Franchising in Australia is heavily regulated.
While franchising can offer a low-risk way to expand your brand, if you are a franchisor or you are thinking of franchising your business, it's important to carefully consider the legal issues in franchising, from navigating franchise agreements to protecting your intellectual property, and complying with laws and regulations, including the Franchising Code of Conduct (the Franchising Code).
Understanding Franchise Agreements
Protecting Your Intellectual Property
Complying with Laws and Regulations
understanding franchise Agreements
A franchise agreement is a legally binding contract that outlines the rights and obligations of both the franchisor and the franchisee. Understanding the terms of the franchise agreement will assist you to deal with legal issues that arise under the franchise agreement.
key terms in a franchise agreement
The franchise agreement typically covers various aspects of the franchise, including:
1. Intellectual Property: The franchise agreement specifies the permitted use of the franchisor's trademarks, logos, trade names, and other proprietary assets.
2. Franchise Fees: The franchise agreement outlines the financial obligations of the franchisee, such as upfront fees, ongoing royalties, advertising contributions, or other payments to the franchisor.
3. Territory and Exclusive Rights: The franchise agreement defines the geographic area where the franchisee is allowed to operate and whether they have exclusive rights to that territory or face competition from other franchisees.
4. Operating Standards: The franchisor establishes specific guidelines, standards, and procedures that the franchisee must follow to maintain consistency in the business operations, product quality, customer service, and branding.
5. Training and Support: The franchise agreement may outline the training programs and ongoing support that the franchisor will provide to the franchisee, including initial training, operational assistance, marketing support, and access to proprietary systems or technologies.
6. Term and Renewal: The franchise agreement specifies the initial term of the franchise agreement and any renewal options, as well as conditions for termination or non-renewal.
7. Transfer and Exit Options: The franchise agreement may address the conditions and procedures for transferring ownership of the franchise to another party or selling the business, as well as any restrictions or approval requirements.
8. Dispute Resolution: The franchise agreement typically includes provisions for resolving disputes between the franchisor and the franchisee, such as through negotiation, mediation, or arbitration.
Common legal issues with franchise agreements
Breach of a Franchise Agreement
Breaches of a franchise agreement can involve the non-payment of monies to you as the franchisor or to third parties, the failure to comply with operating standards (including the failure to purchase from approved suppliers), and restraint of trade breaches. If a franchisee breaches the franchise agreement, you can issue a formal notice to the franchisee (known as a Breach Notice).
Termination of a Franchise Agreement
Sometimes, a franchisor may have to terminate a franchise agreement with a franchisee. Any termination must comply with the Franchising Code and the relevant franchise agreement.
Under the terms of the Franchising Code, you can terminate a franchise agreement if you have provided the franchisee with a valid Breach Notice, you have given the franchisee reasonable time to remedy the breaches and the franchisee has not remedied the breaches.
Under the terms of the Franchising Code you can also terminate a franchise agreement in certain special circumstances set out in the Franchising Code and the franchise agreement, including if
- the franchisee no longer holds a licence that they must hold to carry on the franchised business;
- the franchisee becomes bankrupt, an insolvent under administration or a Chapter 5 body corporate;
- the franchisee is a company that is deregistered;
- the franchisee acts fraudulently in connection with the operation of the franchise business;
- the franchisee voluntarily abandons the franchise business or the franchise relationship;
- the franchisee is convicted of a serious offence; or
- the franchisee operates the franchised business in a way that endangers public health or safety.
Additionally, under the terms of the Franchising Code, you can terminate a franchise agreement if the franchise agreement allows you to terminate the franchise agreement in certain circumstances and one of those circumstances has occurred.
Restraint of Trade
The application of restraint of trade clauses is a common legal issue in franchising. Restraint of trade clauses are included in franchise agreements to:
- prevent franchisees from competing with the franchisor during and after the franchise agreement ends; and
- prevent franchisees from using the confidential information, trade secrets and trade connections of the franchisor.
However, while most franchise agreements contain restraint of trade clauses, enforcing restraint of trade clauses can be a challenge.
Courts will consider the reasonableness of the restraint, the interests of the parties involved, and the interests of the public when determining whether the clause is enforceable.
As a franchisor, it is important that the restraint of trade clauses included in your franchise agreement are carefully drafted to ensure they are reasonable and protect your business interests without being overly restrictive.
