Help & FAQs
Top 10 Questions
A restraint of trade clause is a clause which is included in an agreement typically to stop someone from competing or using confidential information.
When is a Restraint of Trade clause used?
Restraint of trade clauses are used in various situations:
- in the case of a franchise relationship, the exiting franchisee may be restrained from
- competing with the franchisor for the purpose of protecting the franchisor’s goodwill,
- using the confidential information, trade secrets and trade connections of the franchisor.
- in the case of the sale of a business, the vendor may be restrained from competing with the purchaser for the purpose of protecting the goodwill acquired by the purchaser.
- in the case of an employment relationship, an employee may be restrained from using the confidential information, trade secrets and trade connections of the employer.
When will a Restraint of Trade clause be enforced by a Court?
A Court will consider
- how reasonable the restraint is (does it protect only what it is attempting to protect). If a restraint of trade clause is drafted too widely, or if there is another way to protect the interests of the party seeking to enforce the restraint of trade clause, the clause may not be enforceable.
- the interest of the parties to the agreement, and
- the interest of the public.
Given the factors set out above a restraint of trade clause must be carefully drafted taking into account the specific circumstances of the case.
Read a case study about an unenforceable restraint of trade clause.
Haarsma Lawyers have experience in both drafting and enforcing restraint of trade clauses. Contact us if you wish to have a restraint of trade clause drafted, reviewed or enforced.
The rights to end the franchise relationship, to sell your franchised business, or to pass your franchised business on to a beneficiary are determined by the terms of your franchise agreement and the Franchising Code of Conduct (the Code).
Ending the Franchise Relationship
Under the terms of the Code and on the basis that you are not renewing or extending an existing franchise agreement, you can end your franchise agreement
- within 7 days of entering into your franchise agreement, or
- within 7 days of making a payment under your franchise agreement (the cooling off right).
Apart from a cooling off right it is rare to see a franchise agreement which allows you to end the franchise agreement early without paying an exit fee or other money to the franchisor.
However, you can also end the franchise agreement early if your franchisor has breached an essential or fundamental obligation under the agreement.
You should have someone check the provisions of your franchise agreement and advise you
- what rights you have if you want to end the franchise agreement early.
- if you will have to pay any money to the franchisor if you want to end the franchise agreement early.
If you do not have any right to end your franchise agreement early you should speak to your franchisor and ask what the franchisor's policy is in these circumstances.
If you are happy with what the franchisor represents is their policy you should ask your franchisor to put this in writing.
If there might be a substantial amount of money payable to the franchisor if you end the franchise agreement early, you should ask your franchisor to change these provisions in the franchise agreement.
If your franchisor is unwilling to change these provisions, you should make any decision to enter into the franchise agreement with detailed information of:
- the circumstances in which you may be required to pay an amount of money to the franchisor on ending the franchise agreement early,
- the maximum amount of money (including damages) that you may be required to pay if you end the franchise agreement early.
Selling your Franchise Business
The sale of your franchised business will be determined by the provisions of your franchise agreement. Most franchise agreements contain provisions which will allow you to either sell the franchised business back to the franchisor or to sell the franchised business to a third party approved by your franchisor (your franchisor will want to know that anyone taking on the franchised business is a suitable franchisee).
Your franchisor will also normally have the first option to purchase your franchised business either at market value or on the terms and conditions set out in your franchise agreement.
If you sell your franchise business to a third party it is likely that you will have to pay a transfer fee to your franchisor. You should be aware of the amount of the transfer fee before you set the sale price for your franchised business.
It is important that your clearly understand the terms of your franchise agreement which affect the sale of your franchised business before you enter into the franchise agreement.
If you sell the franchised business you will also normally be subject to restrictions such as confidentiality and restraint of trade. These restrictions are designed to protect the franchisor’s goodwill. Again it is important that you clearly understand the proposed restrictions before you enter into the franchise agreement.
Contact us and we will set out any steps that need to be taken to end the franchise relationship, or to sell the franchised business.
You can end the franchise agreement early or terminate a franchise agreement in a number of circumstances.
Breach by franchisee
You can terminate a franchise agreement if the franchisee has not followed the franchise agreement (called a "breach" of the franchise agreement) and does not start to follow the franchise agreement when requested, or do what you request that the franchisee do to fix (called "remedy") the breach.
