
  • Part 2: Disclosure requirements before entry into a franchise agreement;
  • Part 3: Franchise agreements;
  • Part 4 Resolving disputes;
  • Annexure 1: Disclosure document for franchisee or prospective franchisee; and
  • Annexure 2: Information statement for prospective franchisee.

The purpose is promoted through:

  • the provision of appropriate information by the franchisor to a franchisee, or prospective franchisee, so it can make an informed decision about the franchise opportunity;
  • giving the opportunity to the prospective franchisee to seek appropriate advice within reasonable time frames;
  • providing temporal withdrawal rights before and after (cooling off) execution;
  • regulating behaviour before and during the term and during any dispute period, through imposing a statutory duty of ‘good faith’;
  • providing controls and guidance to apply to the relationship of the parties including through updated disclosure;
  • mandating a mediation process as a necessary step before litigation or arbitration, but not as a restraint on the right to seek injunctive relief.

Of these, the most extensively dealt with, is the provision of relevant information through the initial and ongoing disclosure process.

The inclusion of an unequivocal duty of good faith in the Code removes any previous uncertainty as to its application to the franchise relationship. There is an expansion of the core principles through the duty being imposed in the pre-contract stage.

Good faith has become integral to the enforcement strategy adopted by the ACCC as shown by several recent successful prosecutions. Allegations of unacceptable behaviour of franchisors ranging from the fraudulent acts to wilful disregard of Code obligations has been overlaid with allegations of breaches of the duty of good faith, a methodology the courts have accepted.

Exemptions

What are the exemptions and exclusions from any franchise laws and regulations?

The Code has a limited position on exemptions. The Code does not apply to a franchise agreement:

  1. to which another mandatory industry code applies; or
  2. if:
    • the franchise agreement is for goods or services that are substantially the same as those supplied by the franchisee before entering into the franchise agreement;
    • the franchisee has supplied those goods or services for at least two years immediately before entering into the franchise agreement; and
    • sales under the franchise are likely to provide no more than 20 per cent of the franchisee’s gross turnover for goods or services of that kind for the first year of the franchise.

The exemption in (ii) is lost if sales exceed 20 per cent of the franchisee’s gross turnover for the consecutive years and the franchisee is informed.

Franchisor eligibility

Does any law or regulation create a requirement that must be met before a franchisor may offer franchises?

There are no pre-registration requirements. A solvent franchisor must give sufficient current and relevant disclosure, allow time for consideration and advice (minimum of 14 days) and act in good faith before a franchise agreement can be executed and a non-refundable deposit secured. None of this impacts on the right to commence the sale process.

There is a mandatory requirement that the franchisor give an information statement to a prospective franchisee as soon as practicable after it formally applies or expresses interest in acquiring a franchised business. This must be in size 11 font and be in the form set out in Annexure 2 to the Code. It contains words of caution intended to cause the prospective franchisee to be careful in proceeding. It is not needed in the instance of a renewal or extension in scope of a franchise agreement.

Franchisee and supplier selection

Are there any laws, regulations or government policies that restrict the manner in which a franchisor recruits franchisees or selects its or its franchisees’ suppliers?

There are laws that impact on fair advertising which would apply to recruitment of franchisees. There are restrictions on false, deceptive or misleading conduct.

The parties must act with good faith in their dealings before concluding a formal relationship. The information statement is needed.

The terms of a formal disclosure document need include disclosure of payments to third parties for the introduction or recruitment of a franchisee.

The selection of suppliers for franchisee use is linked to the maintenance of quality standards; however, rebate disclosure and competition law requirements do apply.

For franchisor rebate receipts the disclosure obligation requires a statement that rebates are paid and the name of the party doing so. No further particulars are needed.

The formerly prohibited action of directing franchisees to purchase from third parties has largely been removed from the competition laws contained in the CCA. The franchisor may give directions that will be contractually binding absent an application to prevent this made by the ACCC. There can be no substantial lessening of competition by a party holding significant relevant market share.

Pre-contractual disclosure

What is the compliance procedure for making pre-contractual disclosure in your country? How often must the disclosures be updated?

