Franchising in Australia: overview

A Q&A guide to franchising in Australia.

The Q&A provides an overview of the main practical issues concerning local and international franchising, including: current market activity; franchising regulatory framework; contractual issues relating to franchising agreements (analysing pre-contract disclosure requirements, formalities, parties' rights and obligations, fees and payments, term of agreement and renewal, termination and choice of law and jurisdiction); Operations Manual; liability issues; intellectual property; real estate; competition law; employment issues; dispute resolution; exchange control and withholding; and proposals for reform.

To compare answers across multiple jurisdictions, visit the Franchising: Country Q&A tool.

This Q&A is part of the global guide to franchising law. For a full list of jurisdictional Q&As visit www.practicallaw.com/franchising-guide.

Philip Colman, MST Lawyers
Contents

Market

1. What have been the main developments in the franchising market over the past 12 months?

There have been a number of main developments in the franchising market over the past 12 months.

There has been a realisation that quality and service are recognised by the consumer in Australia which has allowed for a new rethink of many existing products and food retail services. Therefore franchise systems that are able to capture quality and service are able to compete not just on price.

There has been a move by franchise systems to investigate new ideas and new technologies which provide the public with better quality and service within a particular industry sector. Franchise systems that do this will gain economy of scale advantages which reduce their delivery costs, increase profits to franchisees, increase royalty payments and further perpetuate the increase of franchise revenue within Australia.

Consumers are also keen to adopt a rethink of an existing concept. This can be seen within:

  • The real estate industry, where fixed price real estate agent contracts for the sale of houses have become a new way of doing business in that sector.

  • The new hairdressing formats, which either provide prompt and efficient ladies haircuts, or new trendy barbershops with added value, or blow dry only options for both sexes, rather than gimmicks, ensuring loyalty and sustained customers to that sector.

  • The food sector, where these concepts are best recognised by the gourmet pizza, gourmet hamburger and expensive coffee that the general public are now willing to purchase on a regular basis at a premium price.

 
2. What are the most commonly used methods of local and international franchising?

Local franchising

Direct franchising from a single Australian based franchisor is the most common method of local franchising. Multi-tiered systems, with state or regional based master franchisees, are more common in mobile service based networks.

There are a number of Australian based franchisors that are master franchisees, joint venture partners or subsidiaries of foreign based franchisors.

Prior to 2015, master franchising was burdensome from a regulatory point of view. On 1 January 2015, the Competition and Consumer (Industry Codes – Franchising) Regulation 2014 (Code) came into force, and this clearly states that no disclosure obligations will be imposed on a master franchisor in respect of a unit franchisee. This may encourage the greater use of master franchising in Australia.

Aside from the usual commercial risks associated with differing methods of franchising in Australia, there are no local laws or commercial issues that have an impact on the prevalence of, or preference for, any of these techniques.

International franchising

Foreign franchisors with networks in Australia tend to use one of the following three methods:

  • Establishment of an Australian domiciled related company to directly franchise to unit franchisees (this Australian domiciled company must have at least one director who is an Australian resident). This is popular for foreign franchisors that want to maintain a high level of control and may wish to relocate key people from head office.

  • Entering into a master franchise agreement with an unrelated Australian company or person. Often this will require the master franchisee to locate, develop, open and trade a certain number of units before it will be permitted to grant sub-franchises. This is popular for foreign franchisors that may be less willing to allocate substantial resources into the Australian operation and prefer to pass most responsibilities onto the master franchisee.

  • Appointment of an area developer to procure and support unit franchisees, but on the basis that the contractual relationship is between the foreign franchisor and the unit franchisee, or the Australian domiciled related company of the foreign franchisor and the unit franchisee. Subway® has been very successful in Australia with this model. Motivated area developers with good local knowledge can find sites and franchisees then pass the contracting back to the franchisor, thereby giving the franchisor ultimate control.

Australian franchisors exporting their system overseas tend to favour a master franchising model.

 
3. Are there any specific reasons for an overseas franchisor to use a separate entity for entering into a franchise agreement with a franchisee in your jurisdiction?

There are several issues that must be considered when deciding on structuring.

First, some types of entities must disclose their financial statements each year. These are publicly available through the Australian Securities and Investment Commission. This is often a concern to foreign domiciled businesses.

Second, complex rules apply in respect of the repatriation of money back to the foreign domiciled head franchisor. These rules, known as transfer pricing rules, exist to ensure that the tax collection agency of the two countries receive their fair share of tax revenue. It is critical to adopt to correct structure before the business commences operations as otherwise there can be significant adverse tax consequences that will arise in the event of a restructure.

Most foreign franchisors opt for an Australian subsidiary to run their Australian franchising operations.

 

Regulation of franchising

4. What is the legal definition of franchising and/or a franchise?

The most important definition in the Competition and Consumer (Industry Codes – Franchising) Regulation 2014 is the definition of a "franchise agreement", which is defined as an agreement that takes the form, in whole or part, of either a written agreement, an oral agreement or an implied agreement which has all of the following elements:

  • 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.

  • The operation of the business will be substantially or materially associated with a trade mark, 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.

  • Before starting or continuing the business, the franchisee must pay, or agree to make a payment to, the franchisor or an associate of the franchisor.

The element concerning payment listed in the final bullet point above will not be met if the payment is any of the following:

  • Payment for goods and services supplied on a genuine wholesale basis.

  • Loan repayment.

  • Payment for goods taken on consignment and supplied on a genuine wholesale basis.

  • Payment of market value for the purchase or lease of real property, fixtures, equipment or supplies needed to start business or to continue business under the franchise agreement.

 
5. What are the laws regulating franchising?

Franchising in Australia is specifically regulated through the Competition and Consumer (Industry Codes – Franchising) Regulation 2014 (Code). This is a federal regulation made under the Competition and Consumer Act 2010 (Cth) (CCA). The Code governs all franchise agreements that involve doing business in Australia. No additional obligations are imposed on foreign franchisors.

