Franchising involves a business owner (the Franchisor) granting to another person (the Franchisee) the right to replicate their business model and to carry on an independent outlet under their trademarked business name. The Franchisee pays a fee to the Franchisor in return for permission to market and sell their services and products. The Franchisee is also generally required to pay ongoing royalties and agrees to implement set procedures, marketing and management techniques.
The practise of franchising in Western Australia is regulated via the Australian Competition and Consumer Commission (the ACCC) under the Competition and Consumer Act 2010 (The Act) (formerly the Trade Practices Act 1974). The Act embodies the Franchising Code of Conduct, which sets out industry standards relating to disclosure of information, the terms of the franchise agreement and dispute resolution.
Starting a Franchise - Things to Consider:
Franchisees must assess prospective franchising opportunities thoroughly before signing, and obtain comprehensive legal and accounting advice. In particular Franchisees need to consider:
What are the Franchisor's Disclosure Obligations?
Under the Franchising Code of Conduct, the Franchisor is required to provide to the prospective Franchisee with copies of:
The Franchisor is required to provide these document 14 days before the agreement is signed or non-refundable payments are made.
Who Sets Product Pricing?
Under to the Franchising Code of Conduct, the Franchisor is not entitled to set prices for the sale of goods or provision of services by the Franchisee, including minimum sale prices. Although the Franchisor is able to provide a pricing guide, the Franchisee has complete discretion in their pricing practices.
How Are Products Sourced?
Where a Franchisor stipulates that the Franchisee must source products from a particular supplier (other than themselves or a related company), they are engaging in ‘third line forcing’, which is a breach of the Franchising Code of Conduct. Franchisors can protect themselves from any legal repercussions by lodging a notification with the ACCC, which must state details of the arrangement, as well as the benefits and detriment to the public which are likely to arise.
Where a Franchisor requires that the Franchisee source products from themselves or a related company, they are not in breach of the Franchising Code of Conduct provided that the arrangement is not designed to, or has the outcome of, substantially reducing competition.
How Are Disputes Resolved?
Where a dispute between a Franchisor and Franchisee arises, the first step towards resolution is mediation. Once mediation has been requested, both parties are obliged to participate and make genuine attempts to resolve the issue. Where mediation is unsuccessful, parties should seek legal advice about commencing legal proceedings. Where a breach of the Franchising Code of Conduct has occurred, the matter can be referred to the ACCC for investigation.
Pursuing Breaches of the Franchising Code of Conduct:
The ACCC has the power to investigate alleged breaches of the Franchising Code of Conduct and to pursue legal proceedings where necessary. Where a complaint of an alleged breach is made and, following an investigation, the ACCC determines that the breach is substantive, then they may commence legal proceedings. Where the breach is proved, the Court may order a range of remedies, including issuing an injunction, awarding damages or compensation, setting aside contracts or varying their terms, or ordering corrective advertising.
Proposed Amendments and Changes:
In April 2014 the Federal Government finalised its review of the Franchising Code of Conduct, resulting in proposed amendments which will come into effect on 1 January 2015. The amendments include requirements for Franchisees and Franchisors to act in good faith; increasing enforcement provisions available to the ACCC, including fines for breaches of the Franchising Code of Conduct; increased disclosure, particularly for online sales; and more information for prospective Franchisees at an early stage.
Similar amendments were proposed in Western Australia in 2011, but were not passed after the vote fell one short of acceptance.
A complete overview of the proposed amendments can be found at the Treasury Website: http://www.treasury.gov.au/ConsultationsandReviews/Consultations/2014/Franchising-Code