The framework for disclosure has remained relatively consistent since the inception of the 1998 Code. The franchisor must create a document (disclosure document) giving information to be delivered to a franchisee or prospective franchisee that:

  • is set out in the form and order of Annexure 1 to the Code using the same headers, numbering and format matters prescribed;
  • contains a table of contents based on Annexure 1 with relevant page numbers and listing any attachments is needed;
  • has information that must be sufficient and current to enable the recipient to make a reasonably informed decision about the franchise and contain current information that is material to running the franchised business;
  • must be signed by the franchisor, or a director, officer or authorised agent of the franchisor
  • must contain information that is meaningful.

It must be updated within four months of the end of each financial year except in certain circumstances excluding compliance where only one agreement was entered into during the relevant year and none is intended for the following financial year. If a request for an updated disclosure document is made, it must be updated despite the above concession.

The ACCC has the power to issue infringement notices (that is civil fines) and seek further civil penalties for a franchisor that fails to comply with annual update obligations.

A master franchisor need not comply with the obligation to create and maintain a disclosure document under Part 2 in relation to a sub-franchisee appointed by its master franchisee.

The Code, as recast in 2014, introduced the need for the delivery of an information statement in a prescribed form provided in new Annexure 2.

The process of disclosure (with some modification) applies where a franchisee seeks a renewal of an existing agreement or if there is an extension in term or scope of the same.

Pre-sale disclosure to sub-franchisees

In the case of a sub-franchising structure, who must make pre-sale disclosures to sub-franchisees? If the sub-franchisor must provide disclosure, what must be disclosed concerning the franchisor and the contractual or other relationship between the franchisor and the sub-franchisor?

The franchisor need not engage in disclosure in dealings between its sub-franchisor and any sub-franchisee. This also applies to disclosure obligations during the course of the sub-franchise relationship. It does not excuse the franchisor from disclosing a materially relevant fact to the sub-franchisor as specified in the Code (an example is a change in majority ownership or control). Any disclosure must be made in writing and within 14 days.

If the franchisor engages in a tripartite grant with the sub-franchisee then it will need to engage in full Code disclosure.

The disclosure document prepared for a franchisee requires particulars if there is a master franchise relationship. These include details of the franchisor and its officers, dealings with franchises over the previous three years and particulars of the grant held by the sub-franchisor.

Particulars of ownership and use of intellectual property must be disclosed.

Due diligence

What due diligence should the parties undertake before entering a franchise relationship?

Commercial due diligence is recommended prior to commitment to a long term relationship. The Code reflects the comparative information disadvantage between the proposed franchisee and the franchisor.

The disclosure requirements, therefore, go some way to reduce any ‘information asymmetry’, and there are opportunities for further enquiry should the proposed franchisee wish.

The Code encourages the taking of independent advice on the franchise documents and mandates the provision of certificates confirming whether such advice was taken or waived.

It mandates inclusion of the particulars of existing franchisees and their contact details. It also requires information of transfer, cessation, termination, failure to extend, buy-backs and termination events.

The ability of a prospective franchisee to make enquiries of an existing franchisee is limited only by the right of the existing franchisee to ask that its details be kept confidential.

The disclosure process involves giving particulars of current public or private proceedings relevant to the franchisor, its directors and associates. This disclosure extends to employee dismissal matters and criminal convictions, civil judgments and bankruptcy or insolvency events.

What must be disclosed

What information must the disclosure document contain?

The content of the disclosure document includes:

  • warning statements to the franchisee regarding acquisition of a franchise and cooling off rights;
  • introductory details relating to the franchisor and its associates;
  • business experience of the franchisor and its officers;
  • litigation involving the franchisor and its officers and associates;
  • payments to agents in connection with franchisee recruitment;
  • details of existing franchises and relevant events (eg, transfer, termination, etc) occurring in relation to franchises in the last three financial years;
  • if relevant, information in relation to the master franchisor and master franchise;
  • a description of relevant intellectual property, the franchisees rights and obligations and any licence of the same to the franchisor;
  • information regarding the franchise site or territory including whether the territory is exclusive;
  • the franchisor’s requirements in relation to supply of goods or services to a franchisee and details of persons providing rebates;
  • the franchisor’s requirements in relation to supply of goods or services by a franchisee;
  • information relation to supply of goods or services online;
  • franchisor policies for selection of sites or territories and a history of the relevant site or territory;
  • payments and costs of operating the franchise;
  • details of marketing or other cooperative funds;
  • financing arrangements offered to franchisees;
  • circumstances in which the franchisor can and has unilateral varied franchise agreements;
  • arrangements to apply at the end of the franchise agreement;
  • whether the franchisor can amend the franchise agreement on transfer of franchise;
  • earnings information if the franchisor chooses to provide the same; and
  • financial details regarding the franchisor.