A contravention of the Code constitutes a contravention of the CCA, exposing the contravening party to:

  • Numerous civil remedies (part VI, CCA).

  • Orders to redress loss or damage suffered by non-parties (sections 51ADB and 51ADC, CCA).

  • The Australian Competition and Consumer Commission (ACCC) exercising its investigative powers, including coercive powers to require the production of documents (sections 51ADD, 51ADE and 51ADF, CCA).

  • The ACCC issuing an infringement notice.

  • The ACCC commencing court proceedings seeking the imposition of a pecuniary penalty.

The Code regulates the offer and sale of franchises. Key aspects include:

  • The requirement to give a prospective franchisee a prescribed "information statement" as soon as practicable after the prospective franchisee formally applies, or expresses an interest in acquiring, a franchised business (clause 11, Code).

  • The requirement to give a prospective franchisee (or an existing franchisee renewing or extending the term of a franchise agreement) a current and compliant disclosure document, a copy of the code of conduct and a copy of the franchise agreement in the form in which it is to be executed. These documents must be provided at least 14 days before the earlier of the prospective franchisee or franchisee executing the franchise agreement or paying any non-refundable money (clause 9, Code).

  • The prohibition against entering into a franchise agreement, or receiving any non-refundable payments, until the franchisor receives from the franchisee a written statement that the franchisee (or prospective franchisee) has received, read and had a reasonable opportunity to understand the disclosure document and the Code (clause 10(1), Code).

  • The requirement before a franchise agreement is entered into that the franchisor received from the prospective franchisee signed statements, and that the prospective franchisee has, or has not, been given advice about the proposed franchise agreement or franchised business by an independent legal adviser, or an independent business adviser or an independent accountant (clause 10(2), Code).

  • The requirement to give other transactional documents (such as guarantees, security documents, non-compete agreements or confidentiality agreements) to a prospective franchisee at least 14 days before the franchise agreement is executed (or as soon as they become available) (clause 14, Code).

  • The requirement to give certain information and documents in relation to the business premises of the franchised business no later than one month after the franchise agreement is executed (clause 13, Code).

The Code also contains provisions that affect the ongoing relationship between the franchisor and franchisee which:

  • Require the provision of a disclosure document upon renewal of a franchise agreement.

  • Prohibit franchisors from preventing franchisees from forming an association or associating with other franchisees.

  • Require the franchisor to prepare and distribute an annual financial statement detailing all of the marketing fund's receipts and expenses for the financial year within four months of the end of the financial year, and have that statement audited (unless 75% of franchisees resolve otherwise within three months of the end of the financial year), and give a copy of the statement and the auditor's report to each franchisee within 30 days after each is prepared.

  • Require the franchisor to disclose changes in majority control or ownership and certain litigation and judgments within 14 days of the occurrence of the event.

  • Prohibit the franchisor from imposing significant capital expenditure on a franchisee, unless such expenditure:

    • has been disclosed in the pre-contract disclosure document; or

    • has been approved by a majority of franchisees; or

    • is required to comply with a law; or

    • is considered by the franchisor as necessary and is justified by a written business case supporting that conclusion.

  • Require the franchisor to deposit marketing and advertising fees in a separate bank account.

  • Require franchisor owned units to contribute towards marketing and advertising fees in the same manner as franchisees.

  • Prohibit the franchisor from expending marketing and advertising fees received on anything other than:

    • expenses disclosed in the disclosure document;

    • legitimate marketing or advertising expenses;

    • expenses agreed to by a majority of franchisees; and

    • costs of administering and auditing a marketing fund.

  • Prohibit the franchisor from disclosing in its disclosure document a former franchisee's details if the former franchisee has requested that there be no such disclosure.

  • Prohibit the franchisor from influencing a former franchisee to request that its details not be disclosed in the disclosure document.

  • Require the franchisor to give a franchisee a current disclosure document within 14 days of a request for that document.

  • Prohibits the franchisor from unreasonably withholding consent to a transfer, sale or assignment of the franchised business.

  • Regulates what steps must be taken before a franchise agreement is terminated.

  • Requires parties to participate in mediation if requested by either party, and to approach mediation in a reconciliatory manner.

The Code also imposes mutual good faith obligations on franchisors and franchisees, details of which are more fully explained in Question 14.

 
6. What is the regulatory authority responsible for enforcing franchising laws and requirements in your jurisdiction?

The regulatory authority responsible for enforcing franchising laws and requirements in Australia is the Australian Competition and Consumer Commission.

There is also the Franchising Council of Australia (FCA), membership of which is voluntary. The FCA is open to any organisation or individual involved in the franchise sector, including franchisees, franchisors, lawyers, accountants, banks, consultants, academics and publishers.

 
7. Must the franchisor be registered with a professional or regulatory body before setting up a franchise system?

There are no registration requirements in Australia, nor is there any obligation requiring a franchisor to pilot one or more outlets before franchising. Further, the franchisor (or the IP owner, if different) does not need to be registered with any IP registry or other body.

 
8. Is there a code of ethics or other means of promoting ethical franchising in your jurisdiction?

There are no codes of ethics or other means of promoting ethical franchising in Australia. However, members of the Franchising Council of Australia (FCA) must comply with the FCA's member standards (details of which can be accessed at: www.franchise.org.au).

 
9. Do franchisees benefit from any laws designed to protect consumers or small businesses?

In Australia, laws which allow the courts to strike down or not enforce unfair contract terms (Part 2.3, Australian Consumer Law) in consumer contracts do not apply to franchise agreements, as these agreements are not consumer contracts.

