Country Review — Australia

Major Recent Activity in Australia in the Franchising Sector

There are about 73,000 franchised businesses in Australia turning over around $131 billion and employing about 400,000 people. Recent annual revenue growth has been reported to be in excess of 10 per cent.

Four main areas of growth are being reported:

aged care services, primarily because of Australia’s ageing population demonstrated in a recent Productivity Commission report which stated that the number of people aged 75 years and more is expected to rise by 4 million until 2060 increasing from 6.4 per cent of the population to 14.4 per cent of the population;

courier services, given the growth in online spending (now about 6.4 per cent of traditional retail spending);

health, given obesity problems in Australia, thereby increasing demand for gymnasiums and personal trainers; and

food retail, with a particular growth in Mexican food outlets and frozen yoghurt outlets.

The above creates plenty of opportunity for lawyers who practice in franchising law.

Australian franchising legal and regulatory framework

Since 1998, Australia has had franchising specific federal regulation governing the conduct of participants in the sector. The Trade Practices (Industry Codes – Franchising) Regulations 1998 (Cth) (the Franchising Code) is a federal regulation that is underpinned by the Competition and Consumer Act 2010 (Cth) (CCA), the effect being that any violation of the Franchising Code will be deemed to be a violation of the CCA, thereby allowing courts to impose a wide range of civil remedies.

Although there are some very limited exceptions to the operation of the Franchising Code, readers should assume that the Franchising Code applies to any franchising relationship that involves the conduct of business in Australia. It therefore covers a foreign franchisor granting a unit franchise or master franchise to a person under which they are given the right to operate the franchised business in Australia.

Fundamental to the applicability of the Franchising Code is the existence or proposed existence of a franchise agreement. This term is defined as an agreement that may be in writing, oral and/or implied and contains the following elements:

a person (the franchisor) grants to another person (the franchisee) the right to carry on the business of offering, supplying or distributing goods or services in Australia under a system or marketing plan substantially determined, controlled or suggested by the franchisor or an associate of the franchisor;

the operation of the business will be substantially or materially associated with a trademark, advertising or a commercial symbol owned, used or licensed by the franchisor or an associate of the franchisor or specified by the franchisor or an associate or the franchisor; and

under which, before starting business or continuing the business, the franchisee must pay or agree to pay money to the franchisor or an associate of the franchisor (such as franchise fees or royalties).

A non-exhaustive summary of the key parts of the Franchising Code is as follows:

The requirement for franchisors to maintain a disclosure document and update it at least annually. The Franchising Code mandates 28 items of disclosure, the form in which disclosure is to be made and the time by which disclosure is to be made (in substance at least 14 days before a franchisee signs a franchise agreement or pays any non-refundable money).

An obligation to give an existing franchisee a current disclosure document within 14 days of request by the franchisee.

A prohibition on franchisors from entering into, renewing, extending, or extending the scope of a franchise agreement or receiving a non refundable payment unless the franchisor has received from the franchisee or prospective franchisee a written statement that the franchisee or prospective franchisee has received, read and had a reasonable opportunity to understand the disclosure document and the Franchising Code.

A requirement that before a franchise agreement is entered into, the franchisor must have received from the prospective franchisee a statement as to whether or not the franchisee has received legal, accounting and/or business advice.

The granting to new franchisees a “cooling off” right to elect not to proceed with the franchise transaction, which must be exercised within seven days of signing the franchise agreement.

A requirement that franchisors ensure that franchisees obtain copies of or sufficient details of any relevant property lease.

A prohibition of any provisions in a franchise agreement requiring a franchisee to sign a general release of the franchisor from liability towards the franchisee or to waive any verbal or written representation made by the franchisor.

As regards marketing or other co-operative funds, the Franchising Code requires franchisors to prepare and give to franchisees an annual financial statement detailing all of the fund’s receipts and expenses for the past financial year within four months after the end of the financial year and, unless franchisee vote otherwise, have the statement audited by a registered company auditor within four months after the end of the financial year to which it relates.

An obligation to make ongoing disclosure to franchisees within 14 days of the happening of key events such as a change in majority ownership or control of the franchisor, judgments against the franchisor in relation to certain types of civil claims, proceedings brought by public agencies against the franchisor, certain unsatisfied judgments, any insolvency events, changes of ownership of key intellectual property and any undertaking given to the Australian regulator, the Australian Competition and Consumer Commission (ACCC).

A prohibition against unreasonably withholding consent to a transfer or novation of a franchise or franchise agreement.

A prohibition against terminating a franchise agreement arising from a franchisee breach, unless notice of breach has been given to the franchisee and the franchisee has not remedied the breach within a reasonable time (it should be noted that this prohibition does not apply in the case of six designated serious events such as fraud by the franchisee, endangering public health or safety, serious criminal convictions, losing a licence to conduct the business or voluntary abandonment of the franchised business.)

