The obligations on franchisors are certainly onerous. In addition to the growth and continual improvement of the franchise network, franchisors are burdened with a number of statutory and contractual obligations (usually found in the franchise agreement itself) including:
- Ongoing disclosure;
- Receipt and analysis of reports;
- Provision of training; and
- Undertaking appropriate audits, renewals and, in some cases, terminations.
It can then be tempting for many business owners to attempt to sidestep such obligations by adopting a licence model, rather than a franchise.
Indeed, LegalVision’s lawyers field numerous enquiries regarding the consequences of operating under a licence agreement while still obtaining the level of control that is the cornerstone of the franchise relationship. Our advice? Don’t do it. Below, we explain the possible ramifications for business owners operating a franchise disguised as a licence agreement.
Franchise vs License
In essence, a licence is a right to use. On the other hand, a franchise agreement is a system requiring the presence of the following four criteria:
- An agreement that is, in part, written, oral or implied;
- A party grants a right to operate a business offering, supplying or distributing goods or services in Australia under a system or marketing plan that the offering party substantially determines or controls;
- Is premised on the use of a trade mark or symbol (brand) the offering party owns; and
- The receiving party makes particular payments to the offering party.
If these criteria are satisfied, and this will be dependent on the individual case, the system is a franchise and the Code applies.
Potential Liability for Failing to Abide by the Code
If you run a franchise, you have obligations under the Franchising Code of Conduct that include disclosure and provision of certain information to current or prospective franchisees before forming a binding contract.
Many successful legal cases have been run because a party was, in fact, operating a franchise and had failed to provide appropriate disclosure under the Code in circumstances where they purported to grant a licence. Had the operating party disclosed the necessary information, the franchisee/licencee would not have entered into the agreement at all. Consequently, an award of damages exceeding hundreds or thousands of dollars is awarded against the operating party.
Potential Liability to ACCC
Further, the Australian Competition and Consumer Commission (ACCC), the body who governs the operation of the Code in Australia, can and does impose sanctions for parties found to be in breach of the Code. We’re not talking a slap on the wrist here. Financial penalties and infringement notices are available under 24 penalty provisions of the Code, with maximum fines at $54,000 per breach, including for a failure to:
- Act in good faith;
- Provide a disclosure document (or provide inadequate disclosure);
- Attend mediation (as is required under the code); or
- Provide reasonable written notice of proposed termination for breach.
We hope all of those dollar signs are enough to make you think twice about operating a franchise disguised as a licence. While the obligations of franchisors can be indeed onerous, the Franchising Code of Conduct exists for a reason, and failure to comply, regardless of what you call your operative document, can lead to very serious consequences.
If you are looking to expand your business and are not sure what model is right for you, get in touch with LegalVision’ franchise lawyers on 1300 544 755.