A consumer contract is defined in section 23 of the Australian Consumer Law as a contract for the supply of goods or services, or the sale or grant of an interest in land, to an individual whose acquisition is wholly or predominantly for personal, domestic or household use or consumption.

However, the Australian Consumer Law has recently been amended by extending the unfair contract laws to a much wider range of contracts, including franchise agreements. This new law will apply to a standard form "small business" contract entered into, or renewed on or after, 12 November 2016, where the following three criteria are met:

  • It is for the supply of goods or services or the sale or grant of an interest in land.

  • At least one of the parties is a small business (that is, it employs less than 20 people, including casual employees employed on a regular and systematic basis).

  • The upfront price payable is no more than AUD300,000 or, if the contract is for more than 12 months, AUD1 million.

A court or tribunal can declare that unfair terms are void if the following three tests are satisfied:

  • It would cause a significant imbalance in the parties' rights and obligations arising under the contract.

  • It is not reasonably necessary to protect the legitimate interests of the party who would be advantaged by the term.

  • It would cause detriment (whether financial or otherwise) to a party if it were to be applied or relied on.

The law presumes that a contract is a standard form contract unless the other person proves otherwise (a reverse onus).

The new law provides examples of terms that may be unfair, such as:

  • Terms that enable one party (but not another) to avoid or limit their obligations under the contract.

  • Terms that enable one party (but not another) to terminate the contract.

  • Terms that penalise one party (but not another) for breaching or terminating the contract.

  • Terms that enable one party (but not another) to vary the terms of the contract.

However, the following terms are not covered by the new law, and cannot be declared null and void on the ground of unfairness:

  • Terms that define the main subject matter of the contract.

  • Terms that set the upfront price payable.

  • Terms that are expressly permitted by federal and state legislation (for example, terms permitted under the Competition and Consumer (Industry Codes – Franchising) Regulation 2014).

 
10. Are there any other requirements which must be met before a business can sell a franchise?

Other than those set out above there are no other requirements which must be met before a business can sell a franchise. No government consents or official authorisations are required to approve or perfect a franchise transaction with an overseas franchisor, or enable it to operate through a franchisee in Australia.

However, in some States of Australia there are laws that regulate the sale of small businesses. Therefore, if a franchisor is running a unit itself and then decides to sell that business as a going concern, tied to a franchise agreement, these laws may apply. For example, in the State of Victoria, the Estate Agents Act 1980 requires a vendor's disclosure statement to be provided to a prospective purchaser of a small business if the purchase price is less than AUD350,000 (this statement is commonly known as a "section 52 statement"), failing which a purchaser can void the purchase contract, provided they do so within three months of signing the contract and have not already taken possession of the business.

Franchised businesses are also often affected by local council regulations in the area in which the business is located, particularly planning regulations.

Other industry codes or laws may also apply, depending upon which industry the franchise business is concerned with. For example, where the franchise is a real estate franchise, motor vehicle dealership or building franchise, further industry regulations will apply on a state-by-state basis.

 

Franchise agreement

Pre-contract disclosure requirements

11. Is the franchisor subject to any general or formal pre-contract disclosure requirements?

Under the Competition and Consumer (Industry Codes – Franchising) Regulation 2014 (Code), franchisors must:

  • Create (before entering into a franchise agreement) and update (within four months after the end of each financial year) a disclosure document that accords with the Code in terms of content and layout.

  • Provide its disclosure document (and a copy of the Code and the franchise agreement in the form in which it is to be executed) to prospective franchisees (including prospective franchisees who are acquiring an existing franchised business), renewing franchisees and existing franchisees where the term or scope of the franchise agreement is being extended, at least either (whichever is the earlier):

    • 14 days before the relevant documents are executed by the prospective franchisee; or

    • 14 days before a prospective franchisee pays to the franchisor any non-refundable money.

The disclosure document must cover the following key topics:

  • Background and relevant business experience of the franchisor, its associates and key personnel.

  • Details of relevant past and current litigation, convictions for serious offences or insolvency relating to, or involving, the franchisor or its directors.

  • Payments to agents for the introduction or recruitment of franchisees.

  • Details of existing franchisees and key events (for example, franchise transfers, businesses closing down, terminations, non-renewals and franchisor buy‑backs) that have occurred in the past three years.

  • Certain prescribed information as to the relationship between the franchisor (if the franchisor is a sub-franchisor) and the master franchisor.

  • Relevant information regarding intellectual property, including how and on what basis the franchisor can pass on rights to use that intellectual property to franchisees.

  • Details of exclusivity or otherwise of sites or any territory.

  • Details of franchisor's requirements for supply of goods or services to a franchisee.

  • Details of franchisor's requirements for supply of goods or services by a franchisee.

  • Rights, if any, of the franchisee to sell goods or services online.

  • Rights, if any, of the franchisor to sell goods or services online.

  • Any profit-sharing arrangement between the franchisor and franchisee in respect of online sales of goods or services.

  • The franchisor's site or territory selection policy.

  • Circumstances surrounding past franchise businesses ceasing to operate in the territory to be franchised.

  • Payments to be made by a franchisee, including prepayments, establishment costs and other recurring or isolated payments.

  • Details relating to contributions to, expenditure from, administration and auditing, of a marketing or other co-operative fund.

  • Details of any financing offered by the franchisor.

  • Details of unilateral variations to the franchise agreement in the past three years and circumstances where the franchise agreement can be unilaterally varied in the future.

  • Details of arrangements to apply at the end of the franchise agreement.

  • Details of whether the franchise agreement will be amended on a transfer or novation.

  • Any earnings information that a franchisor wishes to give and the basis for that information.

  • A statement of solvency signed by a director of the franchisor.

  • Either financial reports of the franchisor for the past two financial years, or an audit report supporting the franchisor's director's statement of solvency.

  • Any other relevant updates pertaining to key changes that may have occurred since the disclosure document was created.

