A franchise agreement is an agreement under which one party (the ‘franchisor’) grants the other party (the ‘franchisee’) the right to carry on a business using a licensed trade mark and trade name, and often a marketing plan or operating system that is determined by the franchisor. Well known franchises in Australia include Subway, McDonald’s and IGA.
Franchise agreements are regulated by the Australian Competition and Consumer Commission (‘ACCC’), which enforces the Franchising Code of Conduct. The parties must also comply with the Competition and Consumer Act 2010 and applicable State legislation (for example, if in New South Wales the Fair Trading Act 1987 (NSW) applies).
When the Franchising Code of Conduct applies
The Franchising Code of Conduct came into force on 1 January 2015, when it replaced the old Franchising Code. It applies to all conduct after that date relating to franchise agreements entered into on or after 1 October 1998. If a franchise agreement was entered into after 1 January 2015, then all of the provisions of the Franchising Code of Conduct apply to the franchise agreement.
For franchise agreements entered into before 1 January 2015, certain provisions do not apply. For example, the prohibition on the franchisor including a clause requiring the franchisee to pay its costs in a dispute settlement does not apply to franchise agreements entered into before 1 January 2015.
Changes made by the Franchising Code of Conduct
The Franchising Code of Conduct introduced a number of important changes to how franchising agreements are regulated in Australia that were not in the old Franchising Code:
- Franchisors and franchisees are required to act in good faith and honestly in relation to their franchise agreement;
- In addition to other disclosure requirements, a franchisor must give a franchisee a short information sheet setting out the risks and rewards of franchising before signing a franchise agreement; and
- Franchisors are prohibited from requiring a franchisee to incur certain kinds of significant capital expenditure.
Contents of the Franchising Code of Conduct
The Franchising Code of Conduct has three key parts. The first places obligations on the franchisor to provide information to the franchisee before the franchise agreement is signed. The second provides for certain conditions relating to franchise agreements. The third provides for a mediation process for resolving disputes arising out of franchise agreements.
Prior to signing a franchise agreement, the franchisor is required to give the proposed franchisee a disclosure document. The information that must be included in the disclosure document is very prescriptive and set out in the Franchising Code of Conduct. It covers issues such as existing franchises of the franchisor, intellectual property, the supply of goods and services by the franchisor to the franchisee, and details of financing arrangements between the franchisor and franchisee.
A copy of the disclosure document must be given to the proposed franchisee at least 14 days before the franchise agreement is to be signed. The disclosure document must also be provided when renewing or extending a franchise agreement. Failure to do so carries a civil penalty of 300 penalty units (i.e. $51,000). The disclosure document must also be kept updated.
This requirement is in addition to the requirement to provide a short information sheet mentioned under the heading ‘Changes made by the Franchising Code of Conduct’.
In certain changes of circumstances the franchisor must inform franchisees of that fact; this includes whether there is a change of intellectual property, whether there are any court proceedings on foot, and whether the franchisor is under external administration.
Terms of franchising agreements
The Franchising Code of Conduct provides for certain conditions relating to franchise agreements. For example, the franchisee is entitled to a seven day cooling-off period after entering into a new (but not a renewed or existing) franchise agreement.
If the agreement is terminated during that cooling-off period, the franchisor must repay any payments made by the franchisee or face a civil penalty of 300 penalty units (i.e. $51,000).
There are also prohibitions on what can be included in a franchise agreement; for example, a general release from liability in favour of the franchisee cannot be included in a franchise agreement.
Compulsory mediation for disputes
Disputes that arise under franchise agreements may be dealt with in two ways. Firstly, the Franchising Code of Conduct requires every franchise agreement to include a minimum standard mediation procedure for resolving disputes. A condition of that procedure is that the parties must attend mediation (if the parties cannot resolve it themselves and refer the matter to mediation), or face a civil penalty of 300 penalty units (i.e. $51,000).
The Franchising Code of Conduct also provides for a more comprehensive mediation procedure that is not required to be included in a franchise agreement.
Failing to apply with the Franchising Code of Conduct
The Franchising Code of Conduct is a mandatory industry code. This means franchisors must comply with it.
If a corporation breaches the Franchising Code of Conduct, the ACCC will investigate the breach. Following an investigation, the ACCC could issue the breaching franchisor with an infringement notice (in which case, a fine of $8,500 is payable) and the matter is treated as settled.
The ACCC may also initiate court proceedings if the franchisor breached a civil penalty provision in the Franchising Code of Conduct. An individual, or the ACCC, may seek an injunction in order to prevent further breaches, or to seek compensation and damages.
