Australia - Franchising Code of Conduct
By Jamie Nettleton, Partner
21 March 2007
Obligations of Franchisors
1. Introduction
The Franchising Code of Conduct ("Code of Conduct") is set out in the Trade Practices (Industry Codes - Franchising) Regulations 1998:
- In general, the Code of Conduct applies to all franchise agreements entered into, renewed or extended on or after 1 October 1998.
- The main obligations of franchisors are disclosure requirements.
This summary lists some of the material obligations on franchisors set out in the Code of Conduct. The Code of Conduct also contains other detailed requirements governing the conduct of franchises.
2. Why must franchises comply with the Code of Conduct?
Failure to comply with the Code of Conduct gives rise to 2 risks:
- An action by the ACCC arising from a contravention of the Trade Practices Act on the basis that the Code of Conduct is mandatory rendering the franchisor liable to pecuniary penalties; and
- A civil claim for damages and/or a declaration that the provisions of the "franchise agreement" are unenforceable.
3. What is a franchise agreement?
A franchise agreement must comprise the following elements:
- An agreement, whether written, oral or implied;
- The grant of a right by the franchisor to a franchisee to supply goods or services in Australia under a system or marketing plan;
- The right to use a trade mark in connection with the business;
- Payment of a fee in respect of the rights granted.
There are a number of exceptions prescribed for arrangements that might fall within this description that are excluded expressly (e.g. employment, partnership, and landlord/tenant relationship).
4. Disclosure obligations
- A franchisor must maintain a disclosure document for the franchise. This document must be created by the franchisor and must be provided to a franchisee:
- before entering a franchise agreement;
- within 3 months after the end of each financial year after entering the franchise agreement; and
- proposing to renew or extend a franchise agreement.
- The form and content of the disclosure document will depend on the expected annual turnover of the franchised business:
- if the expected turnover is more than $50,000, it must be in the from of Annexure 1 of the Code of Conduct;
- if turnover is expected to be less than $50,000, it must be in the form of either Annexure 1 or 2.
- To the extent that obligations on either the franchisor or the franchisee in the franchise agreement correspond with those set out in the Annexure, they must be outlined in the disclosure document.
- The disclosure document must be signed by a director or executive officer of the franchisor.
- The franchisor is obliged to ensure that the required information in the disclosure document is current.
- If a sub-franchise is involved, both the franchisor and sub-franchisor are obliged to give separate disclosure documents in relation to the master and sub-franchise respectively to the prospective sub-franchisee or a joint disclosure document.
- The layout of the disclosure document must be in the relevant form and order, and under the titles, used in the relevant Annexure, and must provide a table of contents based on the items in the relevant Annexure.
5. Obligations before the franchise agreement commences
- Before entering a franchise agreement, a franchisor is obliged to not agree to or in fact enter, renew or extend the franchise agreement, or receive a non-refundable payment unless they have received:
- a written statement from the franchisee or prospective franchisee that they have received, read and had reasonable opportunity to understand the disclosure document and the Code of Conduct;
- (for new franchise agreements) a signed statement that a prospective franchisee has been given independent advice about the proposed franchise agreement or has decided not to take independent advice.
6. Conditions of franchise agreement
- Cooling off period:
- for new franchise agreements, a 7 day cooling off period exists. This allows the franchisee to terminate the agreement within 7 days of execution or of making payment.
- if the agreement is terminated during the cooling off period, the franchisor must return all payments made by the franchisee within 14 days.
- Provision of copy of lease:
- If premises are leased by the franchisor to the franchisee for the purposes of the franchised business, the franchisor or its associate lessor must give the franchisee either a copy of the agreement to lease or copy of the lease within 1 month of the lease or agreement to lease having been signed by the parties;
- If the franchisee occupies premises leased from the franchisor or its associate without a lease, the franchisor or their associate is obliged to give the franchisee, within 1 month after occupation commences or when the documents giving the franchisee the right to occupy the premises are signed, either:
- a copy of the franchisor's or associate's lease or agreement to lease; or
- a copy of the documents giving the franchisee the right to occupy the premises or written details of the conditions of occupation.
- Franchisors are obliged not to induce a franchisee to not form an association or associate with other franchisees for a legal purpose.
- Materially relevant facts must be disclosed.
- A franchisor must either mention the following matters in the disclosure document, or tell a franchisee or prospective franchisee about the matter in writing within a reasonable time, and not more than 60 days, after the franchisor becomes aware of it:
- change in majority ownership or control of the franchisor;
- proceedings by public agencies, judgments in criminal or civil proceedings or an award in an arbitration against the franchisor alleging breach of franchise agreement, contravention of trade practices law or Corporations law, unconscionable conduct, misconduct or an offence of dishonesty;
- a judgment against the franchisor under Industrial Relations Legislation other than for unfair dismissal of an employee;
- civil proceedings in Australia against the franchisor by at least 10%, or 10, of the franchisees in Australia of the franchisor (whichever is lower);
- any judgment entered against the franchisor in Australia, and not discharged within 28 days, for at least
- $100,000 for a small proprietary company, or $1,000,000 for any other company;
- any judgment entered against the franchisor in other matters; and
- the franchisor becoming an externally-administered body corporate or a change in the intellectual property, or ownership or control of the intellectual property that is material to the franchise system.
- In most cases, the franchisor must also tell the franchisee the names of parties to the proceedings, the name of the court or tribunal and the case number and the general nature of the proceedings.
- A franchisor must either mention the following matters in the disclosure document, or tell a franchisee or prospective franchisee about the matter in writing within a reasonable time, and not more than 60 days, after the franchisor becomes aware of it:
7. Specific obligations
There are a number of other issues relating to the conduct of a franchise which are mandated by the Code of Conduct. These include (but are not limited to) procedures relating to:
- The right of the franchisee to transfer the franchise;
- Termination of the franchise agreement by the franchisor (whether upon a breach by the franchisee or otherwise); and
- Resolution of disputes.
8. Reforms
The Government has recently announced its intention to make a number of changes to the Code of Conduct. The principal changes proposed, one of which is to remove existing exemptions, are outlined in a separate paper.