The disclosure document must have attached to it a copy of the Code and the franchise agreement in the form in which it is to be executed by the franchisee. In addition, it must include a form of receipt for signing and return by the franchisee.

A master franchisor is exempted from disclosure obligations in relation to a unit franchisee. These obligations are imposed on the master franchisee, which is required to make certain additional disclosure regarding its relationship with the master franchisor.

There are no differences in treatment for a large or sophisticated franchisee or investor, or if the franchisee or investor is based outside Australia.

A failure to comply with the disclosure requirements amounts to a contravention of the Code and the Competition and Consumer Act 2010 (Cth) (CCA) (see part IV of the CCA for details of the consequences of non-compliance).

 
12. Must the franchisor disclose fairly and in good faith all facts material to the prospective franchisee's decision to enter into the arrangement, or must the prospective franchisee rely on its own due diligence?

The franchisor must provide to the franchisee a current and accurate disclosure document. A franchisor must not mislead or deceive a prospective franchisee. There have been many cases where the laws prohibiting the engagement in misleading and deceptive conduct in trade and commerce (section 18, Australian Consumer Law) have deemed silence by the seller as being misleading and deceptive conduct (see Miller & Associates Insurance Broking Pty Ltd v BMW Australia Finance Ltd (2010) 241 CLR 357; Owston Nominees No 2 Pty Ltd v Clambake Pty Ltd [2011] WASC 76; Demagogue Pty Ltd v Ramensky (1992) 39 FCR 31; Henjo Investments Pty Ltd v Collins Marrickville Pty Ltd (No 1) (1988) 39 FCR 546).

Aside from these caveats, the concept of caveat emptor applies to franchise agreements, which casts at least some obligation on the prospective franchisee to rely on its own due diligence.

Formalities

13. What are the formal contractual requirements to create a valid and binding franchise agreement?

There are no formal contractual requirements to create a valid and binding franchise agreement other than those that exist at common law:

  • There must be an intention to create legal relations.

  • There must be an offer and a precise acceptance of the offer.

  • The agreement must be supported by consideration.

  • There must be certainty and completeness in relation to essential terms.

  • The parties must have legal capacity.

The Competition and Consumer (Industry Codes – Franchising) Regulation 2014 (Code) contemplates that franchise agreements can be in writing, oral or implied, or a combination of being in writing, oral or implied (clause 5, Code).

A franchise agreement will be legally categorised depending on its terms. There is potential for some agreements to be categorised as a hybrid IP and services agreement, a partnership agreement, and perhaps even an employment agreement. However, most franchise agreements in circulation in Australia are very specific in stating, for example, that the relationship is not one of partners or employer/employee, but rather one of independent contractors. These clauses are generally recognised by the courts in Australia.

Parties' rights and obligations

14. Is there a general obligation to behave fairly, reasonably or in good faith to the other party during the term of the franchise agreement?

The Competition and Consumer (Industry Codes – Franchising) Regulation 2014 (Code) contains an express obligation on the parties to a franchise agreement to act in good faith in respect of any matter arising under, or in relation to, the franchise agreement and the Code (clause 6, Code). The obligation is extended to persons who propose to become parties to a franchise agreement in respect of any dealing or dispute relating to the proposed agreement, the negotiation of the proposed agreement and the Code (subclause 6(2), Code).

The concept of "good faith" requires parties to an agreement to exercise their powers reasonably and not arbitrarily or for some irrelevant purpose. Certain conduct may lack good faith if one party acts dishonestly, unreasonably, or fails to have regard to the legitimate interests of the other party. Australian courts have found business dealings to be not in good faith when they involve one party acting for some ulterior motive, or in a way that undermines or denies the other party the benefits of a contract.

The Code states that, in determining whether a party has acted in good faith, the Court can have regard to whether the party acted honestly and not arbitrarily, and whether the party co-operated to achieve the purposes of the franchise agreement (subclause 6(3), Code).

The obligation to act in good faith cannot be contracted out of (subclauses 6(4) and 6(5), Code).

The Code makes it clear that the obligation to act in good faith does not prevent a party to a franchise agreement, or a person who proposes to become a party, from acting in his or its legitimate commercial interests (subclause 6(6), Code).

In an extreme case, an overseas franchisor, or its officers and directors, could be liable as accessories for failures of the local sub-franchisor in this regard. It would be necessary that the claimant prove that the accessory had knowledge of the facts constituting the contravention. The cases establish that to have accessorial liability, the person:

  • Must have knowledge of the essential facts constituting the contravention.

  • Must be knowingly concerned in the contravention.

  • Must be an intentional participant in the contravention based on actual, not constructive, knowledge of the essential facts constituting the contravention (although constructive knowledge may be sufficient in cases of wilful blindness: the leading case is Yorke v Lucas (1985) 158 CLR 661).

 
15. Does local law require that particular provisions must be expressly included in a franchise agreement?

The Code requires that a franchise agreement contain a prescribed complaint handling procedure. This is more fully explained in Question 38.

 
16. Are exclusion and entire agreement clauses enforceable in your jurisdiction? If so, are they effective to protect the franchisor?

Exclusion and entire agreements clauses will not be effective to protect an overseas franchisor that is not a party to the local franchise agreement, either in relation to misrepresentation or other defaults by the local sub-franchisor, primarily because, under the doctrine of privity of contract, a person who is not a party to a contract cannot rely on the terms of that contract.

If there has been some form of misrepresentation or other defaults by the local sub-franchisor as against the local unit franchisee, the overseas franchisor will not be liable as an accessory to the unit franchisee in respect of the local sub-franchisor's conduct (see Question 14).

 
17. Can the franchisor impose product tying or other purchasing restrictions and non-compete obligations on the franchisee during the term of the agreement?

