Franchise Disputes
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.
