Franchising in Australia

Our Franchising lawyers have helped many Australian and international brands expand their operations by sharing their intellectual property with small business owners. 

Franchising is the preferred method to rapidly expand business operations via distribution of goods and services by others. A Company (the franchisor) provides an individual or small business operator (the franchisee) the right to sell goods and services utilizing the franchisor’s intellectual property which may include trademarks, business processes or packaged goods. 

For example, Aldis is popular franchise in Australia. Individual franchisees own store branch and sell goods under the Aldis brand while complying with Aldis’ (the franchisor) specifications and the franchise Agreement. A franchisee may remit a portion of their income to the franchisor or pay a fixed royalty as compensation for using the franchisor’s brand. 

Why choose Denning Legal?

We can help you conduct due diligence and mitigate risks before starting a franchise. Our expert team of franchising lawyers have broad experience in business formation and structuring related to Franchising across various industries. 

Making an informed decision about starting a Franchise in Australia 

A prospective franchisee is entitled to receive specific documents that provide the current information from the franchisor vital to the operations of the franchisee. These key documents help you make an informed decision when considering buying a franchisee. Franchising is a regulated Industry in Australia. The Franchising Code of Conduct enacted by the Australian Competition and Consumer Council (ACCC). This Competition and Consumer (Industry Codes-Franchising) Regulation 2014, broadly includes: 

• disclosure requirements 
• a cooling-off period 
• procedures for ending a franchise agreement 
• a good faith obligation 
• dispute resolution mechanisms

However, this code is not applicable when:

• another mandatory Code of Conduct is prescribed under section 51AE of theCompetition and Consumer Act 2010.
• the agreement is for goods and services that are substantially similar to the ones already being supplied by the franchisee for at least 2years before entering into the agreement.
• the sales under the franchisee are not likely to provide more than 20% of the franchisee’s gross turn over for substantially similar goods or services for the first year of operations.

Disclosure Document

It is mandatory for a franchisor to maintain a disclosure document which must be signed by the franchisor, director, officer, or agent of the franchisor. The franchisor is also required to update the document within four months at the end of each financial year. It should be provided to the prospective franchisee at least 14 days before entering into a franchise agreement.

▶︎ A disclosure document must include:

• Details about franchisor’s business structure details, the kind of business operated under the franchise, years of experience operating in Australia and qualification of the officers of franchisor if relevant. 

• Summary of business experience of the franchisor in the past 10 years in operating a business substantially similar to the franchise. This must also include details about the other substantially similar franchises that are being offered by the franchisor.

• Details about any payments to agents by the franchisor for introduction or recruitment of prospective franchisee.

• Information about existing franchisees and Master Franchises if applicable. 

• Details of intellectual property (IP) vital to the franchise system and franchisee’s rights and obligations regarding itsuse. Franchisor must disclose whether the IP is registered in Australia and whether any judgment or pending proceeding would affect the use of the IP.

• Franchise site or territory and whether territory is non-exclusive or limited. In case of a limited territory, it must disclose whether franchisees may own or operate a business substantially similar to that of the franchise. It is also crucial to determine whether franchisor may change territory of the franchise and the circumstances which may cause such change.

• Details of supply of goods or services to a franchisee or vice versa and provisions for online sale.

• Details of any Pre-payment and establishment costs and recurring payment schedules. This includes financing arrangements being offered by the franchisor or its agents with disclosure regarding minimum amount of working capital and debt to equity ratio to be maintained in relation to the franchise.

• Disclosure about circumstances in the last 3 financial years regarding unilateral variation of franchise agreement.

• Financial information regarding the solvency of the franchisor and earnings information which may include historical earning data or projected earnings.