Unfair Contract Terms
The unfair contract terms provisions in the Australian Consumer Law apply to standard form small business contracts.
A standard form contract is usually a contract that is prepared by one party and provided to the other party on a take it or leave it basis (that is, it is not negotiated).
A franchise agreement may be a standard form small business contract (depending on the circumstances).
After 9 November 2023 significant penalties will apply if a standard form small business contract contains unfair terms.
A term of a standard form small business contract is unfair if:
- the term creates a significant imbalance in the parties' rights and obligations under the contract;
- the term is not reasonably necessary to protect the legitimate interests of the advantaged party;
- the term would cause detriment (whether financial or otherwise) to the disadvantaged party if it were applied or relied on.
Franchising Code Requirements
The Franchising Code requires that a franchisor not enter into a franchise agreement that contains certain provisions or alternatively does not contain other provisions, in particular:
- a franchise agreement must provide a franchisee with a 14 day cooling off period after the franchise agreement is signed, or after a franchisee has paid non-refundable money to the franchisor.
- a franchise agreement must not require the franchisee to pay certain legal fees of the franchisor;
- a franchise agreement must not contain a provision that requires the franchisee to pay costs incurred by the franchisor in relation to settling a dispute under the agreement;
- a franchise agreement must not contain, or require a franchisee to sign a statement that releases the franchisor from general liability towards the franchisor,
- a franchise 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 Franchising Code.
If a franchise agreement does not comply with the requirements of the Franchising Code as to its terms, this may lead to legal issues during the term of the franchise agreement.
Further the requirement that a franchise agreement not contain a provision that requires the franchisee to pay costs incurred by the franchisor in relation to settling a dispute under the franchise agreement is a Franchising Code penalty provision.
protecting your intellectual property
Another legal issue in franchising is protecting your intellectual property. As a franchisor, you’ve invested time and money into developing your brand and products. Protecting your intellectual property is crucial to maintaining the uniqueness of your business and avoiding legal challenges.
Types of intellectual property
Intellectual property refers to creations of the mind, such as inventions, literary and artistic works, designs, symbols, and names used in commerce. There are several types of intellectual property, including trademarks, patents, copyrights, and trade secrets.
A trademark is a symbol, word, or phrase that identifies and distinguishes your brand from others. A registered trademark will protect the symbol, word or phrase that identifies your brand in the categories and location in which it is registered.
A patent protects inventions or discoveries, giving the owner the exclusive right to use and sell the invention for a certain period of time. Copyrights protect original works of authorship, such as books, music, and software.
Trade secrets are best protected under an agreement such as a confidentiality agreement, a licence agreement or a franchise agreement.
Enforcing your intellectual property rights
Enforcing your intellectual property rights is crucial in franchising to protect your brand and avoid legal issues.
To enforce your intellectual property rights, you can take legal action against any infringing parties who use your intellectual property without permission. This can include enforcing clauses of the franchise agreement, sending cease and desist letters and pursuing legal action through the courts.
By taking proactive steps to enforce your intellectual property rights, you can maintain the integrity of your brand and ensure its continued success in the marketplace.
Complying with laws and regulations
Franchisors need to be mindful of various laws and regulations in Australia. While the Franchising Code governs franchising, the Australian Consumer Law and the Fair Work Act are also important laws that you need to be aware of.
The Franchising Code of Conduct
The Franchising Code is a mandatory set of rules that all Australian franchised businesses must abide by.
There are a number of areas which are covered by the Franchising Code including:
- good faith;
- disclosure;
- franchise agreements (which we have referred to above);
- termination; and
- dispute resolution.
Good Faith
Under the Franchising Code, both the franchisor and the franchisee are obligated to act in good faith towards each other. This cannot be limited or excluded by either party.
This encourages a fair and transparent relationship between the two parties.
Disclosure
The disclosure document is an important aspect of compliance with the Franchising Code for franchisors. It provides detailed information to prospective and current franchisees such as the financial and business details of the franchisor, costs and fees required for franchise operation, details of current and former franchisees, and any relevant legal actions being taken against 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 Key Facts Sheet,
- a copy of the Franchising Code,
- a disclosure document in the form set out in the Franchising Code,
- a franchise agreement in the form it is to be executed.
Dispute Resolution
The Franchising Code sets out a detailed procedure for resolving disputes which includes.
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 Franchising 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 Franchising Code provides that the parties to the complaint must endeavour to resolve the dispute between them.