In this circumstance you must provide the franchisee with the following:
- specific details of the breach and how it can be remedied,
- reasonable time to remedy the breach (normally 30 days),
- reasonable notice that you intend to terminate the franchise agreement if the breach is not remedied.
If the franchisee does not remedy the breach within the time frame allowed (normally 30 days) you can then terminate the franchise agreement by notice.
No breach by franchisee
A franchise agreement usually contains terms which allow you in certain circumstances to terminate the franchise agreement without a breach by the franchisee.
The types of things covered by this are
- if the franchisee does not satisfactorily complete training within a certain period,
- if the franchisee is required to enter a lease and the franchisee has not done so within a certain period,
- if the franchisee is required to fit out a retail premises and the franchisee has not done so within a certain period ,
- if the franchisee has not obtained the required insurances or licenses to operate within a certain period.
You must give the franchisee reasonable notice of the termination and the reasons for it. What is reasonable notice will depend on the circumstances.
The Franchising Code of Conduct sets out specific circumstances in which you are not required to provide the franchisee with reasonable notice before terminating the franchise agreement.
You may immediately terminate the franchise agreement for any of the following reasons:
- the franchisee no longer holds a licence or lease that is required to maintain the franchise business,
- the franchisee become bankrupt or insolvent,
- the franchisee voluntarily abandons the franchise agreement or business,
- the franchisee is convicted with a seirous offence,
- the franchisee operates the business in a manner which endangers public health and safety,
- the franchisee is fraudulent in connection with the operation of the franchise business.
Contact us if want some advice about terminating a franchise agreement early.
There are 5 main disadvantages to buying a franchise.
Cost and Fees
Buying a franchise is not cheap, there is usually an up front franchise fee on top of the cost of the premsises, equipment and inventory.
You need to be aware of the ongoing fees. In addition to the initial franchise fees ongoing fees are payable by you to the franchisor.
You also need to be aware that some franchisors will require you to refurbish franchisee stores to keep up with a changing image or theme. These possible refurbishments can cost in excess of $150,000.00
Lack of Independence
The controls and limitations imposed by the franchisor can include limitations on products, pricing, employees, policies, territory, marketing, working hours and other areas deemed critically important to the success of the franchisor and the franchised business as a whole.
There is little freedom of scope for you to be creative; almost every aspect of operating the business will be regulated.
Your ability to sell or transfer the franchise business is likely to be limited. Most franchised systems have some restrictions or obligations regarding the sale or transfer of a franchised business.
Guilt by Association
If a franchisor or other franchisees are receiving bad press or suffering from poor public perception then you will ultimately suffer.
While there are many excellent franchisors in Australia, not all franchise systems are soundly based or well run.
You should conduct comprehensive research on the franchisor and only enter into franchise systems which have a time tested and solid reputation within the industry.
Limited Growth Potential
Unlike in stand alone businesses the growth potential of a franchised venture is limited.
Franchisors will almost always impose territorial limits on you which dictate where you can operate. There are often harsh penalties if you step over this mark.
Restrictive franchise agreements
Franchise agreements tend to be to the advantage of the franchisor.
Franchise agreements can contain heavy penalties if you breach certain clauses, including the ability for the franchisor to terminate the franchisee and to seek monetary compensation from you.
You should always seek your own legal advice before you enter into a franchise agreement no matter how reputable the franchisor is.
Read more about the advantages of buying a franchise.
The Franchising Code of Conduct is a mandatory set of rules all Australian franchised businesses must abide by.
There are 3 main areas which are covered by the Franchising Code of Conduct (the Code)
- Franchise Agreements; and
- Dispute Resolution.
The disclosure document arguably forms the foundation to compliance with the Code by franchisors. The disclosure document includes information such as
- details of all the current franchisees in the franchise system,
- details of the frachisees that have left the system in the last three years,
- details of any relevant legal action that is being taken against the franchisor, and
- the financial and business details of the franchisor.
At least 14 days before a franchisee enters into, renews or extends a franchise agreement or pays a non-refundable deposit in relation to a franchise agreement, a franchisor must give the franchisee:
- a copy of the Code,
- a disclosure document in the form set out in the Code,
- a franchise agreement in the exact form in which it is to be executed.
