Franchising Agreements

25 February 2022 in Civil and Commercial Litigation and Law, Commercial Lawyers, Contract Lawyers

What is Franchising

Franchising is the creation and distribution of a brand and franchise system which allows an individual (franchisee) to do business under an established business’ (franchisor) name and systems in exchange for royalties and often an initial fee.  It is a business model which is commonly used by a variety of successful companies such as McDonalds.  The relationship between the franchisor and the franchisee is generally governed by the franchise agreement.  Every franchising agreement is required to follow the Franchising Code of Conduct, which does not set out the terms and conditions of the agreement but does influence the rights and responsibilities of the franchisor and the franchisee.

The highly experienced business lawyers at Brander Smith McKnight are expert in all areas of franchising and happy to advise and assist you.

What does the Franchising Code require?

The franchising code of conduct is legislated by the Competition and Consumer Regulation 2014 (Industry Codes-Franchising).  Some of the key components are:

Disclosure Requirements

The disclosure document is required to be true, accurate and able to be true, accurate and able to be substantiated, providing current and prospective franchisees with the current information which is relevant to running the franchised business.  It may not omit any information which is important about the franchise or contain any information which is false or misleading.  As part of the disclosure document, an annual solvency state is required, providing the franchisor’s position at the end of the last financial year and financial reports for the past two financial years.  The disclosure document is required to be provided to a franchisee before they sign the financial agreement.  A franchisor is also required to alert the franchisee within 14 days of the franchisor going into administration, liquidation, appointing a receiver or executing a deed of company arrangement which has not been mentioned in the disclosure document.

An Obligation to Act in Good Faith

The franchising code of conduct doesn’t define what good faith is.  Rather it states that the obligation of good faith is to reflect the common law view.  The common law view says that both parties exercise their powers reasonably and not arbitrarily or for some irrelevant purpose.  Conduct which is dishonest or fails to have regard to the interests of the other party is an example of not acting in good faith.  Another example is where one party acts for an ulterior motive or undermines or denies the other party the benefits they are due from the agreement.

The obligation to act in good faith applies to any matter which may arise in relation to any aspect of the franchising relationship, which may include pre-contractual negotiations, the performance of the contract, any dispute resolution and the ending of the agreement.  It may also be extended to conduct occurring after the franchising agreement has come to an end.

The obligation to act in good faith does not require the party to act in the interest of the other party, nor does it prevent a party from acting in their own legitimate commercial interests.

When considering if conduct was in good faith, the Australian Competition and Consumer Commission (ACCC) lists some potential questions to consider:

• Have you been honest with the other party?
• Have you considered the other party’s interest?
• Have you made timely decisions?
• Have you consulted with the party regarding issues or proposed changes?
• Do you have a contractual right to act in that way?
• Are you imposing any conditions on the other party and are those conditions necessary to protect your interests?
• Where a dispute has arisen, have you attempted to resolve the dispute (either directly with the other party, or through mediation)?
• Are you acting for some ulterior purpose?

A Dispute Resolution Mechanism

The internal procedure for handling complaints must be developed by the franchisor, set out in the franchise agreement and meet standards set out by the franchising code of conduct.

The code also sets out a procedure for resolving a dispute.

• Initially the party should write to the other party outlining the nature of the dispute, what their desired outcome is and what action will be used to settle the dispute.  If an outcome can’t be agreed on within 3 weeks, either party can refer the matter for alternative dispute resolution.
• Mediation is one type of alternative dispute resolution.  An independent professional mediator assists by facilitating discussion to achieve a mutually beneficial solution, or at least an outcome that is acceptable to both parties.
• Conciliation is another type of alternative dispute resolution, where a conciliator who is an independent party can suggest options, provide relevant information and encourage the parties to reach agreement.  Conciliators must remain impartial and are unable to give legal advice.  As with mediation, it is a flexible and confidential process which aims for amicable dispute resolution.

If these are not successful, legal action is available to a party.  This can be initiated either under the franchising code of conduct or under the franchising agreement.

The highly experienced team of business lawyers at Brander Smith McKnight are able to advise and advocate for you in any franchise dispute.

Cooling off Period

A cooling off period generally allows the buyer to terminate the agreement within 7 days after signing or paying money under the agreement, whichever comes first. The right to a cooling off period is only applicable to new franchise agreements and is not available to renewals, transfers or extensions of scope to an existing franchise agreement.  If money has been paid under the agreement to the franchisor, the franchisor may be able to keep some of the money if it is included in the franchise agreement and the money is for reasonable expenses.  Any refunds of payments must be made within 14 days.

Procedures for the Ending of the Franchise Agreement

This is generally dependent on the terms of franchise agreement.  As part of the disclosure document, the franchisor is required to outline the rights which the prospective franchisees will have at the end of their agreement.  The franchisee is entitled to a copy of the disclosure document once every 12 months.  The right to terminate a contract and the circumstances which this right will be available is determined by the terms of the franchise agreement.  The franchising code of conduct does set out processes if a franchisor seeks to terminate an agreement before it expires, such as the requirement to provide reasonable notice.

Extending a Franchise Agreement

A franchisee is not granted an automatic right to a further term after the completion of the initial term.  There may be in the agreement a clause which grants the right to an additional term upon the meeting of a certain condition.

The franchisor is required to notify the franchisee at least 6 months before the end of the term whether they intend to extend or grant another franchise agreement. If the term of the agreement was for less than 6 months, this notification is only required 1 month before the end of the term.

Sale of a Franchise

The sale of a franchise by a franchisee is generally subject to conditions in the franchise agreement.  Usually, the franchisor must give the franchisee consent to sell the franchise, which they may not unreasonably withhold.  If this consent is not given within a certain period of time, it will be presumed that the franchisor has given their consent.  The franchisor will then have 14 days in which it may revoke consent to the transfer of the franchise, where it is not able to revoke consent unreasonably.

The experienced business lawyers at Brander Smith McKnight are happy to assist you with all aspects of franchising agreements.

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