The franchisor must also provide the franchise agreement and a copy of the Franchising Code. Related agreements must also be provided though the required timing of provision of these documents may depend on when they become available. A prescribed form of information statement must be given to a prospective franchisee as soon as practicable after the prospective franchisee formally applies or expresses an interest in acquiring a franchised business.

Continuing disclosure

Is there any obligation for continuing disclosure?

Franchisors must disclose materially relevant facts within a reasonable time (but not more than 14 days) after the franchisor becomes aware of their occurrence. Materially relevant facts include:

  • changes in majority ownership or control of the franchisor, its associates or the franchise system;
  • certain legal proceedings and judgments;
  • insolvency events relating to the franchisor and its associates;
  • a change in the intellectual property, or ownership or control of the intellectual property, that is material to the franchise system; and
  • undertakings given by the franchisor to the ACCC.

An existing franchisee can request the current disclosure document once every 12 months. The franchisor must provide the same within 14 days unless the franchisor was not required to update the disclosure document at the end of the last financial year, in which case it must be updated and provided within two months.

Disclosure requirements – enforcement

How do the relevant government agencies enforce the disclosure requirements?

If the ACCC becomes aware of a breach by a franchisor it may take action against the franchisor seeking a civil penalty (of up to A$63,000) or alternatively issuing an infringement notice (A$10,500 for a body corporate and A$2,100 for natural persons or other entities). Other remedies that may be sought by the ACCC include injunctions, compensation and damages. The ACCC may accept enforceable undertakings from franchisors as part of resolving a complaint.

Disclosure violations – relief for franchisees

What actions can franchisees take to obtain relief for violations of disclosure requirements? What are the legal remedies for such violations? How are damages calculated? If the franchisee can cancel or rescind the franchise contract, is the franchisee also entitled to reimbursement or damages?

A franchisee can commence court proceedings to enforce breaches of the Code by the franchisor. The remedies a court may award are broad and may include voiding of the franchise agreement, variation to its terms, injunction and damages. The court will consider the circumstances including the nature and consequences of the breach by the franchisor in determining the appropriateness of the remedy sought. If a franchisee is entitled to rescind the franchise agreement it may also claim damages in the amount of its actual loss or damage caused by the relevant breach by the franchisor.

Disclosure violations – apportionment of liability

In the case of sub-franchising, how is liability for disclosure violations shared between franchisor and sub-franchisor? Are individual officers, directors and employees of the franchisor or the sub-franchisor exposed to liability? If so, what liability?

The franchisor does not owe a disclosure obligation to the sub-franchisee under the Code. However, the franchisor may provide some content for the sub-franchisor’s disclosure document, particularly, for inclusion of item 7, which relates to any master franchise. The CCA provides that persons involved in breaches of the Code may be liable in respect of those breaches along with the principal infringer. Accordingly, if a franchisor (or its officers directors or employees) is involved in a disclosure breach by the sub-franchisor it (or they) may be liable for all or part of any damages awarded in relation to that breach.

General rules on offer and sale

In addition to any laws or government agencies that specifically regulate offering and selling franchises, what are the general principles of law that affect the offer and sale of franchises? What other regulations or government agencies or industry codes of conduct may affect the offer and sale of franchises?

Common law of contract will be relevant to the sale of franchises, particularly, laws relating to misrepresentations inducing a franchisee to enter into the franchise agreement. Where misrepresentation occurs prior to entering into the franchise agreement, this conduct may also give rise to a claim under the provisions of the CCA that prohibit misleading and deceptive conduct and similar state or territory legislation.

Depending on the industry to which the franchise relates, there may be legislation that is relevant to the sale of the franchise. For example, sale of a service station franchise will be regulated by the Competition and Consumer (Industry Codes-Oil) Regulations 2017.