Step 3 – Appointment of a dispute resolution practitioner
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 dispute resolution process (usually mediation or conciliation).
Step 4 – Dispute Resolution Process
The parties will attempt to resolve the matter through a formal dispute resolution process.
Australian Consumer Law
The Australian Consumer Law (the ACL) deals with franchising issues such as Misleading or Deceptive Conduct, Unconscionable Conduct and Unfair Contract Terms.
Misleading or Deceptive Conduct
The ACL provides that a person must not, in trade or commerce engage in misleading conduct or conduct which is likely to mislead or deceive.
Generally, conduct is "misleading or deceptive" if it induces or is capable of inducing error. However, the conduct must be considered as a whole and in context.
As a franchisor you should ensure that your advertising and promotional materials are truthful and accurate, and that they do not make false or misleading claims about your products or services. Failure to comply with the ACL can result in significant penalties and damage to your brand reputation.
It is crucial for franchisors to seek legal advice and implement effective compliance programs to avoid any legal issues related to misleading and deceptive conduct.
Unconscionable Conduct
Another area that franchisors need to be mindful of is unconscionable conduct, which is prohibited under section 20 of the ACL.
As a Franchisor you should ensure that you act in good faith and do not engage in any unfair tactics or exert undue influence on your franchisees.
While unconscionable conduct does not have a precise legal definition, the ACL provides that the Court can have regard to matters such as:
- the relative strengths of the bargaining positions of the parties;
- whether, as a result of conduct engaged in by the supplier, the customer was required to comply with conditions that were not reasonably necessary for the protection of the legitimate interests of the supplier;
- whether the customer was able to understand any documents relating to the supply or possible supply of the goods or services;
- whether any undue influence or pressure was exerted on, or any unfair tactics were used against, the customer or a person acting on behalf of the customer by the supplier or a person acting on behalf of the supplier in relation to the supply or possible supply of the goods or services;
- the amount for which, and the circumstances under which, the customer could have acquired identical or equivalent goods or services from a person other than the supplier;
- the extent to which the supplier’s conduct towards the customer was consistent with the supplier’s conduct in similar transactions between the supplier and other like customers;
- the requirements of any applicable industry code;
- if there is a contract between the supplier and the customer for the supply of the goods or services;
- the extent to which the supplier was willing to negotiate the terms and conditions of the contract with the customer;
- the terms and conditions of the contract;
- the conduct of the supplier and the customer in complying with the terms and conditions of the contract;
- any conduct that the supplier or the customer engaged in, in connection with their commercial relationship, after they entered into the contract;
- whether the supplier has a contractual right to vary unilaterally a term or condition of a contract between the supplier and the customer for the supply of the goods or services; and
- the extent to which the supplier and the customer acted in good faith.
Fair Work Act
The Fair Work Act sets out the minimum employment standards for all Australian workers, including those employed by franchisors and franchisees. It covers areas such as wages, working hours, leave entitlements, and workplace health and safety.
Franchisors may also be liable to penalties arising from a failure by their franchisees to comply with the Fair Work Act.
One of the effects of the implementation of the Fair Work Amendment (Protecting Vulnerable Workers) Act 2017 (Cth) is that franchisors who are considered a responsible franchisor entity can be held liable for breaches of workplace laws by their franchisees.
A franchisor will be considered a responsible franchisor entity if you are judged to exercise a significant level of control over your franchisee's affairs.
A responsible franchisor entity can be vulnerable to contraventions of workplace laws by its franchisees in circumstances where the franchisor knew or could reasonably be expected to have known that a relevant contravention would happen, or could reasonably be expected to have known that a contravention of the same or of similar nature was likely to occur.
However you may avoid facing liability if you can demonstrate that you took reasonable steps to prevent the contravention occurring.
takeaways
Franchising can be a great way to grow your business, however as with any endeavour it's important to educate yourself about the potential legal issues so that you can avoid compliance pitfalls and protect your brand.
If you are considering franchising or already have a franchise model in place, it's advisable to seek out experienced professionals who know and understand the ins and outs of franchise law. They can help you navigate complex legal issues in franchising so that you are well-prepared for every step of the franchising process.
Disclaimer
The information in this article is general in nature and is not intended to address the circumstances of any person or other entity. Although we do our best to provide timely and accurate information, we do not guarantee that the information in this article is accurate or that it will continue to be accurate in the future.
