10 Things Every Franchisor Should Know – Part 1

By Naomi Schulte • In Commercial LawComments Off on 10 Things Every Franchisor Should Know – Part 1

In Australia, the parties to a franchise agreement are legally obligated to comply with the Franchising Code of Conduct (“Code”).  The Code imposes many obligations on franchisors, of which are in addition to their broader obligations under the Competition and Consumer Act 2010 (“Act”).

Franchisors should be aware of exactly what is required of them in order to comply with the Code.  Here is Part 1 of our two part article, setting out the first 5 things that every franchisor should know:

1. GOOD FAITH

  • A franchisor much act in good faith when dealing with a prospective or existing franchisee.
  • Acting in good faith under the Code means to act reasonably and not exercise powers arbitrarily.
  • Conduct that is not in good faith includes dishonest conduct, conduct that has an ulterior motive or conduct that seeks to deny the franchisee benefits under the franchise agreement.
  • This obligation extends to pre-contractual negotiations, the performance of the contract, dispute resolution and the expiry or termination of a franchise agreement.

2. DISCLOSURE

2.1 – Information Statement

A Franchisor must provide an Information Statement to a prospective franchisee after they apply or express an interest in acquiring a franchised business and prior to them entering into a franchise agreement.   

2.2 – Disclosure Document

  • A franchisor must provide a disclosure document, a copy of the franchise agreement and the Code to a prospective franchisee at least 14 days before they enter into a franchise agreement or pay any money to the franchisor.
  • The disclosure document must include the information prescribed under the Code and be in a specific format.
  • A franchisor must not enter into, extend, renew or transfer a franchise agreement without receiving a written statement from the franchisee that they have received, read and understood the disclosure document and the Code.
  • A franchisor must also not enter into a franchise agreement before they receive a written statement from an independent legal or business advisor that they have provided advice to the franchisee.
  • A franchisor is obligated to update the disclosure document within 4 months after the end of each financial year during the term of the franchise agreement.

3. THE AGREEMENT

A franchisor should ensure that the franchise agreement complies with the following requirements:

  • A franchisee must not be restricted or impaired from forming an association with other franchisees.
  • A franchisee cannot be required to provide any release of the franchisor from liability.
  • The agreement must not contain a waiver of any representation that a franchisor may have made.
  • The franchise agreement must not require mediation to be conducted, or actions or proceedings to be brought outside the State or Territory of the franchisee, or outside Australia.
  • A franchisee cannot be required to pay the franchisor’s costs to settle a dispute.

4. MARKETING FUNDS

  • A franchisor must provide transparency in relation to the use of money for marketing and advertising and must maintain a separate bank account for the marketing fund.
  • A franchisor must contribute to the fund on the same basis as other franchisees for each company-owned store that the franchisor operates.
  • The money in the marketing fund may only be used to meet certain defined expenses.

5. CAPITAL EXPENDITURE

Franchisors cannot impose significant capital expenditure on franchisees, except in circumstances where the expenditure:

  • Was detailed in the disclosure document provided to the franchisee before entering into or renewing the franchise agreement;
  • Will be incurred by a majority of franchisees and a majority have approved the expense;
  • Is required to comply with legislative obligations;
  • Has been agreed to by the franchisee; and
  • Is considered necessary by the franchisor as a capital investment in the franchised business and is justified by a statement setting out the reasons for making the investment, the capital expenditure required, the anticipated outcomes and benefits and expected risks associated with the investment.

Stay tuned for Part 2.  For further information and assistance, please contact Bell Legal Group on (07) 5597 3366 or email nschulte@belllegal.com.au

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