The requirement for franchise agreements to contain a dispute resolution process that is consistent with that in the Franchise Code.

On the whole, the franchise sector has coped well with the Franchising Code. Certain flaws have been recognised over time and it is expected that by the commencement of 2015, many of those flaws will be addressed.

Proposed changes to Franchising Regulation in Australia

In April 2014, following a review of the Franchising Code conducted in 2013, the Australian government announced that a new franchising code (Proposed Code) would come into existence on 1 January 2015. The government also announced that there would be amendments to the CCA to allow for pecuniary penalties of up to AU$51000 to be imposed for certain breaches of the Proposed Code.

At the same time it released an “exposure draft” of the Proposed Code for comment by interested persons.

Since April 2014, various submissions have been made in relation to the exposure draft of the Proposed Code. Feedback from the Australian Department of Treasury suggests that, although there might be some tinkering to the drafting of the Proposed Code, the substance of the Proposed Code as set out in the exposure draft will not change.

A non-exhaustive summary of the key aspects of the Proposed Code are as follows.

It will impose a duty on franchisors and franchisees to act in good faith towards each other in accordance with the common law in Australia. A breach of this duty could result in a pecuniary penalty of up to AU$51,000.

Restraint provisions in franchise agreements will not be enforceable by a franchisor if:

a franchisee sought to renew the franchise agreement on substantially the same terms;

the franchisee was not in breach of the franchise agreement;

the franchisee has not infringed the intellectual property of the franchisor during the term of the agreement;

the franchisor does not renew the agreement; and

the franchisee sought compensation as a result of the non-renewal, but no proper compensation was paid or the franchise agreement did not give the franchisee a right to compensation.

Franchisors will be required to disclose any incentive or financial benefit that may be received under or in relation to the lease of premises from where the franchised business will be conducted.

Franchisors will be required to disclose the rights of the franchisor and the franchisee to conduct and benefit from online sales.

Franchisors will be required to maintain a separate bank account relating to the operation of marketing funds.

A franchisor must give a prospective franchisee a prescribed risk statement at an early stage in the communications between the franchisor and prospective franchisee.

Franchisors are prohibited from imposing significant capital expenditure unless:

it was disclosed in the disclosure document at the outset;

it is to be incurred by and approved by a majority of franchisees in the network;

it is required to comply with a legal requirement; or

the franchisor can demonstrate a business case for capital investment in the franchised business.

In multi-tiered franchise networks (where there is a master franchisee), the previous requirement that the unit franchisee be provided with either a joint disclosure document of the franchisor and master franchisee or individual disclosure documents of the franchisor and master franchisee, has been removed – instead, the unit franchisee will only receive the master franchisee’s disclosure document, but with enhanced disclosure about the relationship between the franchisor and the master franchisee.

Pecuniary penalties of up to AU$51,000 can be imposed for certain breaches of the Proposed Code – this would entail the ACCC commencing court proceedings to have those penalties imposed.

The ACCC will be given power to issue “infringement notices” of up to AU$8,500 for certain breaches of the Proposed Code. In contrast with the pecuniary penalties, this is an administrative right of the ACCC and the recipient of the infringement notice will either have to pay the amount or commence legal proceedings to have it set aside.

Likely future developments in the franchising sector in Australia

Apart from the Proposed Code referred to above, the major potential legal development that may affect franchisors in Australia is the proposed extension of existing “unfair contracts” laws in the Australian Consumer Law (ACL) to business-to-business transactions.

The ACL, which only applies to consumer transactions, renders “unfair terms” in “standard form contracts” void.

In the future, this may apply to franchise agreements if they have the aspects of a standard form contract. The ACL provides that in determining whether a contract is a standard form contract, a court may take into account such matters as it thinks relevant, but must take into account the following:

whether one of the parties has all or most of the bargaining power relating to the transaction;

whether the contract was prepared by one party before any discussion relating to the transaction occurred between the parties;

whether another party was, in effect, required either to accept or reject the terms of the contract in the form in which they were presented;

whether another party was given an effective opportunity to negotiate the terms of the contract; and

whether the terms of the contract take into account the specific characteristics of another party or the particular transaction.

The ACL provides that a term is unfair if:

it would cause a significant imbalance in the parties’ rights and obligations arising under the contract; and

it is not reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term; and

it would cause detriment (whether financial or otherwise) to a party if it were to be applied or relied on.

If these laws are introduced, franchisors may either change the way in which they deal with franchisees by being more willing to negotiate terms in the hope that their agreement will not be considered a standard form contract, remove any terms considered to be unfair or leave unfair terms in the agreement, but knowing there is a chance a court may declare them void.

A final announcement from the Australian government is expected in late 2014.