Legal Challenges to Restraint of Trade Clauses in Franchising: What Franchisees Need to Know
Restraint of trade clauses are common in franchise agreements and are designed to protect the...
Under the Franchising Code of Conduct (the Franchising Code) all Australian franchisors must issue a disclosure document in a prescriptive form to a prospective franchisee, or to an existing franchisee when the franchisee is proposing to renew or extend the scope or term of a franchise agreement.
The disclosure document must be:
The disclosure document must be accompanied by a copy of the franchise agreement in its final form [What is a Franchise Agreement?], the key facts sheet [What is a Key Facts Sheet?], and a copy of the Franchising Code of Conduct itself, together with further documents if the franchisor leases the premises.
A disclosure document will need to contain the following information to comply with the Code.
A disclosure document must include on the first page, the date of preparation of the disclosure document.
The information contained in the disclosure document must be accurate as at the preparation date of the disclosure document or where the disclosure document provides for another date (such as the end of the last financial year) as at that date.
Franchisors must provide details of the business to be franchised, the franchisor's associates and the qualifications and business experience of each officer of the franchisor.
The term "officer" has the meaning given by the Corporations Act 2001.
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.
In addition, pursuant to the 2021 amendments to the Franchising Code, the franchisor must include the percentage of franchisees in the franchise system who were a party to a mediation, conciliation or arbitration process in the previous financial year.
The disclosure document must contain details of all existing franchisees as at the date of the disclosure document. This allows a potential franchisee to contact existing franchisees with any questions they may have about the franchise business.
In addition, the disclosure document must contain details for each of the last 3 financial years about the following events:
The contact details of former franchisees must be included in the disclosure document unless the former franchisees have requested that their details not be included under clause 32(1) of the Franchising Code.
However, a franchisor must not attempt to influence a former franchisee to make such a request (civil penalties apply).
Intellectual Property includes property such as patents, trade marks, copyrights and designs and confidential information [What is Intellectual Property?].
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 disclose whether the franchise is for an exclusive or non-exclusive territory or whether the franchise is limited to a particular site.
If the franchisor has a site-selection policy then the details of the site-selection policy must also be disclosed.
The franchisor must provide a prospective franchisee with a history of the territory or site in which it is proposed that the franchise business be operated. The history is to be provided in a separate document to be included with the disclosure document.
In addition, if the franchisor has an interest in a lease of the premises, that interest will also need to be disclosed in a separate document to be included with the disclosure document.
The disclosure document must contain information regarding the conditions which will be imposed on a franchisee in relation to supply of goods and services.
The ACCC has indicated that names of suppliers and specific types of goods and services should be disclosed, if the details are known as at the date of the disclosure document.
In addition, the disclosure document must detail the nature of any rebate or other financial benefit received from each supplier.
The disclosure document must provide details regarding the requirement and specifics of any franchisee payments to the franchisor or an associate of the franchisor. This information must include upfront fees and ongoing items such as marketing fees, advertising fees or other financial obligations requiring contributions.
In addition, the disclosure document must provide details regarding any payments to be made to third parties. These payments will include ongoing operating costs which are reasonably foreseeable, such as rent, inventory, wages, office expenses.
If the franchisor administers a marketing fund to which franchisees contribute, then details of the marketing fund and how the payments made to the marketing fund will be used must be disclosed.
The disclosure document must include a summary of the rights under the franchise agreement, that both the franchisor and the franchisee have to end the franchise agreement early. This summary should include more than just directing a prospective franchisee to clauses in the franchise agreement.
One of the important issues in franchising is what happens once the franchise agreement expires. Most franchise agreements include a term providing that the goodwill in the franchise business belongs to the franchisor.
In addition, most franchise agreements contain a restraint of trade clause. [Legal Challenges to Restraint of Trade Clauses in Franchising: What Franchisees Need to Know]
The disclosure document must set out details of the arrangements to apply at the end of the franchise agreement, including whether the franchisee will have the option to renew or extend the franchise agreement.
A disclosure document must contain a statement which confirms the franchisor's solvency, together with the financial statements of the franchisor for the last two financial years or an independent audit report.
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.
Restraint of trade clauses are common in franchise agreements and are designed to protect the...
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