Restrictions on purchasing and product tying

A franchisor can require the franchisee to buy products and services, including those for resale to customers of the franchisee, only from the franchisor. This is known as full line forcing, which does not offend Australian competition laws.

Requiring franchisees to buy products and services, including those for resale to customers of the franchisee, only from third-party suppliers is known as third line forcing. This is currently illegal under the Competition and Consumer (Industry Codes – Franchising) Regulation 2014 (Code) and the Competition and Consumer Act 2010 (Cth) (CCA) (sections 47(6) and 47(7), CCA), but the Government has announced its intention to amend the CCA so that third line forcing will only be illegal if it substantially lessens competition.

Although currently illegal, a process exists under the CCA to file a "notification" with the Australian Competition and Consumer Commission (ACCC). This process is commonly successfully adopted by franchisors who wish to require franchisees to buy products and services, including those for resale to customers of the franchisee, only from third-party suppliers.

The notification process involves informing the ACCC of what is intended and the likely public benefits. The ACCC then has 14 days (although this can be extended by the ACCC by giving a notice under section 93A(2) of the CCA) to assess the matter, after which the notification takes effect, immunising the proposed conduct against breach of the third line forcing law.

Non-compete obligations and transfer restrictions

There are no limitations on the franchisor's ability to impose reasonable non-compete obligations during the term of the agreement. To be reasonable, the non-compete obligation must not go beyond what is reasonably necessary to protect the legitimate business interests of the franchisor.

There are no legal restrictions on the ability of the franchisor to require its prior consent to transfers of the business and/or transfers of interests in the entity owning the business. However, the Code (clause 25(2), Code) provides that a franchisor must not unreasonably withhold its consent to such a transfer, although it also provides (clause 25(3), Code) that a franchisor can reasonably withhold its consent if:

  • The proposed transferee is unlikely to be able to meet the financial obligations that the proposed transferee will have under the franchise agreement.

  • The proposed transferee does not meet a reasonable requirement of the franchise agreement for the transfer of the franchise agreement.

  • The proposed transferee does not meet the selection criteria of the franchisor.

  • The proposed transferee does not agree, in writing, to comply with the obligations of the franchisee under the franchise agreement.

  • The franchisee has not paid, or made reasonable provision to pay, an amount owing to the franchisor.

  • The franchisee has not remedied a breach of the franchise agreement.

  • The franchisor has not received from the proposed transferee a written statement that the transferee has received, read and had a reasonable opportunity to understand the disclosure document and the Code.

Fees and payments

18. What fees are usually payable by the franchisee? Are there any restrictions on the parties' freedom to set the fees and payments, or any other payment requirements?

Franchisees are usually required to pay:

  • An upfront franchise fee for the grant of the franchise.

  • Royalties.

  • Marketing contributions.

  • A transfer fee, on the assignment or transfer of the franchise or sale of the franchised business.

  • A renewal fee on the renewal of the term of the franchise agreement, together with the franchisor's legal costs.

Interest can be charged on overdue payments if the franchise agreement so provides, but the interest rate must not be too high as it may then be struck down as an unenforceable penalty.

Term of agreement and renewal

19. Are parties free to agree on the term of the franchise agreement? What is the typical term of a franchise agreement in your jurisdiction?

Parties are free to agree on the term of a franchise agreement. Australian law does not impose a minimum and/or maximum term. The typical terms of franchise agreements in Australia are:

  • For franchise agreements operated from retail premises, ten years (often the term of the franchise agreement is tied to the term of the retail lease.)

  • For mobile service type franchise agreements, ten to 25 years.

 
20. What rights of renewal are usually included in the franchise agreement? Are fees paid on renewal?

Commercial practice

The granting to franchisees of options to renew the franchise agreement varies significantly from system to system in Australia.

Usually if a renewal is granted, the franchisee is required to pay another upfront franchise fee, but sometimes this is discounted on renewal.

Clauses often provide that the option to renew is lost if the franchisee is in breach or has, during the term, been in persistent breach of the franchise agreement.

Local law

The Competition and Consumer (Industry Codes – Franchising) Regulation 2014 does not entrench any right of renewal into a franchise agreement. The right must be expressly contained in the agreement.

If a right exists, the franchisee validly exercises the option to renew and the franchisor refuses to grant the renewal, the franchisee can seek an order for specific performance of the renewal obligation. Alternatively, the franchisee can treat the franchisor's conduct as a repudiation of the franchise agreement, accept the repudiation and sue the franchisor for the loss sustained (most likely to be the value of the franchised business at the time).

Termination

21. Are there any limitations on the right of a franchisor to terminate the agreement?

A franchisor can terminate a franchise agreement on either or both of the following grounds:

  • If the franchisee has repudiated the franchise agreement or evinced an intention to be no longer bound by the terms of the franchise agreement.

  • If a right to terminate exists under the franchise agreement.

Most franchise agreements used in Australia contain extensive provisions granting termination rights to the franchisor in certain circumstances. Despite the existence of those rights, the Competition and Consumer (Industry Codes – Franchising) Regulation 2014 (Code) contains some overriding obligations that must be met.

Except for in special circumstances (contained in clause 29 of the Code), a franchisor cannot exercise a contractual right to terminate a franchise agreement unless:

  • It has given to the franchisee written notice setting out the breach, and the intention of the franchisor to terminate the franchise agreement.

  • That written notice also specifies what is required to remedy the breach and the time to remedy the breach (this must be reasonable, but need not exceed 30 days), and the franchisee fails to remedy the breach in accordance with the notice.

A franchisor can exercise a contractual right to terminate a franchise agreement without giving such a notice if the franchisee:

  • No longer holds a licence that the franchisee must hold to carry on the franchised business.

  • Becomes bankrupt, insolvent under administration or an externally-administered body corporate.

