5 Ways a Franchisor Can Breach a Franchise Relationship

In Short

• Understand common ways franchisors breach franchise relationships, including breach of contract and failure to act in good faith.

• Familiarise yourself with your legal obligations under the Franchising Code of Conduct and Australian Consumer Law.

• Avoid potential liabilities by ensuring compliance with the Fair Work Act and maintaining transparency with franchisees.

Tips for Businesses

Franchisors should prioritise maintaining good faith in all dealings, ensure clear contract terms, and comply with all regulatory obligations. Protect your business by staying informed about the Franchising Code of Conduct and Australian Consumer Law. Regularly review franchise agreements to avoid breaches and reduce the risk of legal action.

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Table of Contents

• Franchise Agreement
• Good Faith
• Australian Consumer Law
• Fair Work Act
• Breaches of the Code
• Key Takeaways
• Frequently Asked Questions

In Australia, franchising is a heavily regulated industry. Further, the Franchising Code of Conduct (the Code) governs the conduct of franchisors and franchisees, outlines several rights and obligations and provides mechanisms for dispute resolution within franchise systems. In particular, franchisors have many obligations and responsibilities within their franchise relationship. Indeed, there may be severe consequences if they breach these duties. This article will discuss five ways a franchisor can breach a franchise relationship.

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Franchise Agreement

A franchise agreement is a legally binding contract between a franchisor and a franchisee. It differs from other commercial contracts, as it must comply with the terms set out in the Code. However, a breach of a franchise agreement occurs when one party fails to deliver on the terms of the agreement. In addition, a franchisee can claim a breach by the franchisor on a contract law-based claim. This claim may give rise to a contract law-based remedy.

Franchise agreements are often drafted in favour of the franchisor to protect their interests. Therefore, there are typically more clauses describing what the franchisee must do than the franchisor. Nonetheless, contractual breaches can occur. For example, if the franchise agreement requires the franchisor to maintain the intellectual property, they let an important TM registration lapse. The Code does not provide an automatic right to terminate a franchise agreement in case of a breach. As such, franchisees must look to the terms of the agreement, which will determine any right to terminate for breach of contract. A franchisee may have to operate the franchise until the agreement expires. A franchisee may also issue a notice of the dispute to terminate the franchise agreement if a franchisor has misrepresented or over-promised ongoing support and marketing services. 

Where the parties are unable to meet their obligations under the franchise agreement, the ACCC encourages both franchisors and franchisees to maintain a:

• collaborative; 
• constructive; and 
• flexible relationship. 

Good Faith

Franchisors and franchisees have a mutual obligation to act in good faith in dealings with one another according to a provision of the Code. It would help if you considered this when exercising rights and performing obligations under the agreement or the Code.

Under common law, the duty of good faith requires parties to act reasonably, not dishonestly or for an ulterior motive. This obligation extends to all aspects of the franchising relationship, including:

• pre-contractual negotiations; 
• performance of the contract; 
• dispute resolution; and 
• the end of an agreement. 

Australian Consumer Law

Like other commercial contracts, the franchise agreement is subject to the Australian Consumer Law (ACL). Accordingly, franchisors should be mindful of their obligations under the ACL, which include refraining from:

• misleading or deceptive conduct in dealing with franchisees and prospective franchisees;
• unconscionable conduct in dealing with franchisees; and
• unfair contract terms in standard form contracts.

A franchisor may be liable to pay compensation, any franchise fees and payment for work completed, which can be significant for the franchisor. In this case, you can declare the franchise agreement void. 

Fair Work Act

A franchisor can be held legally responsible for its franchisee’s employees in specific circumstances. This occurs if the franchisor knew, or should have known, that an infringement of workplace laws occurred. In particular, if they should have taken ‘reasonable steps’ to prevent the infringement. 

A franchisor can be subject to enforcement action for breaches of their extended liability provisions in the Fair Work Act 2009 and can be subject to court proceedings. A court can make a range of orders, including that the franchisor pays compensation to its employees. It can also order that the franchisor pay penalties of over $13,000 for individuals and $66,000 for corporations. 

A franchisor should take reasonable steps to prevent an infringement from happening. What is reasonable will vary from network to network based on numerous factors including:

• the size and resources of the franchisor;
• the ability to influence or control the actions of the franchisee concerning the obligation that was not met;
• the procedures for handling complaints about possible underpayments or breaches of workplace laws in the franchise; and
• what steps can the franchisor take to encourage, support, or train Franchisees about complying with workplace laws.

Breaches of the Code

Franchisors should ensure that they are familiar with their obligations under the Code, as breaches of these obligations are far more common. In addition, 2021 changes to the Code have implemented tougher penalties for franchisors for breaches of the Code.

Under the Code, breaches by the franchisor may occur for the following obligations (amongst others):

• disclosure – franchisors must disclose materially relevant facts to prospective franchisees before entering into a franchise agreement or within a reasonable time after the franchisor becomes aware of them;
• disclosure document – franchisors must provide a copy of the disclosure document upon request by the franchisee;
• limit good faith obligations – franchisors must not enter a franchise agreement that limits the obligation to act in good faith (including by applying, adopting, or incorporating the words of another document);
• information statement – franchisors must provide a copy of the information statement to a prospective franchisee within a reasonable time, before formal disclosure of more detailed documents; and
• cost of settling disputes – franchisors must not enter into franchise agreements that require the franchisee to pay for the costs of settling any disputes.

Key Takeaways

Indeed, franchisors have many obligations and responsibilities within their franchise relationship. Therefore, a breach of these duties can result in severe consequences. Some ways a franchisor can breach the franchise relationship is through breach of:

• the franchise agreement;
• good faith obligations;
• ACL;
• fair work act; and 
• the Code. 

If you need assistance understanding your obligations as a franchisor or franchisee, our experienced franchise lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.

Frequently Asked Questions