ACCC: The Australian Consumer and Competition Commission is the key regulatory body which protects consumer rights. It is also the body in charge of administering and enforcing the Franchising Code of Conduct.
Advice: Under the Code, franchisees are required to provide a statement that shows they have taken advice before entering the franchise agreement. This may be advice from:
- A legal advisor;
- A business advisor; or
- An accountant.
For each type of advice not received from the above, the franchisee is required to provide a statement stating either they have already received that kind of advice or has decided not to seek the advice.
Code of Conduct: This is the industry code which binds all franchisors and franchisees and sets out the mandatory regulations surrounding a franchise system. Most importantly it provides legal protection to franchisees and sets out disclosure obligations of franchisors.
Complaint handling procedure: Franchise agreements must contain a complaint handling procedure. If a franchise dispute occurs, the franchisee/franchisor should ensure that the procedure is followed precisely. In general, the complaint must be in writing and alternate dispute resolutions will be the first point of call.
Cooling periods: Under the Code of Conduct, franchisees are given two cooling off periods that allows them to:
- End within seven days of entering into the franchise agreement; or
- End within seven days of making a payment under the franchise agreement.
Disclosure document: Under the Code, franchisors are under strict obligations to provide a disclosure document to any potential franchisee before they enter into the franchise agreement. Details of what the franchisor needs to disclose are included in the Code and includes copies of the lease, any security agreements, confidentiality agreements and financial statements.
Disputes: Franchising disputes are difficult for both sides of the agreement. It should be noted that under the Code of Conduct, both franchisee and franchisor has obligations to ‘genuinely resolve the dispute’. This includes:
- Attending and participating in meetings;
- Undergoing the mediation process;
- Not damaging the reputation of the franchise system during the dispute.
Disputes are often started at the complaints stage. See also “Complaint handling procedure”.
Fit-Outs: Fitting out the business premises of the franchise is usually one of the first tasks for a new franchisee, it essentially means to fix up the premises according to the requirements of the franchisor. Most franchises will make the franchisee responsible for fitting out the premises at the franchisees’ own expense and the franchise disclosure documents should give an estimate of these costs.
Franchise: The Code of Conduct sets out a four-point test for determining whether a business structure can be deemed a franchise. The four points are:
- Existence of an oral, implied or written contract;
- Existence of a system or marketing plan;
- Use of a trademark or commercial symbol;
- Payment of a fee.
Franchise Agreement: All franchises are bound and governed by the franchise agreement. This is usually provided together with the franchise’s disclosure document. The agreement should follow the guidelines set by the Code of Conduct as well as set out the terms and conditions expected of the franchisee. Franchisors should ensure that the franchise agreement is drafted flexibly as the agreement usually covers a long term period.
Franchise Fee: Also known as the upfront payment, the franchise fee is the amount the franchisee pays upon entering into the franchise agreement. This can vary drastically depending on the franchise system and is usually quite costly for the franchisee. Franchisees should ensure they are financially able to take on the franchise fee before considering purchasing a franchise.
Franchisee: The franchisee is the party that has purchased a franchise. Franchisees must ensure they are in a suitable position to enter into a franchise system before they sign the franchise agreement and they understand their legal obligations.
Franchisor: The franchisor is the original owner of a franchise system. The Franchisor has specific rights and obligations they must comply with under the Franchising Code of Conduct.
Good faith: The new Code of Conduct, which came into effect on 1 January 2015, introduces a new obligation for parties to a franchise agreement to act in good faith in their dealings with one another. While good faith is not defined, under common law it requires parties to deal with each other reasonably and not arbitrarily, to act honestly and respect the terms of the Code and franchise agreement.
Income guarantee clause: This is a right usually granted to franchises in the franchise agreement and ensures that a franchisee will earn a minimum income over a period of time. It is an important clause for franchisees as it gives security for at least the first year of trading and is an incentive towards purchasing the franchise.
Leases: Most franchises operate on leased premises. Usually either the franchisees can lease the premises directly or the franchisor will lease it first and licence it to the franchisee. This will be included in the terms of the franchise agreement. For franchisees, it is important to note that the lease term corresponds with the franchise term. If it is being licenced to the franchisee from the franchisor instead, the lease agreement should contain a term that allows the franchisor to do so.
Master Distribution Agreement: One common alternative to a franchise agreement is to use a master distribution agreement. The franchisor may prefer to use a master distribution agreement because it can provide the same economic benefits of upfront fees and sales percentage royalties but for a lower cost and less continuous management. Additionally, master distribution agreements do not require any additional obligations on the part of the distributor aside from supplying the goods.
Master franchise: A master franchise system allows franchisors to portion off control of the franchise network by specific territories. In this system, master franchisors will have some sub-franchises under their management which are owned by different franchisees. This is a popular approach to establishing a large number of franchise networks over various territories.
Mediation: The Code sets out obligations for franchisee and franchisor to resolve disputes through mediation. Once one party asks for mediation the other party must attend it, or they will be in breach of the Code. There exists the Office of the Franchising Mediation Adviser who can assign mediators specifically to help resolve a franchise dispute.
Minimum performance: Minimum performance clauses can usually be found in franchise agreements that set out the basic criteria franchisees must meet in running the business. These will vary depending on the franchise system and can range from completing a training program to meeting an annual sales target. Failure to meet the minimum performance clause will have varying consequences, from incurring additional costs to termination of the franchise agreement.
Ongoing payments: Franchise agreements will usually various obligations on the franchisee to pay ongoing fees. This could cover a number of areas. Most commonly, franchisees will be required to pay royalties on a percentage of their sales. Most franchise agreements will also ask franchisees to contribute to the marketing fund on an ongoing basis.
Operation manual: Franchisors should ensure that a training guide or operations manual is provided as a first step for initial training as this will set out important information that franchisees need to know. It will also set the standard so that franchisees know what is expected and franchisors can maintain quality control across the franchise system.
Restraint of trade: Franchise agreements will usually contain a restraint of trade clause that stops the franchisee from competing with the franchise business within a particular period of time and in a particular location. The term that the restraint covers will vary and franchisees should ensure they understand the limits imposed on them before entering the agreement.
Royalties: Most franchise systems ask their franchisees to pay regular royalty fees. This is charged based on the revenue and is in the form of a percentage, e.g. 5% of the monthly sales revenue. Often in initial stages, the royalty fee may exceed profits for the business.
Termination: There are only certain circumstances under which a franchise agreement can be terminated. This includes:
- When the franchisee has breached the franchise agreement;
- Special circumstances in which the franchisor can terminate;
- Where no breach has occurred but the franchise agreement allows for termination (not franchisors have an obligation to provide an explanation for termination in this case).
Training: In general, franchise agreements will provide that franchisors are responsible for the initial training of franchisees. However, a training fee may be required from the franchisee or it could have been folded into the upfront fee. Ongoing training is usually only provided at the expense of the franchisee. Training should cover information about the industry, the goods/services offered by the business and the daily operations of the business.
Unconscionable/unfair contracts: A contract is unconscionable under Australian Consumer Law if there is an unfair dispute between the two parties, usually if there is an uneven playing field – i.e. a dominant party taking advantage of the weaker party. This means that franchisors cannot take unfair advantage of their franchisees when drafting the franchise agreement. For example, a clause that states the franchisor can amend the agreement without franchisee’s consent is unconscionable.
Questions? Contact LegalVision’s franchise lawyers on 1300 544 755.
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