In Australia since 1998 any franchisor wishing to enter into a contractual agreement with a franchisee must provide the franchisee with a document in four sections which include:
- Disclosure Document in the format required by the Franchising Code of Australia (Franchise Code)
- Copy of the Franchising Code
- Receipt document to be signed by the applicant franchisee
- Franchise Agreement
This article will provide an overview of important details that should be considered for inclusion in an Australian Franchise Agreement.
There are many business deals which require a set of contract terms but do not need the parties to sign a Franchise Agreement. However, once the business deal fits within the definition of a franchise set out in the Franchise Code each of the four documents set out early in this article must be prepared.
Who must receive a Franchise Agreement
Until March 2008 an overseas franchisor seeking to appoint an Australian business to operate the franchise in Australia was not included in the Franchise Code definition of a franchise. These negotiations are now included in the definition so any international franchisor must be aware and be prepared to complete a Franchise Agreement with an Australian Master Franchisee and also prepare sub franchise documents for each unit franchisee. During negotiations a draft of the Franchise Agreement can be exchanged. When negotiations have been completed the four documents listed above including a Franchise Agreement ready to be signed need to be provided to the applicant franchisee allowing a minimum of 14 days for the document to be signed. After the Franchise Agreement is signed a cooling off right of a further seven days will also apply. The franchisor may only recover reasonable expenses from the franchisee if those expenses and their method of calculation have been set out in the Franchise Agreement.
Once the Franchise Agreement has been signed by all parties, a copy should be returned to the franchisee. At present no Federal or State fees or stamp duty is charged on a Franchise Agreement. The Franchise Agreement does not have to be registered with any Government organisation. As the Franchise Code can be updated by the Federal Government creating changes in the law which may affect the rights of a franchisee, a franchisor should review each Franchise Agreement on a regular basis. Though it may cause administrative complications, it is permissible for a franchisor to enter into a Franchise Agreement with various franchisees setting out different obligations and conditions in each document.
The Courts of Australia have power to terminate or vary the terms of a Franchise Agreement in the event of a Court dispute where it is found that the obligations are misleading, deceptive, unconscionable or in breach of the Franchise Code. Consequently careful drafting of Franchise Agreements is essential.
How much details is required in the Franchise Agreement
In Australia it is usual for a Franchise Agreement to be very detailed and will usually be between 60 to 100 pages in length.
In Australia a franchisor grants a franchisee either an exclusive or non-exclusive franchise right to operate a franchise business, the award of a franchise right must be carefully worded to comply with the Franchise Code, Federal Australian laws and Australian State and Territory laws. Unlike the United States of America and some other countries, the Australian States and Territories currently do not have specific franchise laws but do require certain fair trading, health and safety rules and business licensing.
The franchise must set an initial term which is usually between five to 10 years and will often include a right for the franchisee to request one or more additional extensions of the Agreement. Traditionally the right of a franchisee to gain an additional franchise term is subject only to written request and full compliance with the current Franchise Agreement.
Many terms in a Franchise Agreement will depend on the scope of the franchise, whether it is a retail, wholesale or manufacturing business or providing services which or without leased business premises. In Australia it is expected that each of these requirements will be set out in detail within the Franchise Agreement rather than within an operations manual.
The obligations and standards required of a franchisee are set out in the Franchise Agreement including payment, training, record keeping, insurance, protection of intellectual property, non-competition and confidential information obligations.
It is usual that at the commencement of the franchise that the franchisee pays an initial capital payment to acquire the grant of the franchise and an ongoing royalty as a percentage of gross income and initial fee for training and contributions to a group marketing fund based on a percentage of gross income. There are many variations to this arrangement. It is permissible to substitute the franchise royalty for the payment for goods or services, set a predetermined weekly or monthly payment, set payments based on net income and many other alternatives.
To maintain standards and performance a franchisor may set minimum compliance obligations and audit information and performance.
A Franchise Agreement may be brought to an end if a franchisee is in breach of obligations set out in the Franchise Agreement. The Franchising Code restricts the right of a franchisor to immediately terminate (clause 23 of the Franchising Code) and otherwise a termination due to a breach must be in writing and provide a reasonable notice period of up to 30 days to rectify the breach. In addition clause 22 of the Franchising Code provides circumstances where termination can occur without a breach and without the consent of the franchisee.
In Australia if the franchisee disputes the demands of a franchisor, the franchisee may seek mediation of the dispute which will follow the process set out in the Franchising Code. Electing to engage in the mediation process does not stop the franchisor taking separate legal action in the Australian Courts.
Franchisors can include an obligation for the franchisee to indemnify the franchisor for a wide range of risks. However the Franchising Code prohibits a franchisee from giving a general release to the franchisor or waiving any verbal or written representations made by a franchisor before or after signing the Franchise Agreement. A franchisor is also prohibited from attempting to stop franchisees or prospective franchisees from forming a franchisee association.
It is usual that a franchisee will contribute a portion of its revenue to a joint franchise system marketing fund. If required other co-operative funds can also be established and may include pooled funds for national conferences, technology development and other purposes. Auditing requirements are set out in clause 17 of the Franchise Code.
If a franchisee wishes to sell its franchise business, after giving written notice a franchisor must not unreasonably withhold consent and if it stays silent will be treated as giving consent within 42 days. It is important that the franchisor set out its requirements for reasonable consent. A franchisor can charge costs and may charge a percentage of the sale price of the franchise business or other formula.
In Australia the principal clauses of the Franchise Agreement are supplemented by schedules which contain the specific details relating to the new franchisee and any special conditions which may be negotiated.
About Alan Branch
Alan is an experienced consultant, commercial lawyer and franchise expert recognised for his skill in negotiating and completing business set up and expansion projects.
Phone (0) 4133 524 134