Business Franchising

The Franchising Code of Conduct.

Business franchising in Australia is governed by the Franchising Code of Conduct (‘the Code'). The Code has been in force since 1998 and was established, under the Trade Practices Act 1974, by the Commonwealth Government.

The Code is a complex document which outlines the relationship that must exist between a ‘franchisor' and a ‘franchisee'. The most common example of such a franchising relationship is the company, such as a fast-food company, which allows another business to trade under its name and sell its product-range. However, the full range of franchising relationships is, in fact, far broader than this and covers many varied and complicated arrangements, from multinational chains to individual persons. In all cases, the Code must be understood and followed by both the franchisor and franchisee. The relationship established by the Code focuses heavily on the rights of the franchisee and places a considerable burden on the franchisor to make sure that the franchisee is fully informed about all aspects of the business.

Key aspects of the Code include disclosure of information, the structure and conditions of a franchising agreement, and the process of resolving disputes that arise between franchisor and franchisee. The following points outline some of the most important aspects and an experienced business lawyer can fully explain the Code and all its implications.

A Franchise Agreement

An agreement to establish a franchising relationship can be in written, oral or implied form. It will be defined by a number of key characteristics.

Firstly, it must be an agreement where a company or person (the franchisor) agrees to give another (the franchisee) the right to offer, supply or distribute their goods, products or services in Australia, and to do so by using the existing business structure plan or marketing plan of the franchisor.

Secondly, the conduct of that business is to occur under a trademark, advertising profile or other symbol that is recognisably that of the franchisor.

Thirdly, the franchisee must pay the franchisor a fee which may take many forms, such as an investment fee, payment for goods, products or services, a training fee or a percentage of income.

There is a whole range of other, often similar arrangements which are clearly not eligible for franchise status. Furthermore, the precise nature of the above requirements can be detailed and complex, and there are always exceptions; for example, there are other forms of payment which are clearly excluded and will not satisfy the third requirement listed above.

To be sure that any arrangement concerning you is, in fact, a franchising agreement and that you have the rights and protection provided by the Code, it is important to speak to solicitors with experience in business law.

Disclosure of information by franchisor.

The Code is intended to protect franchisees by ensuring they are as informed as possible about the commercial and legal circumstances of the franchisor, and provides franchisors with a long list of complex disclosure requirements that must they must meet. There are no less than twenty three kinds of information they must provide to a prospective franchisee and this must be done at least fourteen days before any agreement is signed.

Information about obligations expected of the franchisee, the exclusivity of the franchise, whether or not an agreement will limit the franchisee's other business activities and future plans, the business experience of the franchisor, and their legal history, are just a few of the items of information a franchisor is required to provide to the franchisee. Furthermore, this information must be provided in a very specific, legal format. The obligations do not end there; whenever any of the many details provided change or become incorrect, for whatever reason, the franchisor must also advise the franchisee of this within a short period of time.

In the case of a transfer of a franchise agreement, or when the turnover of a franchise is below a certain amount, there are eleven very specific items of information which must be provided.

The failure to meet any one of these stringent requirements may void any franchise agreement and both franchisors and franchisees should seek professional legal assistance to ensure that nothing has been overlooked.

Further responsibilities.

The obligations do not end once all the necessary information has been exchanged. Both parties must be fully aware that the other understands their position. For example, the franchisee must provide a written statement to the franchisor that they have read and fully understood all the information provided to them. Furthermore, the franchisee must seek independent legal, business and accounting advice about the proposed agreement and provide written proof to the franchisor that this has occurred.

Process of Agreement

The Code also has clear requirements about the process of finalising the franchising agreement and the form it must take.

For example, it outlines a seven-day ‘cooling-off' period and ensures that all relevant lease documents are exchanged. It also prevents franchisors from trying to restrict the activities of the franchisee, such as the right to associate with other franchisees. Importantly, it prohibits franchisors from attempting to abrogate their general liability towards the franchisee by incorporating any kind of release clause into the agreement. Other key requirements include marketing funds, ongoing disclosure of information, transferral of the franchise and the process of terminating the agreement.

Resolving disputes.

A key purpose of the Code is to provide a clear mechanism for the resolution of disputes arising between franchisors and franchisees and it selects mediation as the primary form of dispute resolution. Like in every other legal process, parties should definitely seek the professional legal advice of a business lawyer throughout the dispute process.

The complaining party must provide a written complaint to the other party and both parties must then attempt to resolve the problem within three weeks. If this fails, the matter is referred for professional mediation, which both parties are required to attend. If mediation fails after thirty days, a certificate of failure will be issued by the mediator before the matter proceeds to the courts.

An informed decision.

The Franchise Code of Conduct has established a complex system of rights and responsibilities. Both the franchisor, facing a range of obligations, and the franchisee, seeking to understand the range of protections offered by the Code as well as their own responsibilities, will shoulder the burden of making an agreement work. An experienced business lawyer is well placed to explain the many requirements of the Code and can ensure that either party uses it to their best advantage.

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You should consult a lawyer for individual advice regarding your own situation.