Franchise Disputes

We act for both Franchisors and Franchisees.

Franchising Code of Conduct

The greatest growth industry in Australia in recent years has been the franchise industry. There has unfortunately been a growth in the number of franchise disputes ending up in the court system.

Scope of the Code

The first stage of the Franchising Code of Conduct came into effect on July 1 1998 and is now mandatory. It includes provisions requiring franchisers to provide a copy of any lease to franchisees (clause 14), ensure franchisees have the right to associate (clause 15) and prepare financial statements for marketing and promotional funds (clause 17).

The second stage, which includes disclosure, conditions of franchise agreements and dispute resolution provisions, came into effect on 1 October 1998.

What is a franchise agreement?

The code defines franchise agreements very broadly as an agreement in any form:

  • Under which the franchisor grants the franchisee the right to carry on the business of offering, supplying or distributing goods or services within Australia.
  • Under a system or marketing plan substantially or materially associated with the franchisors trademark, advertising or commercial symbol, and
  • under which, before starting business or continuing the business, the franchisee must pay the franchisor or its associate an amount including, by way of example, an initial capital investment fee, payment for goods or services, a fee based on a percentage of gross or net income whether or not it is called a royalty or franchise service fee or a training fee.

Although the Code's broad definition will inevitably encompass relationships the traditional have fallen outside the usual concept of franchise, the definition expressly excludes all employer and employee relationships, partnership relationships, landlord and tenant relationships, mortgagor and mortgagee relationships, lender and borrower relationships, and the relationship between the members of a co-operative.

Disclosure documents

The code requires franchisors to give a disclosure document containing the information set out in Annexure 1 to the Code to a prospective franchisee or a franchisee proposing to enter into, renew or extend a franchise agreement. A person who proposes to transfer a franchise or franchised business is required to give a disclosure document under Annexure 2 to the Code.

The Code imposes an obligation on franchisors to update the disclosure document annually. Franchisors are also subject to a continuous obligation under the Trade Practices Act 1974 to correct any information contained in a disclosure document that becomes incorrect.

In addition, a franchisor must not enter into a franchise agreement or receive non- refundable money unless it has received a written statement from the (prospective) franchisee confirming that the franchisee has received, read and had a reasonable opportunity to understand the disclosure document and the Code.

A new franchisee must also provide a signed statement that it has received independent legal, business and accounting advice about the proposed franchisee agreement or business.

Conditions of franchise agreement

In addition to the disclosure document, the Code requires franchise agreements to contain certain clauses including:

  • cooling-off period
  • acknowledgement of receipt of a copy of lease
  • details of any association of franchisees, marketing and co-operative funds +
  • details of the manner in which the franchise can be transferred (if it can) and terminated, and
  • an appropriate dispute resolution procedure

In addition, a general release of the franchisor from all liability is prohibited. Penalties The Australian Competition and Consumer Commission will monitor and enforce the Code and will investigate and deal with breaches of it. The sanctions for breaching the provisions of the Code include injunctions, damages and corrective advertising.

Changes to the Franchising Code of Conduct

 At the beginning of 2015, the old Franchising Code of Conduct was repealed and replaced with the new Franchising Code of Conduct (Competition and Consumer (Industry Codes—Franchising) Regulation 2014 (Cth)) (the Code). This new code is applicable to conduct that took place from the 1 January 2015 that relates to a franchise agreement that was: entered into, renewed, extended or transferred on or after 1 October 1998.

The Code is a mandatory industry code that is prescribed under the Competition and Consumer Act 2010 (Cth) and is applicable to all of the parties to a franchise agreement. The Australian Competition and Consumer Commission (ACCC) are in charge of administrating and enforcing the code.

The Code outlines a range of circumstances relating to the rights and obligations of a franchisor and franchisee under a franchise agreement. The purpose of the Code is to regulate the behaviour between parties to a franchise agreement towards each other. The main aspects of the Code serve to; require franchisors to disclose certain information to franchisees, prescribe minimum standards in franchise agreements and to provide dispute resolution processes.   

Implications of the new code of conduct

 Under the new code:

  • There is an obligation for parties to act in good faith in their dealings with each other, meaning that at all times parties should: act honestly; make timely decisions; consider the other parties interests; consult with other parties about proposed changes and proactively attempted to resolve disputes.

  • Financial penalties and infringement notices for serious breaches of the code apply.

  • Franchisors are required to provide a disclosure document, franchise agreement and a copy of the Code to a party at least 14 days before they: enter into a franchise agreement, pay non-refundable money or valuable consideration connected with the franchise agreement or renew or extend their agreement.

  • Franchisors are required to provide potential franchisees with a short information sheet outlining the risks and benefits of becoming a franchisee.

  • Franchisors must provide greater transparency in the use of and accounting for money used for marketing and advertising and to create a separate marketing fund for marketing and advertising fees.

  • There is a requirement for additional disclosure about the ability of the franchisor and a franchisee to sell online.

  • Franchisors are prevented from imposing substantial capital expenditure except in limited circumstances.

  • There is an established dispute resolution framework that allows franchisors and franchisees to resolve disputes in a cost effective and timely manner with the aim of avoiding litigation.

Failure to comply with the code

Non-compliance with the code may result in a party facing action by the ACCC whom will issue an infringement notice or enforce a financial penalty under the Code.

Agreements entered into prior to 1 January 2015

If a franchise agreement was entered into between 1 July 1998 and 29 February 2008 the following provisions do not apply:

  • waiver of verbal or written representations by the franchisor
  • prohibition on actions or proceedings, including mediation, being brought in a State or Territory outside that in which the franchisee operates
  • costs of settling disputes

If an agreement was entered into between 1 March 2008 and 31 December 2014 the following provisions don not apply:

  • prohibition on actions or proceedings, including mediation, being brought in a State or Territory outside that in which the franchisee operates
  • costs of settling disputes

Our practice is located outside of the Perth CBD and because of this our hourly rates are 20% lower than the standard rates charged by most Perth law firms.  Our rates are extremely competitive compared to the rates charged by other commercial law firms.

Sources:

  • Australian Competition and Consumer Commission

 

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