What is a Franchise Agreement?

A franchise agreement (Franchise Agreement) is defined in clause 5(1) of the Franchising Code of Conduct (Code), located in Schedule 1 of the Competition and Consumer (Industry Codes–Franchising) Regulation 2014 – as:

• a written, oral or implied agreement;
• in which a person (Franchisor) grants to another person (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; and
• under which the business will be substantially or materially associated with a trade mark, advertising or a commercial symbol that is owned, used, licensed or specified by the Franchisor or an associate of the franchisor; and
• under which, before starting or continuing the business, the Franchisee must pay or agree to pay to the Franchisor or their associate an amount; for example, an initial capital investment fee or a payment for goods or services.

Pursuant to clause 5(3) of the Code, agreements concerning certain relationships (including employer-employee relationships, partnerships, and landlord-tenant relationships) are expressly excluded from constituting “Franchise Agreements”.

Common clauses in Franchise Agreements

The Code imposes onerous obligations concerning the contents and delivery of franchising documents.    Common clauses include (but are by no means limited to):

• Confidential information – the Franchisee must not disclose any confidential information of the Franchisor;
• Franchise Fee – the fees paid by the Franchisee to the Franchisor immediately following the execution and delivery of the Agreement;
• Franchisee’s obligations – example obligations can cover the areas of customer service, the business premises, records and accounts, and compliance with the Code;
• Franchisor’s obligations – example obligations include acting in good faith, disclosing all material facts, and providing a Training Program;
• Intellectual property – the Franchisee may use the Intellectual Property of the Franchisor, such as the business name and Franchise Manual, but the Franchisor retains ownership of this Intellectual Property;
• Marketing Fund – if the Franchisor establishes a separate bank account for marketing and advertising the Franchise, the Agreement must set out what these contributions will be, how the fund will be used, and how financial reports and audits of the fund will be compiled; and
• Term – the length of time that the Franchise is granted under the current Agreement; and
• Renewals and Extensions.

For an exhaustive list of the sorts of clauses which can be used to control the franchising relationship please ask for a copy of our “Franchising Agreement Checklist”.

Common problems with Franchise Agreements

The wording of the Franchise Agreement is critical, as poor drafting can see a purported Franchise Agreement deemed to be a Distribution Agreement, which has a range of different legal implications.  In short, the franchise relationship is predicated on control and breadth of influence, while a distribution agreement is narrower in scope and does not concern itself with marketing and merchandising.

Links and further references

Cases

In Rafferty v Madgwicks [2012] FCAFC 37 the Federal Court implemented a two-stage test for determining whether a relationship is classified as a Franchise. The first stage is whether there is a system or marketing plan. The second is whether the Franchisor retains the requisite level of control.

Legislation

Franchising Code of Conduct

Further information about Franchise Agreements and Franchise Systems

If you need assistance drafting or reviewing a Franchise Agreement or advising on the implementation of a Franchise System, please telephone me for an obligation free and confidential discussion.

Disclaimer

This article contains general commentary only.  You should not rely on the commentary as legal advice.  Specific legal advice should be obtained to ascertain how the law applies to your particular circumstances.

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