The franchise agreement

What a franchise agreement includes

The franchise agreement is the most important document in a franchising relationship. It sets out the rules that both the franchisor and franchisee have agreed to.

It provides answers to questions that occur in a franchising relationship, such as:

• What fees and payments does the franchisee owe?
• What is the term of the franchise agreement?
• What are the rights and restrictions when using the franchisor’s branding and other intellectual property?
• Does the franchisee have to buy certain equipment and products for the business?
• Does the franchisee have to participate in promotions and local area marketing?
• What rules must the franchisee follow if they want to sell their franchised business?
• How can the franchisee and franchisor settle disputes?
• When can the franchise agreement be terminated?
• What rules must the franchisee follow when the franchise agreement ends?

What is required to form a franchise agreement

Usually, there is a franchise agreement if all these features are present in an arrangement:

1. One person (the franchisor) grants another person (the franchisee) the right to carry on a business in Australia supplying goods or services under a specific system or marketing plan. The business is substantially determined, controlled, or suggested by the franchisor or its associate.
2. The business is associated with a particular trademark, advertising or a commercial symbol owned, used, licensed, or specified by the franchisor or its associate.
3. The franchisee must make, or agree to make, certain types of payments to the franchisor or its associate, before starting or continuing the business.

Franchisees usually enter a franchise agreement by signing a written document, but a franchise agreement can also be oral or implied.

The franchise agreement that franchisors give to potential franchisees during disclosure should be in its final form.

What is allowed in a franchise agreement

Choosing to sign the agreement means franchisees agree to follow what it says. Often franchise agreements favour the franchisor because it’s usually the franchisor who has written the agreement. Generally, this is not against the law.

There are laws that put some limits on what can be put in franchise agreements including:

• competition laws such as laws about resale price maintenance and exclusive dealing
• consumer laws such as unfair contract terms which apply to small business standard form contracts
• the Franchising Code of Conduct, such as not allowing general releases of liability that favours the franchisor.

The franchising code limits what franchisors can put into a franchise agreement, in areas including:

• terms that prevent a franchisee from working elsewhere once the agreement ends or if it is not renewed or extended, such as restraint of trade clauses   
• terms about who pays for legal costs and settling disputes
• the ability of franchisors to make changes to franchise agreements that apply retrospectively
• general releases of liability that favour the franchisor
• waivers of any statements the franchisor makes to franchisees, either verbally or in writing.

The franchising code also includes rules about what should be in a new vehicle dealership agreement.

If you’re a franchisor, you must not include terms in a franchise agreement that are prohibited under the franchising code. If you do so you may face penalties.

Protection from unfair contract terms

It’s common for a franchise agreement to be a standard form small business contract, even if the franchisee can negotiate minor changes to terms. Therefore, most franchisees and master franchisees in Australia are likely to be protected by the unfair contract terms laws. These protections make it unlawful for businesses to offer or enter into a small business or consumer contract containing unfair contract terms. Significant penalties can apply.

Terms in a standard form small business or consumer contract are unfair if they:

• cause a significant imbalance in the rights and obligations of the parties under the contract,
• are not reasonably necessary to protect the legitimate interests of the party advantaged by the term, and
• would cause detriment to the other party if applied or relied upon.

We have a guide on unfair contract terms in franchise agreements to help with identifying unfair terms.

Changing a franchise agreement

Before it is signed

A potential or existing franchisee can negotiate changes to a franchise agreement before they sign, but the franchisor doesn't have to agree.

During the disclosure period

A franchise agreement must be given to potential franchisees in its final form, apart from some minor changes. Minor changes during disclosure are allowed, but these are limited to:

• giving effect to a franchisee’s request
• filling in required particulars
• reflecting changes of address or other circumstances
• making a minor clarification
• correcting errors or references.

After an agreement has been signed

After an agreement has been signed, the franchisor usually can’t change a franchise agreement unless the franchisee agrees, or unless the agreement allows for this.

One party making changes to an agreement after it has been signed is sometimes called unilateral variation. If a franchisor does this, they must include in the disclosure document:

• information about variations that have happened in the last 3 financial years
• when the franchise agreement may be unilaterally varied in the future.

Under the code, a franchisor cannot change a franchise agreement to apply to previous situations or to deal with the past, unless the franchisee agrees to this in writing.

Franchisees should get legal advice before signing to understand what changes a franchisor can make.