Read more about Disclosure Documents.
The Code requires that franchisors provide their franchisees with certain rights in relation to franchise agreements, in particular:
- the franchisee and the franchisor have a 7 day cooling off period after the franchise agreement is signed, or after a franchisee has paid non refundable money to the franchisor. If the franchisee decides to exercise their cooling off rights the franchisor must give a refund of any payment the franchisee has made within 14 days. The franchisor does have the ability to deduct a reasonable amount incurred by the franchisor.
- the Franchisor is prohibited from preventing franchisees or prospective franchisees from forming an association or from associating with other franchisees or prospective franchisees for a lawful purpose.
- the franchise agreement must not contain, or require a franchisee to sign a statement that releases the franchisor from general liability towards the franchisor.
- a franchisee agreement must not contain, or require a franchisee to sign, a waiver of any verbal or written representation made by the franchisor.
- a franchise agreement must contain a dispute resolution clause which complies with the Code.
Read more about Franchise Agreements.
The Code sets out a detailed procedure for resolving disputes between franchisors and franchisees.
Step 1- Written Notice of Dispute
The complainant, whether they are the franchisee or the franchisor, must write to the other party with details of the complaint. The code stipulates that the letter must include the following information:
- The nature of the dispute,
- The outcome the complainant wants, or the desired outcome, and
- What action the complainant believes will settle the dispute.
Step 2- Direct negotiation between the parties
The code mandates that before any other action is taken the parties to the complaint must endeavour to resolve the dispute between them.
Step 3- Appointment of a mediator
If the parties have tried to resolve the dispute between them and have failed, after 21 days of the written notice of dispute being given, either party may refer the matter to a mediator.
Step 4- Mediation
When mediation is required by a party, the code stipulates that before any other action is taken the parties must engage in mediation.
Read more about mediation.
This is just a brief overview of the Code and does not cover all of the Code's provisions. Should you require any advice about the Code or the effect of the Code on your business we can assist you.
Read more about the franchise law and consulting services we offer.
The Fair Work Act establishes procedures for dealing with unfair dismissal claims and provides remedies, if a dismissal is found to be unfair.
- Employees of a small business are not able to make a claim for unfair dismissal until after they have served a minimum employment period of 12 months, while for larger businesses; the minimum employment period is six months.
- ‘Operational reasons’ are no longer a defence to a claim of unfair dismissal. However, a dismissal is not unfair if it is because of genuine redundancy.
- Workers who earn more than $100,000 a year won’t be able to make an unfair dismissal claim unless they are covered by an industrial award or enterprise agreement.
What is a Small Business
A ‘small business’ is any business which employs fewer than 15 full-time equivalent employees.
It should be noted that a careful calculation must be performed which includes your casual, part time and absent employees to determine whether your business meets the definition of a small business.
Under the new legislation, the Government defines a small business solely on the number of employees, regardless of the revenue the company earns.
A person has been unfairly dismissed if Fair Work Australia (FWA) finds that:
- they were dismissed by the employer or forced to resign (constructively dismissed), and
- the dismissal was harsh, unjust or unreasonable, and
- the dismissal was not a case of genuine redundancy.
It's not an unfair dismissal if the employer is a small business employer (employs fewer than the equivalent of 15 full-time employees) and they follow the Small Business Fair Dismissal Code when dismissing an employee.
When is a dismissal unfair?
When FWA considers whether a dismissal is unfair, they take into account a range of factors including:
- if there's a valid reason for the dismissal relating to the employee's conduct or capacity,
- if the employee is notified of the reason and given an opportunity to respond,
- if the dismissal relates to unsatisfactory performance, then whether the employee is warned about it before the dismissal.
Note: An employer has the right to summarily dismiss an employee for serious misconduct.
Making a Claim
When an employee applies to FWA, the FW.A will check the application to see if it's complete and valid. You'll be notified about this.
Usually, a conciliation conference is then arranged, to assist both sides to resolve the matter by agreement.
If a resolution can't be reached, a hearing will be held and if FWA finds that the dismissal was unfair, you can be ordered to either:
- reinstate the employee (give them back their job), or
- compensate them for up to 26 weeks pay (if this is more than $54,150, then compensate them for up to $54,150).
