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All franchise agreements contain different ways a franchise can be terminated. Indeed, many of the termination clauses found in franchise agreements mirror the termination rights provided under the Franchising Code of Conduct (the Code). The Code is the law that applies to franchises in Australia. Under the Code, franchise parties have several ways in which they can end their franchise agreement, including termination for breach or termination by mutual agreement. As a franchisor, the Code also provides you with specific rights to terminate a franchise agreement by notice to a franchisee. In the franchise industry, these circumstances are often referred to as ‘special circumstances’ termination rights or ‘particular grounds’ terminations and are found in section 29 of the Code.

Until recently, a franchisor was entitled to immediately terminate a franchise agreement where one of the section 29 events occurred. However, now a franchisor can only terminate the franchise agreement for a section 29 reason after giving a franchisee seven days’ notice of their intention to terminate and additional restrictions apply. This article will discuss the ‘special circumstances‘ in section 29 of the Code.

What Are the ‘Special Circumstances’ Outlined in Section 29 of the Code?

The Code lists seven circumstances that allow for ‘special circumstances’ termination, these are:

1. The Franchisee No Longer Holds a Licence That the Franchisee Must Hold to Carry on the Franchised Business

You can rely on this in circumstances where the franchisee requires a licence as part of their operation of the business. For example, for a franchise in the building industry, the franchisee may be required to have a building licence under the terms of the franchise agreement. Therefore, if the franchisee loses their building licence, the franchisor can rely on section 29 of the Code to terminate the franchise agreement.

Further, there are many types of licenses that franchisees may require under the franchise agreement, including licenses like a liquor licence or even a driver licence. Where a franchisee no longer holds these necessary licences, the franchisor may terminate.

2. The Franchisee Becomes Bankrupt, an Insolvent Under Administration or a Chapter 5 Body Corporate

This covers circumstances where a franchisee is unable to pay their debts.

For an individual, this termination right will be provided to a franchisor if their franchisee becomes bankrupt.

For companies, events that will trigger this termination right are generally outlined under the Corporations Act, which covers companies that may be:

amongst other things.

If a franchisee is in this position, then the franchisor may move to terminate the agreement.

3. The Franchisee is a Company That is Deregistered by the Australian Securities and Investments Commission

The Australian Securities and Investments Commission (ASIC) governs the conduct and registration of companies in Australia. There are limited circumstances where ASIC may deregister a company. These circumstances include: 

  • the voluntary deregistration of a company at the company’s determination; or
  • deregistration initiated by ASIC.

4. The Franchisee Voluntarily Abandons the Franchised Business or the Franchise Relationship

This occurs when a franchised business no longer exists or the franchisee ceases to operate the business. It arises by the conduct of the franchisee, such as showing no intention to: 

  • be bound by the terms of the franchise agreement;
  • take any responsibility for the franchise; or
  • be involved in it in any way. 

This may also apply in situations where the franchisee (or its nominated manager) no longer resides in Australia in order to operate the business. In these circumstances, the franchisor may consider the franchised business ‘abandoned’.

5. The Franchisee is Convicted of a Serious Offence

A serious offence is defined within the Code as “an offence under any law of the Commonwealth or a State or Territory for which… a person would be liable, on first conviction, to imprisonment for a period of not less than 5 years; or a contravention of any provision of the Corporations Act”.

This means that if a franchisee commits a crime with a minimum sentence of five years, or if the franchisee commits an act under the Corporations Act, which is deemed an ‘offence’, then the franchisor may terminate.

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6. The Franchisee Operates the Franchised Business in a Way That Endangers Public Health or Safety

This criteria is a little vaguer than the others mentioned in section 29 of the Code.

Here, the franchisor should determine what is considered to be operating in a way that endangers public health or safety. For instance, for franchises in the beauty and medical industry, this may include unsanitary procedures or failure of health and safety checks undertaken by council, health authorities or the franchisor. Similarly, in the food industry, it may be unhygienic food practices or failed food safety inspections. 

The franchisor should apply logic and reasonableness in these situations and only move to terminate where there is a clear endangerment to public health or safety.

7. The Franchisee Acts Fraudulently in Connection With the Operation of the Franchised Business

This may cover several circumstances where the franchisor could consider a franchisee’s conduct as fraudulent. Fraud is considered an act of deception or falsity by someone. In franchising, this may mean: 

  • falsifying sales data or company records;
  • intentionally misstating income; 
  • lying regarding taxes and employees; or
  • pretending to have qualifications that someone does not have. 

If a franchisee is fraudulent in their operation of the franchise, then the franchisor may terminate.

What Should I Do if I Believe a ‘Special Circumstance’ Applies to One of My Franchisees?

Under the Code, a franchisor must not terminate the agreement because of a ground mentioned above, unless you have provided the franchisee with seven days written notice of the proposed termination and the ground for it.

If you provide the franchisee with notice of termination and the franchisee responds in writing with a notice of dispute regarding the termination, then the:

  • franchisor cannot terminate the agreement until the end of the 28 days after they gave the notice; and
  • franchisee may refer the matter to an alternative dispute resolution (ADR) process as outlined under the Code. Both parties may work together to appoint an ADR practitioner or request that one be appointed as soon as possible.

Despite this, the franchisor can require the franchisee to cease operating the business. Indeed, they can do so even if the agreement has not formally terminated under section 29 or if the parties are required to undertake an ADR process in the event of a dispute notice.

Key Takeaways

It is important for franchisors to understand the ‘special circumstances’ which allow for the section 29 termination rights to be triggered under their franchise agreement and the Code. However, even by providing franchisees with seven days notice, franchisors should be mindful that the termination process may be drawn out by franchisees where the franchisee disputes the ground for termination. Additionally, the franchisor may be required to undertake ADR processes in the meantime. If you are having difficulty with a franchisee or believe that the above circumstances may apply to one of your franchisees, contact LegalVision’s franchise lawyers on 1300 544 755 or fill out the form on this page. 

Frequently Asked Questions

What is ‘special circumstances’ termination?

‘Special circumstances’ termination refers to specific rights to terminate a franchise agreement found in section 29 of the Code. Alternatively, they may be called ‘particular grounds’ terminations.

Can I terminate straight away if a ‘special circumstance’ applies?

No, the Code states that a franchisor must not terminate the agreement for ‘special circumstances’, unless they have provided the franchisee with seven days written notice of the proposed termination and the ground for it.

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