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Contract law and the franchise agreement
As the franchise agreement is a contract, contract law is important in franchising. If a franchisor or franchisee doesn't follow the franchise agreement, this may mean a breach of contract law.
If the franchisor hasn’t followed the franchise agreement, it doesn’t necessarily mean that laws have been broken. It can mean that the franchisor has breached their contract with the franchisee.
If you think the other party to your contract hasn’t followed the agreement and you want to make them follow, you need to take your own action. You can ask the Australian Small Business and Family Enterprise Ombudsman to help you begin an alternative dispute resolution process. You may want to get independent advice from a lawyer.
Laws affecting franchising responsibilities and rights
Franchisors and franchisees have rights and obligations under the following laws:
The ACCC regulates these laws. If the laws are not followed, penalties can apply.
Franchisees and franchisors can also take private legal action against each other under these laws.
Franchisors and franchisees may have obligations under other legislation, such as:
- the Fair Work Act 2009
- the Australian Securities and Investments Act 2001
- Australia’s tax laws
- state and territory licensing schemes.
The franchising code
All participants in franchising must follow the Franchising Code of Conduct.
The franchising code aims to address problems that arise because of the power imbalance between franchisors and franchisees. Franchisees usually have little say in major decisions affecting their business.
Rules in the franchising code
The code includes rules.
The franchisor must give certain information and documents to a potential franchisee before a franchise agreement is signed.
The franchisor must give the franchisee specific information and documents during the franchise agreement.
- Franchisees can back out of the franchise agreement within a certain timeframe, known as the cooling-off period.
- Franchisors and franchisees must act in good faith towards each other.
- Franchisors and franchisees can resolve a franchising dispute without going to court.
- Specific steps must be followed if either the franchisor or franchisee want to end the franchise agreement early
- Franchisors must create a franchise profile and publish key disclosure information on the franchise disclosure register before 14 November 2022.
When the franchising code doesn't apply to franchising agreements
All or some parts of the franchising code may not apply to your agreement or circumstances. If you are unsure which provisions of the code apply to your agreement, you should seek legal advice.
Agreements before 1 July 2021
If you did not sign, extend or renew your agreement on or after 1 July 2021, some of the newest provisions of the code may not apply to you.
New vehicle dealership agreements
There are specific parts of the code that only apply to new vehicle dealership agreements. These are agreements where one party is a motor vehicle dealership that deals mostly in new passenger vehicles or new light goods vehicles, or both.
You can find out about the specific rules that apply to these agreements in the Franchising Code of Conduct.
When another mandatory industry code applies
The franchising code doesn't apply to a franchise agreement when another mandatory industry code applies, for example the Oil Code of Conduct.
If sales covered by the agreement are less than 20% of turnover
The franchising code doesn't apply to the agreement if the agreement is for goods or services that:
- are substantially the same as those supplied by the franchisee for at least two years immediately before entering the franchise agreement, and
- are likely to provide no more than 20% of the franchisee’s gross turnover for goods or services in the first year of the franchise.
Cooperatives registered under a state or territory law
The franchising code doesn't apply to franchise agreements that form part of arrangements under which the franchisee is a member of a cooperative registered under the Cooperatives National Law or the Co-operatives Act 2009 (WA).
The franchising code doesn't apply to franchise agreements that form part of arrangements under which the franchisee is a member with voting rights of a mutual entity.
Case study of an agreement that isn't covered by the franchising code
A retail business “Waterpower” sells different kinds of motorised boats, and has been operating for about 10 years. Waterpower usually sells 60 motor boats a year. To expand its range Waterpower signs an agreement with a manufacturer to stock a new brand of motor boats.
Under the agreement Waterpower sells 5 of the new motor boats a year, using the branding and logos of the manufacturer. Waterpower pays a fee to the manufacturer to help with marketing.
This agreement is not captured under the code because:
- the agreement is for the kind of products Waterpower was already selling before it signed the agreement (motor boats)
- Waterpower had been selling motor boats for more than 2 years before they signed the agreement
- Waterpower’s sales of the new motor boat are likely to provide no more than 20% of gross turnover for sales of motor boats in the first year of the agreement.
Competition and consumer laws
Businesses in Australia must follow competition and consumer laws of Australia. These national laws are known as the Competition and Consumer Act 2010 and include the Australian Consumer Law. They apply to franchisors and franchisees.
Some of these laws apply specifically to small businesses and so include those franchisees that are small businesses.
Competition and consumer laws that apply to franchising include:
- Australian Consumer Law, requiring businesses to provide consumer guarantees for most goods and services they sell
- laws that prevent parties from including unfair terms in contracts, including franchising agreements
- laws prohibiting franchisors engaging in misleading and deceptive conduct or unconscionable conduct when dealing with franchisees
- laws that prevent competition from being substantially lessened, where franchise supply arrangements amount to exclusive dealing
- laws that say that documents or information given to franchisees by a franchisor mustn't contain information that is misleading or deceptive.
You can read more about the rights and protections that businesses have under the Competition and Consumer Act 2010.