Objecting to an application
You can apply to the FWA for an application to be dismissed:
- if it's lodged outside of the prescribed time limits,
- for jurisdictional reasons (i.e. FWA doesn't have the power to deal with it, for example if the employee isn't covered by the national workplace system),
- if the complaint is frivolous, vexatious or has no reasonable prospects of success.
A dismissal will not be unfair if it is a ‘genuine’ redundancy.
Redundancy happens when an employer decides they no longer want an employee's job to be done by anyone and terminates their employment (except in cases of ordinary and customary turnover of labour).
Note: What constitutes ordinary and customary turnover of labour may depend on individual circumstances.
Redundancy may happen when:
- the job someone does becomes mechanised - it can be done by a machine,
- business slows down due to lower sales or production,
- the business relocates,
- a merger or takeover happen,
- the business restructures or reorganises.
Under Commonwealth workplace laws, a person's dismissal is a genuine redundancy if:
- you no longer need the person's job to be done by anyone because of changes in the operational requirements of the business,
- you've followed consultation requirements in the award or agreement that applies.
When it's not a genuine redundancy
It's not a genuine redundancy if it is reasonable for the employee to be redeployed in:
- your business, or
- the business of an entity associated with you.
Small Business Fair Dismissal Code
If a business falls under the definition of small business, it should use the Small Dismissal Fair Code every time an employee is dismissed. The Code contains a step-by-step checklist which, if carefully followed when dismissing an employee, will mean Fair Work Australia will consider the dismissal to have been ‘fair’.
Contact us if you need any advice relating to the operation of the Fair Work Act.
A disclosure document is a prescribed document which contains information from the franchisor to help you to make a reasonably informed decision about the franchise.
There is a legal requirement under the Franchising Code of Conduct (the Code) for an Australian franchisor to give you a disclosure document at least 14 days before you enter into a franchise agreement.
A disclosure document will need to contain the following information to comply with Code.
Franchisors details and business experiences
Franchisors must provide details of the business including business experience, business names, business associates and a statement that the business is solvent.
The Franchisor must provide all details, if there are any, of any present litigation and any litigation which was commenced in the past. The relevant litigation is generally for matters including fraud, dishonesty and any breach of franchise.
The disclosure document must contain details of all existing franchisees, this allows a potential franchisee to contact and existing franchisee with any questions they may have regarding the franchise business.
The franchisor must describe and list its intellectual property and outline the conditions which restrict the use of the intellectual property by Franchisees. The franchisor also must provide any details of a licence agreement regarding the intellectual property.
The franchisor must provide details of any statements relating to the exclusivity of any territorial boundaries.
The franchisor must provide you with a history of the territory or site in which it is proposed that you operate your business. Th history is to provided in a separate document to be included with the disclosure document.
Goods and Services
The disclosure document must contain information regarding the conditions which will be imposed on a franchisee regarding information about the supply of goods and services.
Fees and Payments
The disclosure document will provide details to you regarding the requirement and specifics of any franchisee payments to the franchisor. This information must include items such as marketing fees, advertising fees or other financial obligations requiring contributions.
Obligation of Franchisor
These include the franchisors obligations, contained in the franchise agreement, before and after the franchisee opens their business. Any obligation contained in the franchise agreement which relates to the nature of training to be provided by the Franchisor must also be outlined.
Obligations of the Franchisee
The expected obligations on the franchisee, which are contained in the franchise agreement, must also be disclosed. These obligations must include site selection, acquisition, training before and during the operation of the business, expected standards, warranties, customer service, insurance, marketing, required indemnities, records and reports and inspections and audits.
The disclosure document must contain all details of documents related to the franchise agreement, such as a lease for premises of the franchised business, a hire purchase agreement, a security agreement or a confidentiality agreement which you will be obligated to sign.
To comply with the Code the disclosure document must be accompanied by a copy of the proposed franchise agreement and a copy of the Code itself.
Read more about the Franchising Code of Conduct
A franchisor can end the franchise agreement early in a number of circumstances.
Breach by franchisee
A franchisor can end your franchise agreement early if you have not followed your franchise agreement (called a "breach" of the franchise agreement) and you do not start to follow your franchise agreement when requested or do what the franchisor requests that you do to fix (called "remedy") the breach.
