There is a lot to consider when drafting a franchise agreement. Primarily, it would help if you considered your obligations under the Franchising Code of Conduct (‘the Code’). However, you will also have to consider your franchise network’s present and future needs. Therefore, it is a good idea for franchisors to engage experienced lawyers when drafting franchise documents. This article explores why working with a lawyer to construct a franchise agreement could benefit you.
Making the decision to franchise your business can be difficult. This Franchisor Toolkit covers all the essential topics you need to know about franchising your business.
This Toolkit also contains case studies from leading franchisors including leading Australian franchises including Just Cuts, FlipOut and Fibonacci Coffee.
Complying with the Law
Understanding your obligations is especially important when drafting a franchise agreement. In Australia, the Code and Australian Consumer Law dictate what you need to include in the franchise agreement and the terms your franchise agreement cannot include. An experienced franchise lawyer will be well aware of your legal obligations as a franchisor and can help ensure you are complying with the law when drafting your agreement.
The Code
In Australia, the Code heavily regulates franchises and franchise agreements. However, while the Code dictates your rights and responsibilities under a franchise agreement, it does not set out the terms and conditions of each agreement. This is because franchise agreements will invariably differ depending on each business.
Nevertheless, the Code limits what you can put into a franchise agreement, including:
- restraint of trade clauses that prevent a franchisee from working elsewhere once the agreement ends;
- terms about who pays for legal costs and settling disputes;
- your ability to make changes to franchise agreements that have retrospective application;
- a general release of your liability; and
- waivers of any statements you make to a franchisee.
A lawyer can ensure your franchise agreement is consistent with the Code.
Australian Consumer Law
Australian Consumer Law prohibits unconscionable conduct between businesses. Further, since franchisees are likely in a weaker bargaining position, the law prevents you from taking unfair advantage of franchisees by including unfavourable terms in the franchise agreement. For example, a clause that allows you to amend the agreement without consulting the franchisee may be unconscionable.
To avoid this, a lawyer can help you strike a balance between drafting a favourable agreement and being in line with consumer law.
Covering All Bases
An experienced franchise lawyer will also understand what terms you should include to facilitate business growth. Some of the terms you are likely to find in a franchise agreement include:
- an intellectual property clause;
- the royalty fees you will charge franchisees;
- the franchise period, as well as any rights to renew the franchise agreement;
- terms that deal with the franchisee’s occupation of the business premises either through a direct lease with the landlord or a licensing arrangement with you;
- guidelines for marketing the franchise business;
- limits on what goods and services the franchisee can supply;
- how your franchise can use operational manuals; and
- the cooling-off period, requests to terminate the agreement early and the consequences of non-compliance with the agreement in line with the Code.
Ensuring The Agreement is Enforceable
Once a lawyer drafts the franchise agreement, they can also assist with some additional steps that may follow.
Signing the Agreement
When prospective franchisees enter the franchise agreement in their individual capacity, they must sign the agreement next to their full legal name before a witness.
Alternatively, if a franchisee enters the franchise agreement as a corporate franchisee or corporate trustee, they must execute the franchise agreement by acquiring the signature of:
- the sole director/secretary of a sole director/secretary company; or
- one of the directors, alongside the signature of another director or the company secretary for companies with more than one director.
These rules also apply when you execute the franchise agreement as the franchisor.
Ensuring the Franchisee Complies With Their Obligations
Before starting the franchise, there are a few steps the franchisee must complete. Furthermore, failure to complete these steps can be detrimental to the operation of the franchise business. For this reason, a lawyer can ensure you receive a:
- ‘franchisee’s statement’ with the franchisees signature, acknowledging that the franchisee has had a reasonable opportunity to read and understand the franchise documents at least 14 days before executing the franchise agreement;
- completed receipt page from the disclosure document;
- completed ASIC Business Name Authority; and
- legal advice certificate and accountants certificate acknowledge that you have encouraged the franchisee to seek independent advice.
Key Takeaways
The terms in a franchise agreement can vary depending on the nature of your business. For this reason, most franchisors will consult franchise lawyers to draft their franchise agreements. Often, an experienced lawyer can:
- ensure the agreement is consistent with the law;
- covers all relevant bases for the proper establishment and operation of a franchise business; and
- ensure the agreement is enforceable.
If you need help drafting your franchise agreement, our experienced franchising lawyers can assist as part of our LegalVision membership. You will have unlimited access to lawyers to answer your questions and draft and review your documents for a low monthly fee. Call us today on 1300 544 755 or visit our membership page.
Frequently Asked Questions
The franchise agreement is a legally binding contract that sets out a franchisor’s and franchisee’s obligations when operating a franchise. It covers a range of issues, including rights to intellectual property and royalty fees.
The cost for document drafting will vary from firm to firm. Feel free to contact us to learn more about our different pricing models.
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