What is a franchise agreement?
A franchise agreement is a specific type of business agreement where a franchisor grants to a franchisee the right to carry on a business using the franchisor’s business systems and intellectual property.
The definition of a franchise agreement is set out in section 5 (1) of the Franchising Code of Conduct (“the Code”), as an agreement:
- that takes the form, in whole or part, of any of the following:
- a written agreement;
- an oral agreement;
- an implied agreement; and
- in which a person (the franchisor) grants to another person (the franchisee) the right to carry on the business of offering, supplying or distributing goods or services in Australia under a system or marketing plan substantially determined, controlled or suggested by the franchisor or an associate of the franchisor; and
- under which the operation of the business will be substantially or materially associated with a trademark, advertising or a commercial symbol:
- owned, used or licensed by the franchisor or an associate of the franchisor; or
- specified by the franchisor or an associate of the franchisor; and
- under which, before starting or continuing the business, the franchisee must pay or agree to pay to the franchisor or an associate of the franchisor an amount including, for example:
- an initial capital investment fee; or
- a payment for goods or services; or
- a fee based on a percentage of gross or net income, whether or not called a royalty or franchise service fee; or
- a training fee or training school fee;
- but excluding:
- payment for goods and services supplied on a genuine wholesale basis; or
- repayment by the franchisee of a loan from the franchisor or an associate of the franchisor; or
- payment for goods taken on consignment and supplied on a genuine wholesale basis; or
- payment of market value for purchase or lease of real property, fixtures, equipment or supplies needed to start business or to continue business under the franchise agreement.
Notwithstanding the above, a motor vehicle dealership agreement is taken to be a franchise agreement regardless of whether the elements of the definition set out above are satisfied.
It is critical to understand that clauses within agreements which seek to expressly exclude the characterisation of the agreement as a franchise agreement are void in circumstances where the factual matrix of the underlying business relationship satisfies the definition of a franchise agreement set out above.
Franchisor Disclosure Document and Key Facts Sheet
Franchisors are obligated to provide a disclosure document in the form prescribed by the Code to potential franchisees to allow them to make an informed decision about the franchise and ascertain whether they would like to proceed with acquiring a franchise.
The information within the disclosure document must be accurate and reliable to ensure that the potential franchisee is not misled, including details of the franchise’s directors, any applicable financial obligations of the potential franchisee, details surrounding the terms of the agreement and the relevant terms surrounding termination. The disclosure document must be updated each year; however, franchisors must keep franchisees informed regularly regarding any applicable changes.
The Key Facts Sheet must be in the prescribed format. It is essentially a summary of the disclosure document information, highlighting information that is in the disclosure document and which assists the potential franchisee to navigate and understand the disclosure document. Such information includes, inter alia, the franchisor’s financial history, legal history and the estimated costs relating to the operation of the franchise.
The Key Facts Sheet is also required to be updated from time to time, particularly when the disclosure document is updated. Most key facts sheets and disclosure documents need to be updated within 4 months after the end of the franchisor’s financial year.
Franchising Code of Conduct
The Code is a mandatory industry code that must be complied with as per section 51AE of the Competition and Consumer Act 2010 (Cth). The Code regulates conduct within the franchise relationship, requires each party to the franchise relationship to act in good faith, and also requires that certain provisions within franchise agreements comply with particular requirements.
It is imperative that the Code is complied with. A failure to comply with the Code may result in significant penalties. Since 15 April 2022, contraventions by a body corporate of certain provisions of the Code attract the new ‘super penalties’, being the greater of:
- if the court can determine the value of the benefit that the body corporate (and anybody corporate related to the body corporate) has obtained directly or indirectly, and that is reasonably attributable to the contravention — three times the value of that benefit; or
- if the court cannot determine the value of that benefit — 10% of the annual turnover of the body corporate during the period of 12 months ending at the end of the month in which the contravention occurred.
If you have any franchising queries, require a franchise agreement or disclosure document to be prepared or reviewed, or would like to discuss your specific circumstances surrounding whether your agreement constitutes a franchise agreement, please contact the Commercial Law Team at Long Saad Woodbridge Lawyers for assistance.
Important Disclaimer: The content of this article is general in nature and for reference purposes only. It does not constitute legal advice and should not be relied upon as such. Legal advice about your specific circumstances should always be obtained before taking any action based on this publication.