When is a Distribution Agreement really a Franchise Agreement?

Our recent article, When is a Licence Agreement really a Franchise Agreement? looked at considerations for parties entering into a licence agreement, particularly whether a licence agreement is really a franchise agreement (regardless of whether it is called a licence agreement or a distribution agreement).

These issues were further discussed with respect to Distribution Agreements in the recent case of Workplace Safety Australia v Simple OHS Solutions Pty Ltd [2015] NSWCA 84 which was handed down on 8 April 2015.

Material Facts

 This matter:

• Involved a Distribution Agreement between Workplace Safety Australia Ltd (Workplace Safety) and Simple OHS Solutions Pty Ltd (Simple OHS Solutions) (Distribution Agreement);
• considered whether the Distribution Agreement was actually a Franchise Agreement; and
• if the Distribution Agreement was a Franchise Agreement, had Workplace Safety complied with the Franchising Code of Conduct.

Analysis  

The Distribution Agreement in this case required Simple OHS Solutions to:

• pay a customer list fee (quarterly) to Workplace Safety;
• provide a business plan to Workplace Safety;
• follow sales administration procedures prescribed by Workplace Safety;
• use forms supplied by Workplace Safety;
• comply with an operations manual supplied by Workplace Safety; and
• comply with all reasonable directions of Workplace Safety.

Outcome

Both at the trial at first instance and upon appeal in the New South Wales Court of Appeal, it was found that the Distribution Agreement contained the characteristics of a franchise agreement and was therefore held to be a franchise agreement.

As a result of the finding, Workplace Safety did not comply with the Franchising Code of Conduct (Code), specifically the pre-contractual disclosure at Part 6 of the Code or the pre-termination requirements in clause 21 of the Code.

This failure to comply with the Code meant that the Court of Appeal held that Workplace Safety was in breach of section 51AD of the Competition and Consumer Act 2010 (Cth) and was required to pay Simple OHS Solutions the amount of $208,178.39 in damages.

Take Home Points

The moral of the story is that careful consideration must be given as to whether an agreement termed a distribution agreement or licence agreement is actually a franchise agreement.

If the agreement is a franchise agreement, (whatever the agreement is termed as) the agreement and the franchisor MUST comply with the Franchising Code of Conduct.

Non compliance with the Code may result in court action against the franchisor (or distributor/ licensor) such as the case of Workplace Safety Australia v Simple OHS Solutions Pty Ltd.

To re-iterate our earlier article setting out the features of franchise agreements as distinct to licence agreements, there are certain distinct elements that a Franchise Agreement must possess, as set out in section 5 of the Code:

• it must be written, oral or implied;
• it grants a person (the franchisor) the right to grant to another person (the franchisee) the right to carry on a business under a system or marketing plan substantially determined, controlled or suggested by the franchisor;
• it grants the franchisee the right to use a trade mark, advertising or commercial symbol that is owned, used, licensed or specified by the franchisor; and
• it provides that the franchisee must make certain payments to the franchisor.

Do you require legal advice as a franchisor or franchisee?

If you require advice as a licensor/ distributor/ franchisor as to the contents of your agreements and whether the Code applies, contact one of our specialist LegalVision franchise lawyers today.

If you are a licencee/ franchisee/ party to a distribution agreement, we also suggest you obtain independent legal advice before entering into an agreement as to the applicability of the Code and other key items of the agreement.

Call one of our expert lawyers today on 1300 544 755.