▶︎ Other key documents that must be provided to you

• An information statement which is a document that highlights the associated risks and expected returns from the franchise.
• Financial statements of the franchisor in case, franchisee is required to contribute to a marketing fund.
• The franchise agreement.
• Ancillary Agreements essential to the running the franchise. These include relevant lease or hire purchase agreement; security agreement including a guarantee or a mortgage or bank guarantee,confidentiality agreement and any restraint on trade that continues after termination of the franchise agreement.
• Competition and Consumer (Industry Codes-Franchising) Regulation 2014

▶︎ Disclosures by franchisor related to Litigation

It includes details of Litigation the franchisor is a party to includes proceedings by public agency or civil or arbitration or criminal proceedings against the franchisor, a franchising director or director of an associate of the franchisor. It includes proceedings in Australia alleging breach of a franchise agreement, contravention of trade practices, misconduct, or an offence of dishonesty. The franchisor must also disclose whether the franchisor, a franchisor director, an associate of the franchisor or a director of an associate of the franchisor have been subject to final judgment in civil proceedings mentioned above and whether they were convicted of a serious offence in our outside Australia in the last 10 years.

Franchise Agreements

Any agreement whether written or oral or implied, is a franchising agreement when it satisfies the following conditions: 

• One party (the franchisor) grants to another party the rights to engage in business of sale or supply of goods and services substantially determined and controlled by the franchisor. 

• The operations of a business operations of one party (the franchisee), are substantially associated and dependent on the trademark, advertising, and other intellectual property of another party (the franchisor). 

• One party (the franchisee) before starting business operations, has paid or agreed to pay to another party (the franchisor) costs related to initial capital investment, training fees and fee based on percentage of gross sales whether or not called a royalty. 

Before a franchise agreement is executed, a franchisor is required to obtain an acknowledgement that the prospective franchisee has received, read and had a reasonable opportunity to understand the disclosure document and the franchising code. This includes a signed statement that the prospective franchisee has been given advice about the franchise agreement or business by an independent legal adviser or independent business adviser or accountant. 

Denning Legal offers full-service Litigation and General Corporate Advisory in all areas of franchising in Australia. We begin by carefully reviewing with our clients the disclosure document and agreements provided to them. We analyse the Franchise system you are considering and provide risk mitigation strategies in tune with your expertise and business needs. 

Important considerations before entering into a franchising agreement

▶︎ Franchise site or territory 

It is important to determine whether the franchise is limited to a particular site or for an exclusive or non-exclusive territory. A prospective franchisee must consider: 

• Whether franchisee or its associate may operate other businesses substantially similar to the franchise? 
• Whether franchisee or its associate can establish new businesses substantially similar to the franchise? 
• Whether franchisee may operate or own substantially similar business outside the exclusive territory of the franchise? 
• Whether franchisor can change the territory or site of the franchise and the circumstances that may trigger for such change? 

▶︎ Marketing & advertising fees

Often, franchisees must bear the costs of marketing and advertisement related to the operations of the franchise as well as promotion of the franchisor’s intellectual property. Franchisor must provide details of these expenses to the franchisee in the disclosure document, and they must be included in the terms of the franchise agreement. A franchisor is obligated to maintain separate bank account for marketing and advertising fees contributed by the franchisees. Further, if there are multiple units of the franchised business the franchisor my pay marketing fees and advertisement on behalf of each unit on the same basis. 

▶︎ Prohibition on General Waivers and Release from Liability

As per the franchising Code of Conduct a franchise agreement must not require general release of the franchisor from liability towards the franchisee or any similar general waiver. Even if a franchise agreement contains such a general waiver or release it has no effect even if signed by the franchisee. It will not prevent a franchisee from settling a claim against the franchisor after entering into a franchise agreement.  

▶︎ Supply of goods or services to a franchisee 

Franchisees are often required to use the goods and services supplied by the franchisor for maintaining standards in the operations of the Franchise. A prospective Franchisee must consider: 

• Any requirement for the franchisee to acquire or maintain minimum levels of inventory. 
• Any restrictions on acquisition of goods and services from other sources. 
• Obligations of the franchisee to accept good and services provided by the franchisor. 
• Whether franchise business is limited to certain products or whole range offered by the franchisor? 
• Conditions under which goods provided by the franchisor can be returned. 
• Whether franchisor or its associate will receive any financial benefit from the supply of goods and services to the franchisee? 