  • In the case of a franchisee that is a company, becomes deregistered by the Australian Securities and Investments Commission.

  • Voluntarily abandons the franchised business or the franchise relationship.

  • Is convicted of a serious offence.

  • Operates the franchised business in a way that endangers public health or safety.

  • Acts fraudulently in connection with the operation of the franchised business.

The franchisor is not liable to pay compensation to the franchisee where it validly terminates the franchise agreement. Nor is the franchisor liable to pay compensation to the franchisee upon the term of the franchise agreement expiring, unless the obligation to do so is contained in the franchise agreement.

A franchisee can terminate a franchise agreement on either or both of the following grounds:

  • If the franchisor has repudiated the franchise agreement or evinced an intention to be no longer bound by the terms of the franchise agreement.

  • If a right to terminate exists under the franchise agreement.

Clause 26 of the Code also gives a franchisee the right to terminate the franchise agreement within seven days after the earlier of either:

  • Entering into the agreement.

  • Making a payment under the agreement.

Liquidated damages clauses in franchise agreements will be enforced provided the amount of the liquidated damages is considered by the court to be a genuine pre-estimate of the loss the innocent party will suffer as a result of the breach. If this test is not satisfied, the clause will be classified as a penalty and will not be enforced.

 
22. Are post-term restrictive covenants enforceable?

Other than as set out below, there are no limitations on the franchisor's ability to impose reasonable post-term restrictive covenants.

The Competition and Consumer (Industry Codes – Franchising) Regulation 2014 (Code) (clause 23, Code) states that a restraint of trade clause will not be enforceable if all of the following circumstances exist:

  • The franchisee had given written notice to the franchisor seeking to extend the agreement on substantially the same terms as those contained in the franchisor's current franchise agreement and that apply to other franchisees, or would apply to a prospective franchisee (the term "extend" does not cover a renewal: it covers the situation where a new term is granted in circumstances where the franchisor was not under any obligation to grant such a new term).

  • The franchisee was not in breach of the agreement or any related agreement.

  • The franchisee had not infringed the intellectual property of, or a confidentiality agreement with, the franchisor during the term of the agreement.

  • The franchisor does not extend the agreement.

  • Either:

    • the franchisee claimed compensation for goodwill because the agreement was not extended, but the compensation given was merely a nominal amount and did not provide genuine compensation for goodwill; or

    • the agreement did not allow the franchisee to claim compensation for goodwill in the event that it was not extended.

Australian courts will enforce post-term restrictive covenants against the franchisee, in particular non-compete and confidentiality restrictive covenants, provided they are not unreasonable. To be reasonable, the restrictive covenant must not go beyond what is reasonably necessary to protect the legitimate business interests of the franchisor. Payment to the franchisee is not required as a condition for the validity or enforceability of post-term restrictive covenants.

 
23. Can the franchisor or a replacement franchisee continue to sell to the former franchisee's customers?

Absent any contractual prohibition, the franchisor or a replacement franchisee can continue to sell to the former franchisee's customers.

Choice of law and jurisdiction

24. Will local courts recognise a choice of foreign law in a franchise agreement for a business operating in your jurisdiction?

Australian courts will recognise a choice of foreign law in a franchise agreement for a business operating in Australia.

 
25. Will local courts recognise a choice of foreign jurisdiction in a franchise agreement for a business operating in your jurisdiction?

The Competition and Consumer (Industry Codes – Franchising) Regulation 2014 (Code) provides that a franchise agreement must not contain a clause that requires a party to the agreement to either:

  • Conduct mediation.

  • Bring an action or proceedings in relation to a dispute under the agreement in anywhere outside the state or territory in which the franchised business is based.

Any clause in contravention of this provision will be of no effect (see clause 21(2) of the Code, although this provision only applies to a franchise agreement entered into, varied or transferred after 1 January 2015).

 

Operations Manual

26. How does the franchisor ensure that the franchisee complies with the business standards, systems and requirements?

Franchisee compliance with the Operations Manual is usually a fundamental term of the franchise agreement. A franchisor can ensure that the franchisee complies with the business standards, systems and requirements by:

  • Providing thorough training of franchisees and their staff.

  • Conducting regular monitoring of the franchisees' operations, through overt and covert site visits, secret shopper programmes and detailed analysis of the financial information provided to the franchisor by the franchisee.

 
27. Can the franchisor change the Operations Manual unilaterally, as is usually required?

Unless specified in the franchise agreement there are generally no legal restrictions on the right of the franchisor to introduce changes, both to the Operations Manual and other aspects of the franchised business.

Franchisors should not use Operations Manual changes to undermine the nature of the franchise granted to the franchisee. If a franchisor pushes the limit too far it could be faced with a test case instituted by the Australian Competition and Consumer Commission, where it may be alleged that:

  • The unilateral right to vary the Operations Manual constitutes an unfair term that should not be enforced (see Question 9).

  • In making the change, the franchisor is in breach of its good faith obligation (see Question 14).

  • In making the change, the franchisor has engaged in unconscionable conduct.

Unconscionable conduct is unlawful under section 21 of the Australian Consumer Law. A good summary of the law is contained in Australian Competition and Consumer Commission v ACN 117 372 915 Pty Ltd (formerly Advanced Medical Institute Pty Ltd) [2015] FCA 368, at paragraphs 25 to 61.

 

Liability issues

28. What are the franchisee's remedies against the franchisor for deceptive or fraudulent selling practices?

Remedies under the Australian Consumer Law are the most commonly sought remedies where there have been fraudulent or deceptive selling practices by the franchisor. The Australian Consumer Law states that a person must not, in trade or commerce, engage in conduct that is misleading or deceptive, or is likely to mislead or deceive (section 18, Australian Consumer Law). A person who suffers loss because of such conduct can recover from the person who engaged in the conduct the amount of loss and damage that the person has suffered (section 236, Australian Consumer Law). Other remedies such as injunctions, declarations, orders varying agreements and the similar orders are also available to victims of misleading and deceptive conduct.