In this circumstance the franchisor must provide you with the following:
- specific details of the breach and how it can be remedied,
- reasonable time to remedy the breach (normally 30 days),
- reasonable notice that the franchisor intends to terminate the franchise agreement if the breach is not remedied.
If you receive a notice from the franchisor advising you that you have breached the franchise agreement you should get some legal assistance as soon as possible. If the franchisor ends the franchise agreement early you may not only lose your franchise business, you may also have to pay the franchisor money.
No breach by franchisee
A franchise agreement usually contains terms which allow the franchisor to end the franchise agreement early without a breach by the franchisee.
The types of things covered by this are
- if you do not satisfactorily complete training within a certain period,
- if you are required to enter a lease and you have not done so within a certain period,
- if you are required to fit out a retail premises and you have not done so within a certain period ,
- if you have not obtained the required insurances or licenses to operate within a certain period.
You should make sure you are aware of the circumstances in which the franchisor can end the franchise agreement early without breach.
A franchisor must give you reasonable notice of the termination of franchise agreement and the reasons for it. What is reasonable notice will depend on the circumstances.
The Franchising Code of Conduct sets out specific circumstances in which the franchisor is not required to provide you with reasonable notice before terminating the franchise agreement.
The franchisor may immediately terminate the franchise agreement for any of the following reasons:
- you no longer holds a licence or lease that is required to maintain the franchise business,
- you become bankrupt or insolvent,
- you voluntarily abandon the franchise agreement or business,
- you are convicted with a seirous offence,
- you operate the business in a manner which endangers public health and safety,
- you are fraudulent in connection with the operation of the franchise business.
Contact us if want some advice about your franchisor's rights to end the franchise agreement early, or if your franchisor is attempting to end the franchise relationship.
There are 5 main advantages to buying a franchise:
Brand Name Recognition
Well established franchisors provide you with an identity and a system which has proven to be effective and has a market impact:
- you may be protected from market conditions, by the experience of the franchisor and the strength of a well established brand.
- you may gain an established recognition from customers who identify your company or service.
- a well established franchise offers you the ability to get customers in the door from day one with almost no extra expenditure.
You may gain the advantage of national advertising campaigns that are included in an upfront franchise fee or an ongoing monthly fee payable to the franchisor.
The advertising fee paid by to the franchisor is usually relatively small compared with the frequency and scope of advertising campaigns conducted by the franchisor.
National advertising campaigns would be out of reach for a small business.
Support and Training
Well established franchisors will train you in everything from technology, to accounting, to standing behind the counter and taking money.
Training makes the franchise model a much less riskier venture than buying a stand alone business or starting a business from scratch:
- franchisors are generally willing to help you to ensure the success of the franchisee.
- you have the opportunity for support from other, more experienced, franchisees.
A franchisor is more likely to be in touch with the market trends that trigger changes necessary to keep up with changing times:
- a well established and proven system is more likely to be able to withstand stormy economic conditions than a newly formed business.
- the impact of any failed efforts are greatly reduced compared to a single business owner.
- you have better negotiating power as a member of a recognised and proven brand.
- you have the ability to tap into the bulk purchasing power and negotiating capacity made available by the franchisor.
If you are thinking of entering into a franchise agreement we can provide you with advice about the franchise agreement and the franchise system.
Read more about our franchise experience.
On 4 June 2010 the Federal Government announced the introduction of the latest changes to the Franchising Code of Conduct. Below is a summary of the significant Franchising Code changes.
When do the changes start?
The Franchising Code changes apply to franchise agreements entered into on or after 1 July 2010.
This means that all franchisors must amend their documentation and in particular their disclosure document to give effect to these changes for franchise agreements to be entered into after 1 July 2010. For franchise agreements to be entered into prior to 1 July 2010, documentation based on the current Franchising Code should be used.
Consequently all documentation provided to prospective franchisees for franchise agreements to be entered into after 1 July 2010 must incorporate the latest changes to the Franchising Code.
Audit of marketing funds
Currently under the Franchising Code a franchisor must either have the Marketing Fund audited or have the agreement of 75 per cent of franchisees not to audit. Currently an agreement not to audit must be given within 5 months of the end of the relevant financial year and will last 2 years.
Under the latest changes, any agreement not to audit needs to occur within 3 months of the end of the relevant financial year and will last 3 years.