▶︎ Supply of goods or services—online sales 

Online sales have the potential to exponentially increase the revenue of your franchise. In some industries, it is of utmost importance that a business can deliver its goods and services online. Thus, it is important to consider the rights and restrictions on online sales in a franchise agreement. These considerations include: 

• Whether the franchisee may make available online goods of the same type or brand associated with the franchise? 
• Whether there are any restrictions or conditions on the franchisee’s ability to sell goods and services online? 
• Whether goods and services may be sold via third-party websites or platforms? Such platforms include online stores or delivery apps. 
• Whether goods and services may be supplied outside the territory of the franchisee? 
• Whether goods and services are expected to be sold online exclusively on the platforms owned or operated by the franchisee or its associates? The franchisor must also disclose any profit-sharing arrangement with such online platform. 

▶︎ Lease Associated with the Franchise

The franchisor must provide details of lease that is essential for the franchise’s operations. A franchisee is entitled to receive a copy of the lease or agreement to lease as well as details of any incentive or financial benefit that the franchisor will receive from the lease. The copy of the lease must be provided to the franchisee within 1 month from the date of signing of the franchise agreement. If premises are leased from the franchisor itself, then a copy of the franchisor’s lease must be provided to the franchisee. 

Termination of Franchise Agreements

A franchise is usually a continuing business relationship. Thus, the success of a franchise is dependent on the value addition by Franchisee as well as the adherence to obligations by both parties under the Franchise Agreement. These agreements are usually long-term and have clauses that may include a right to renew or extend the term of the franchise agreement. A franchise agreement may be terminated early, or the franchisor may refuse to renew the franchise agreement due to a myriad of reasons. The franchisor must comply with certain conditions before terminating a franchise: 

• Franchisor must give notice to the Franchisee in writing. 
• Franchisor must give notice 6 (six) months before the end of the term of the agreement if the franchise agreement is for a duration of six months or longer. This period to give notice is reduced to 1 (one) month if the term of the franchise agreement is less than six months.

▶︎ End of term arrangements

The franchise agreement must detail the process of determining arrangements that will apply at the end of the franchise agreement. Stipulations in these arrangements may include:

• Whether the franchisee will have the option to renew the franchise agreement or enter into a new one?
• Whether the franchisee will have the option to extend the term of the franchise agreement and the conditions it must satisfy for such an extension.
• Whether franchisee will be entitled to any compensation if franchise agreement is nor renewed?
• Whether franchisor will purchase unsold stock or inventory, or marketing material and equipment related to the franchise?

▶︎ Termination by franchisee and cooling off period

A franchisee is entitled to terminate an agreement within 7 (seven) days or earlier from the date of signing of the franchise agreement or the date of making any payment (or any other consideration) for franchise agreement. This cooling-off period is not applicable when renewing or extending a franchise agreement. If the franchisee terminates the agreement in the cooling-off period the franchisor must repay all payments made by the franchisee within 14 days from the date of termination.

▶︎ Termination due to breach by franchisee

A franchisor may propose to terminate the franchise agreement due to breach of obligations by the franchisee. The franchisor must satisfy the following conditions to terminate the agreement:

• Franchisor must give reasonable notice in writing that the franchisor proposes to terminate the franchise agreement due to breach by the franchisee.
• Franchisor must tell the franchisee what is required to be done to remedy the breach.
• Franchisor must allow franchisee reasonable time to remedy breach. The franchisor does not have to allow more than 30 days to remedy the breach.
• If breach is remedied by the Franchisee in stipulated time, then the franchisor cannot terminate the franchise agreement.