Where an existing franchise business is sold state or territory legislation relating to sale of small businesses may apply. Those laws may require separate disclosure by a vendor of the business to the purchaser. Further, where real property leases are granted or transferred separate state or territory retail or commercial leasing legislation may require disclosure in respect of the lease.

Federal personal property securities laws may be relevant if the franchisor leases plant and equipment to the franchisee or otherwise offers finance for acquisition of the franchise business assets. These laws may also be relevant if the franchisor or a related entity supplies inventory to franchisees on credit.

General rules on pre-sale disclosure

Other than franchise-specific rules on what disclosures a franchisor should make to a potential franchisee or a franchisee should make to a sub-franchisee regarding predecessors, litigation, trademarks, fees, etc, are there any general rules on pre-sale disclosure that might apply to such transactions?

There are no general rules on pre-sale disclosure. See question 24 for commentary on common law and specific laws that may be relevant.

Fraudulent sale

What actions may franchisees take if a franchisor engages in fraudulent or deceptive practices in connection with the offer and sale of franchises? How does this protection differ from the protection provided under franchise sales disclosure laws?

See question 24 in relation to misrepresentation and misleading and deceptive conduct. The typical remedies are rescission and damages. These laws may provide the franchisee with a basis for a claim despite the franchisor having complied with its disclosure obligations under the Code. However, if a franchise has engaged in misrepresentation or misleading and deceptive conduct the relevant conduct may provide a basis for a claim that the franchisor has also breached its obligation of good faith under the Code.

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.

Update and trends

New legislation and regulation

Are there any proposals for new legislation or regulation, or to revise existing legislation and regulation? Are there other current developments or trends to note?

New legislation and regulation49 Are there any proposals for new legislation or regulation, or to revise existing legislation and regulation? Are there other current developments or trends to note?

On 22 March 2018, the Commonwealth Government Senate initiated an inquiry into the operation and effectiveness of the Code. The report of the inquiry entitled ‘Fairness in Franchising’ was published on 14 March 2019. In accordance with the inquiry’s recommendations an inter-agency franchising taskforce has been established to examine the feasibility and implementation of a number of the recommendations contained in the report.

Some examples of the many reforms recommended in the report are as follows.

  • Actual business activity statements (for the past two years), financial statements and an assessment of labour costs for the franchise unit must be provided in the disclosure document where a franchisee is acquiring an existing franchise. For new franchise units, the franchisor must provide the same information relating to a comparable franchise.
  • Franchisors must provide franchisees quarterly financial statements for marketing funds within 30 days of the end of each quarter.
  • Supplier rebates, commissions and other similar payments must be disclosed as a percentage of the full purchase price on each transaction.
  • The cooling off period within which the franchisee may terminate the franchise agreement is extended from seven to 14 days.
  • Certain ‘special circumstances’ (eg, franchisee insolvency) permit immediate termination under the Franchising Code. It is recommended that seven days’ notice of termination be required in these circumstances and that, if a mandatory dispute resolution procedure under the Franchising Code is triggered, the termination process be suspended pending completion of that procedure.
  • The option of binding arbitration be added to the dispute resolution procedures under the Franchising Code. This would not exclude court action.
  • Franchisors who commence court action must demonstrate to the court’s satisfaction that the matter cannot be resolved through mediation. Otherwise, the court should order the parties to mediate.
  • Except where incorporated into a joining fee, franchisors are prohibited from passing on to prospective franchisees the legal costs of preparing, negotiating and executing documents.
  • There is to be a duty on franchisors to provide training on the Franchising Code.
  • The disclosure document must include a reasonable estimate of personal workload to be undertaken by the franchisee (or their nominee or manager) in running and operating the franchised business.

Following completion of a review of the unfair standard form small business contract terms regime in late 2018, the federal government announced its intention to consult on a number of possible amendments to the laws. Possible changes include making unfair contract terms illegal and attaching civil penalties to breaches. At present, the laws make unfair terms void but do not impose penalties for including the terms in contracts. Imposing penalties for including unfair terms is a reform both major political parties have announced support for. Accordingly, amendments to these laws are anticipated in the near future.