 
29. How can third-party claims against the franchisee be brought successfully against the franchisor?

Indemnity

Often, third parties who have been injured or suffered loss by reason of the acts or omissions of a franchisee will seek to join the franchisor in the legal proceeding. More often than not, such a joinder will lack merit unless it can be shown that the injury or loss was in some way caused by the franchisor.

Franchise agreements commonly state that the franchisee conducts the franchised business as an independent proprietor (not as a partner, employee representative, agent or joint venturer of, or with, the franchisor), and must ensure that the franchisee's independent proprietorship is clearly marked on the business premises and any stationery or business cards used by the franchisee.

Nearly all franchise agreements will contain a clause under which the franchisee indemnifies the franchisor in respect of any such liability. Such a clause will generally be upheld by the Australian courts.

Precautions

The common and prudent practice in Australia is for franchisors and franchisees to insure against such claims (often with the same insurer). The practical reality is that the insurer takes up the defence of the claim without the need for any concern about the issue of franchisee/franchisor indemnity.

 

Intellectual property

30. What provisions are usually made in relation to intellectual property rights (IPRs), including know-how?

A franchisee is only granted a licence to use the franchisor's intellectual property rights and know-how, and these rights are usually granted by the franchise agreement. These rights are granted to the franchisee for a limited time (usually the term of the franchise agreement), and are often limited for use within the specified territory.

 
31. What are the registration requirements for licensing IPRs?

Trade marks, patents, registered designs and plant breeders' rights can be registered through IP Australia (see: www.ipaustralia.gov.au). Together with copyright, such rights are protected by Australian intellectual property laws. Confidential information, including know-how and trade secrets, is generally protected by non-disclosure agreements or confidentiality deeds.

However, in Australia there is no registration process for licences of intellectual property rights. It is not strictly necessary to use a separate licence agreement, and many franchisors grant these rights in the franchise agreement.

 

Real estate

32. Are consents from landlords difficult to obtain when transferring leases or granting subleases from a franchisor to a franchisee?

In most cases consents from landlords are not difficult to obtain. Landlords prefer to grant leases to the franchisor (who generally has a deeper pocket than the franchisee), and they accept that they and the franchisor are both steadfast in ensuring compliance by the franchisee.

In circumstances where the franchisor holds the head lease, then sublets or licences the premises to the franchisee, it is prudent to negotiate the approval process into the lease at the outset. Well established franchisors are often able to negotiate a deemed consent process where the franchisor merely certifies that the franchisee has completed the franchisor's training programme.

Some landlords require the execution of formal deeds of consent, the cost of which is usually passed onto the franchisee.

The process can be completed reasonably quickly (two to four weeks), and it is important that the request for consent is made at the earliest possible time.

 
33. How can a franchisor prevent the franchisee from occupying the premises after the franchise agreement has ended?

If the franchisor holds the head lease and it is a term of the sublease that it will expire upon the termination of the franchise agreement, a franchisor can adopt self-help measures (often with the assistance of the landlord) to lock out the franchisee. In doing so the franchisor must not disturb the peace, and if aggression is shown by the franchisee, the franchisor is best advised to go to court to obtain an order for possession.

If the franchisee holds the head lease and there is nothing in the franchise agreement or any tripartite agreement between the franchisor, franchisee and the landlord requiring the assignment of the lease to the franchisor, there is little the franchisor can do. If the ex-franchisee is continuing to conduct the same type of business, or is using the franchisor's intellectual property, an interlocutory injunction can be sought to restrain such activities.

 
34. How can the franchisor effectively acquire the franchisee's premises at the end of the franchise relationship?

If the franchisor holds the head lease, the franchisor is able to retake possession of the premises without difficulty and there is no obligation to make any payment to the franchisee.

If the franchisee holds the head lease and there is nothing in the franchise agreement or any tripartite agreement between the franchisor, franchisee and the landlord requiring the assignment of the lease to the franchisor, there is little the franchisor can do if the franchisee refuses to assign the lease.

The fixtures, fittings, plant and equipment used in the franchise business is usually the property of the franchisee. Well drawn up franchise agreements contain provisions that both:

  • Allow the franchisor to use the franchisee's plant and equipment at no cost for a short period of time (up to three months).

  • Grant to the franchisor an option to purchase from the franchisee the fixtures, fittings, plant and equipment used in the franchise business at the lower of either the written down value or the market value. Such an option does not need to be registered in any registry.

 
35. If the franchisor leases or subleases its own site to its franchisee, can it pass on all related costs to the franchisee? Can the franchisor charge its franchisee tenant a rent expressed as a percentage of the franchisee's sales?

If the franchisor leases or subleases its own site to its franchisee, it can pass on all related costs to the franchisee. A franchisor can charge its franchisee tenant a rent expressed as a percentage of the franchisee's sales.

 

Competition law

36. What is the effect of competition law rules on franchising agreements? Are there any available exemptions?

Competition law

Australia's competition law is contained in the Competition and Consumer Act 2010 (Cth) (CCA). Also see Question 17 in relation to third-line forcing.

Other aspects of competition law that can impact on franchising include:

  • The prohibition against cartel conduct (division 1, Part IV, CCA) and price collusion.

  • The prohibition against contracts, arrangements or understandings that restrict dealings or affect competition (section 45, CCA).

  • The prohibition against exclusive dealing (section 47, CCA), including third-line forcing (see Question 17).

  • The prohibition against resale price maintenance (section 48, CCA).

Exemptions

Immunity from liability for such unlawful conduct can be sought via the authorisation or notification process. This can be a difficult, expensive and uncertain process. Further information is contained in the Australian Competition and Consumer Commission's website: www.accc.gov.au.