Other Commonwealth and State law obligations
Franchisors are also subject to other provisions of the Competition and Consumer Act 2010 (Cth), including the Australian Consumer Law rules. For example, a franchisor cannot engage in misleading or deceptive conduct or unconscionable conduct when negotiating a franchise agreement.
The remedy for such actions depends on the offence. For example, if a corporate franchisor makes false or misleading representations about its franchise, a maximum fine of $1.1 million may apply.
Court action can also be commenced against a franchisor breaching the Australian Consumer Law rules for compensation and damages.
Obligations under New South Wales law
If a person enters into a franchise agreement to operate a business, and they are required to be licensed under the Property, Stock and Business Agents Act 2002 (NSW) in order to carry on that business (e.g. real estate agents and strata managing agents), they must notify the Department of Fair Trading within 30 days of entering into the franchise agreement. Failure to do so is subject to a maximum penalty of 100 penalty units (i.e. $11,000).
Franchisors are also under an obligation to inform the Department of Fair Trading if a franchisee fails to account for any money under the agreement. Failure to do so is also subject to a maximum penalty of 100 penalty units (i.e. $11,000).
Separately, the Australian Consumer Law rules form part of NSW law. This means that NSW government bodies such as the NSW Commissioner for Fair Trading apply their own investigative powers to ensure the Australian Consumer law is enforced.
Obligations under Victorian law
Under the Estate Agents Act 2008 (Vic), estate agents are required to be licensed. A registrar keeps a register of all estate agents, which will include the details of any franchise agreements an estate agent operates their business under. Estate agents must give notice to the Business Licensing Authority of any such franchise agreements.
Furthermore, franchisors are made jointly and severally liable with franchisees in a number of circumstances; for example, if the estate agent commits any theft, embezzlement or fraudulently misappropriates money, or liabilities that arise out of a franchisees’ negligence.
Separately, the Australian Consumer Law is enforced in Victoria by Consumer Affairs Victoria under the Australian Consumer Law and Fair Trading Act 2012 (Victoria).
Obligations under South Australian law
Unlike NSW and Victoria, South Australia does not have specific rules for the registration of certain franchise agreements.
The Australian Consumer Law is enforced in South Australia under the Fair Trading Act 1987 (SA) by the Commissioner for Consumer Affairs under the Office of Consumer and Business Affairs. The Small Business Commissioner of South Australia also assists with resolving franchising disputes through, for example, mediation.
Obligations under Western Australian law
In Western Australia, under the Real Estate and Business Agents Act 1978 (WA), real estate agents and business agents cannot carry on business under a franchise agreement without government approval. If they do so, all parties under the franchise agreement commit an offence with a maximum fine of $10,000. If approval is given, the franchisor and franchisee are both liable for penalties if the franchisee fails to comply with certain trust account obligations and any criminal or fraudulent conduct by the franchisee which results in another person losing property.
Equally important, Western Australia is the only jurisdiction that explicitly states that transfers of assets from a franchisor to a franchisee under a franchise agreement are generally not subject to stamp duty (except for circumstances where one franchisee relinquishes its rights under a franchise agreement so another franchisee could acquire them). If you are in Western Australia, you should check with the Office of State Revenue to confirm whether your transaction under a franchise agreement is not a dutiable one.
The Australian Consumer Law rules are enforced in Western Australia under the Fair Trading Act 2010 (WA) by the Department of Commerce Consumer Protection division.
Obligations under Queensland law
Unlike Western Australia, under the Duties Act 2001 (Queensland) rights arising under franchise agreements are specifically referred to as dutiable property. This means that rights arising under franchise agreements may be subject to stamp duty. Therefore, you should seek legal advice on whether you will need to lodge a franchise agreement in Queensland with the State Revenue Office, Queensland and pay stamp duty.
The Australian Consumer Law is enforced in Queensland by the Office of Fair Trading.
Obligations under Tasmanian law
Under the Property Agents and Land Transactions Act 2005 (Tasmania), if a real estate agent carries on business pursuant to a franchise agreement, the franchisor and the real estate agent are both guilty of an offence if the real estate agent fails to comply with its trust account obligations, and for any criminal or fraudulent conduct committed by the real estate agent that results in another person losing property.
Separately, the Australian Consumer Law is enforced in Tasmania by Consumer Affairs and Fair Trading.
Obligations under ACT law
Obligations under NT law
Under the Stamp Duty Act, in certain circumstances the termination and creation of franchise agreements are subject to stamp duty and are treated as transfers between old and new franchisees. This means franchisees may be subject to stamp duty in the Northern Territory for transfers of assets under franchise agreements.
The Australian Consumer Law is enforced in the Northern Territory by Northern Territory Consumer Affairs.