▶︎ Termination in case of no breach by franchisee

In case of no breach on part of the franchisee, the Franchisor may still terminate the franchise agreement in accordance with the terms of the agreement. A condition that franchise agreement can be terminated by the franchisor without the consent of the franchisee is not considered consent. The franchisor is required to give reasonable written notice of the proposed termination and reasons for such termination.

▶︎ Effects of restraint of trade when franchise agreement is not extended or renewed

A restraint of trade clause in the franchise agreement has no effect:

a) if the franchisee has given written notice to the franchisor seeking to extend the franchise agreement on substantially similar terms.
b) the franchisee was not in breach of any terms of the franchise agreement.
c) The franchisee has not infringed the intellectual property of the franchisor or breached any terms of the confidentiality agreement or related agreements.
d) The franchisor refuses to extend or renew the franchise agreement.

▶︎ Termination in special circumstances

A franchisor may terminate the franchise agreement in special circumstances. The right to terminate the franchise agreement only arises when they are specifically provided for in the franchise agreement. These circumstances include:

• Franchisee no longer holds a license that is necessary to carry on the franchised business.
• If the franchisee becomes bankrupt or insolvent
• If franchisee is deregistered by ASIC.
• If franchisee is convicted of a serious offence or abandons the franchised business
• If franchisee acts fraudulently in connection with the franchised business or operated the franchisee in a way that endangers public health and or safety.

Understanding Good Faith obligations

Rule 6 of the Competition and Consumer (Industry Codes-Franchising) Regulation casts an obligation on each party to the franchise agreement to act towards another party with good faith in matters related to the franchise agreement or the code. This obligation also extends to parties who exploring possibilities of entering into a franchise agreement while negotiating and dealing with any dispute under the proposed agreement. The obligation to act in good faith cannot be limited or excluded by terms of a franchise agreement, it even extends to performance of contract, dispute resolution and termination of the franchise agreement.

A court may determine under Rule 6 (3) whether a party under the franchise agreement acted honestly and not arbitrarily, and whether a party cooperated to achieve the purposes of the agreement. A party is required to consider the interests of the other party but is not required to act against its own interest. Thus, a party acting in its legitimate commercial interest does not violate the good faith obligations under the code.

Resolving Franchising Disputes

The code casts an obligation on the franchisor to develop internal procedures for resolving disputes which must meet certain standards and must be mentioned in the franchise agreement. The jurisdiction or place of bringing an action or resolving disputes under the franchise agreement is usually the state or territory in which the franchise business is based. The code prohibits terms that may force a party to resolve disputes outside Australia or in a state or territory different the location of the franchised business. A party (the complainant) to the franchise agreement may resolve a dispute as per the terms of the agreement or initiate a complaint with the other party (the respondent) under the code. A complaint must set out:

• the nature of the dispute.
• the outcome / relief desired by the complainant.
• the actions the Respondent can take to resolve the dispute.

The parties must try to resolve the dispute within 3 weeks, after which either party may refer the matter for mediation as per terms of the franchise agreement or the code of conduct. Once mediation is requested it is essential for the parties to attend the mediation proceedings and ‘try’ to resolve a dispute. A party is said to be ‘trying’ to resolve a dispute when: 

• the party attends and participates in meetings at reasonable times. 
• the party does not take any action during the dispute including providing inferior goods or services or support and similar refusal, which may affect the reputation or business operations of another party.

Mediation may be terminated with the consent of the parties or if a resolution/settlement has been reached between them. Mediation proceedings terminate if the dispute is not resolved after 30 days from the date of first mediation meeting. After such termination of mediation each party is entitled to receive a certificate from the mediator stating the name of parties and the nature of dispute. The mediator must acknowledge that mediation has concluded, and the dispute has not been resolved.

Disputes in a Franchise Agreement are essentially Contract Disputes. Read more on Contract Disputes on our dedicated page here.

Resolving a Franchise Dispute involves analysis of the circumstances in the light of the franchising code. We have diverse experience in franchising disputes and contract disputes across numerous industries, providing you with pragmatic solutions that minimize your costs and risk.