Online/e-commerce restrictions

Through the franchise agreement, and sometimes through the enforcement of IPRs, a franchisor can prevent a franchisee from:

  • Having its own website presence.

  • Promoting its business on the internet.

  • Engaging in e-commerce.

 

Employment issues

37. Can a franchisee be regarded as an employee of the franchisor?

Provided the franchise agreement clearly states the nature of the relationship between the franchisor and franchisee (for example, in the manner described in Question 29), a franchisee will not be regarded an employee of the franchisor.

 

Dispute resolution

38. How are franchising disputes typically dealt with? What provisions for handling disputes are usually included in domestic franchise agreements?

Under the Competition and Consumer (Industry Codes – Franchising) Regulation 2014 (Code) all franchise agreements must contain a complaint handling procedure. This procedure must provide for the giving of a notice of dispute (setting out the nature of the dispute, the outcome the complainant wants and what action the complaint thinks will resolve the dispute), followed by a three-week period to attempt to resolve the dispute, failing which either party can refer the dispute to mediation (clause 34, Code). If the parties cannot agree on the mediator, the dispute can be referred to the Office of the Franchising Mediation Adviser, which will appoint a mediator from its panel of mediators. Parties in dispute can either invoke that complaint handling procedure contained in the franchise agreement, or adopt the almost identical procedure contained in Division 3 of part 4 of the Code.

Mediation must be conducted in Australia and be attended by persons who have authority to settle (clause 41, Code).

It is rare to see an arbitration clause in a domestic franchise agreement. Adjudication of disputes via arbitration is not common in Australia, except where an international party is involved. This is because:

  • Civil litigation in Australia is adjudicated by judges only (not juries).

  • The processes and costs of court proceedings are often more favourable than the arbitration process.

  • Mediation tends to result in a high proportion of disputes being resolved.

In reality, the only significant advantage for foreign franchisors that include clauses in their franchise agreements that require arbitration to be conducted in Australia is the confidential nature of the process and the outcome (compared to the court process).

Whilst foreign choice of law clauses will be recognised and enforced, overseas forum clauses in agreements entered into, transferred or varied after 1 January 2015 will not be enforced (see Questions 24 and 25).

 
39. How are foreign judgments or foreign arbitral awards enforced locally?

The enforcement of foreign judgments in Australia is covered by the Foreign Judgments Act 1991 (Cth), which in essence provides that final judgments and orders from certain foreign superior courts (as set out in the Foreign Judgments Regulations 1992 (Cth)) can be registered in the Australian courts and then enforced.

The enforcement of foreign arbitral awards in Australia is covered by the International Arbitration Act 1974 (Cth), which in essence provides that:

  • A foreign award is binding on the parties to the arbitration agreement under which it was made.

  • A foreign award can be enforced in a court of a state or territory or the Federal Court of Australia as if the award were a judgment or order of that court.

Courts can refuse to enforce the foreign award in certain circumstances (sections 8(5), 8(7) and 8(7A), International Arbitration Act).

 

Exchange control and withholding

40. Are any exchange control or currency regulations applicable to payments to an overseas franchisor?

Australian laws control and regulate, or permit the control and regulation of, a broad range of payments and transactions involving non-residents of Australia. Except for a number of exemptions, authorities and approvals, there are no general restrictions from transferring funds from Australia, or placing funds to the credit of non-residents of Australia. However, Australian foreign exchange controls are implemented from time to time against proscribed countries, entities and persons. Depending on the overseas franchisor, there may be an applicable exchange control or currency regulation, and it will be necessary to check each situation on a case-by-case basis.

 
41. Is there a withholding obligation on payments made to an overseas franchisor?

Australian tax laws incorporate withholding tax on certain payments made to a foreign entity. If a tax treaty exists between Australia and the country where the payment is to be made, that treaty will determine the applicable rate of the withholding tax. If no treaty exists, the rate is 30%.

As a result, it is important for the applicable franchise agreement between the parties to clearly provide for the manner in which withholding tax obligations are to be fulfilled, and responsibility and liability in the event that those obligations are not properly discharged. For example, it is not unusual for franchise agreements to both:

  • Recite that the parties will co-operate with each other to secure the lowest rate of withholding taxes properly available.

  • Reciprocally file, or provide the other party with, all necessary documentation to establish the entitlement to, and substantiation of, the applicable beneficial withholding rates.

 

Reform

42. Are there any proposals to reform the laws affecting franchising?

The Australian Government has announced that it proposes to amend the Fair Work Act to make franchisors and parent companies liable for breaches of the Act by their franchisees or subsidiaries in situations where both:

  • They should reasonably have been aware of the breaches.

  • They could reasonably have taken action to prevent them from occurring.

Franchisors who have taken reasonable steps to educate their franchisees, who are separate and independent businesses, about their workplace obligations, and have assurance processes in place, will not be captured by these new provisions.

 

Online resources

Austlii

W www.austlii.edu.au/

Description. The website for Austlii containing all legislation in Australia.

Australian Competition and Consumer Commission

W www.accc.gov.au/

Description. The website for the Australian Competition and Consumer Commission.

Franchise Council of Australia

W www.franchise.org.au/

Description. The website for the Franchise Council of Australia.

IP Australia

W www.ipaustralia.gov.au/

Description. The website for IP Australia.



Contributor profile

Philip Colman, Principal

MST Lawyers

T +613 8540 0200
F +613 8540 0202
E Philip.colman@mst.com.au
W www.mst.com.au

Professional qualifications

  • Admitted as an Australian Lawyer by the Supreme Court of Victoria and High Court of Australia in 1981.
  • Accredited by the Law Institute of Victoria as a specialist in commercial litigation since 1993.

Areas of practice. Franchising; commercial litigation and dispute resolution.


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