If the term of a franchise agreement is 6 months or longer a franchisor must notify the franchisee of whether it intends to renew, not renew or enter into a new franchise agreement. This notice must be provided at least 6 months before the term expires.
In the case of franchise agreement for a term of less than 6 months the notice period is 1 month.
While the Franchising Code does not introduce a separate obligation to act in good faith it will, from 1 July 2010, include a provision that nothing in the Code limits any obligation imposed by any other law or statute to act in good faith.
Dispute Resolution and Mediation
The Franchising Code currently includes an obligation on a franchisor and a franchisee to mediate a dispute if either of them request mediation. Additionally there is currently an obligation to try to resolve the dispute.
The latest amendments include a list of actions which are taken to be “trying to resolve the dispute”. These include attending and participating at reasonable times, making clear what a party intends to achieve from mediation, observing confidentiality and not taking action during the dispute which would have the effect of damaging the franchise system, for example stopping supply of goods or services or supplying inferior goods or services.
Additionally the Franchising Code currently provides that the parties are equally liable for the costs of mediation unless they otherwise agree.
Under the latest amendments, costs of mediation are now specifically defined to include the costs of the mediator, the costs of room hire and the costs of any additional input needed at the mediation for example input from experts.
Also under the latest changes, a franchisor must state whether they will require a franchisee to pay the franchisor’s costs of dispute resolution.
Under the latest changes to the Franchising Code, the following additional statement must be included on the first page of the disclosure document
“Franchising is a business and, like any business, the franchise (or franchisor) could fail during the franchise term. This could have consequences for the franchisee.”
Payments to third parties after start up
Currently a franchisor must disclose various details about payments to the franchisor and its associates both on start up and throughout the course of the franchise. Additionally under the current provisions a franchisor must disclose any payments to third parties to start operating.
The latest amendments to the Franchising Code mean, that in addition, a franchisor must disclose the required details about any payments to third parties throughout the course of the franchise as long as they are within the knowledge or control of the franchisor or are reasonably foreseeable.
Under the Franchising Code changes a franchisor must now disclose whether they will require the franchisee to undertake any unforseen significant capital expenditure (whether under the franchise agreement, an operations manual or by any other means).
Unilateral Variation of Franchise Agreement
The latest Franchising Code amendments require a franchisor to disclose
● for franchise agreements entered into in the 2011-2012, 2012-2013 and 2013-2014 financial years, the circumstances in which the franchisor has unilaterally varied a franchise agreement since 1 July 2010 - from the 2014-2015 financial year onwards this disclosure requirement will require details for the last 3 financial years,
● the circumstances in which a franchise agreement may be unilaterally varied by the franchisor in the future.
A franchisor will be required under the Franchising Code changes, to disclose the details of any confidentiality obligation that will be imposed on the franchisee including confidentiality requirements relating to outcomes of mediation, settlements, intellectual property and trade secrets.
End of Term Arrangements
Under the latest amendments, a franchisor will be required to detail the process to apply at the end of a franchise agreement including
● details of any option to renew,
● whether the franchisee will be entitled to an exit payment,
● details of arrangements in relation to unsold stock, materials, equipment and other assets including whether the franchisor will buy these items and how the price will be determined,
● whether the franchisee will have the right to sell the business at the end of the term and if so will the franchisor have a right of first refusal,
● whether the franchisor will consider any significant capital expenditure by the franchisee during the course of the franchise in determining the arrangements that will apply at the end of the term.
Additionally under the latest amendments, a franchisor must disclose for franchise agreements entered into in 2011-2012, 2012-2013 and 2013-2014 financial years details of whether a franchisor has since 1 July 2010 considered any significant capital expenditure by the franchisee during the course of the franchise in determining end of term arrangements - again from the 2014-2015 financial year onwards this disclosure requirement will require details for the last 3 financial years.
Amendment on Transfer of a Franchise
Finally the latest Franchising Code changes require a franchisor to disclose whether it will amend the franchise agreement (or require the franchise agreement to be amended) before a transfer of the franchise.
Contact us if you require advice about the changes to the Franchising Code of Conduct and its affect on your franchise system, or if you need assistance to update your franchise documents to ensure compliance with the updated Franchising Code of Conduct.