Understanding the Franchising Code of Conduct

Written on the 24 March 2008 by Elisabeth Ritchie

Franchising is a method of expanding your business. It involves the granting of rights to another person (the ‘Franchisee’) to distribute your products or services in conjunction with your name or mark and pursuant to a particular method or business plan.

Franchising in Australia has been widely accepted and seen rapid growth in recent years. The 2006 survey compiled by Lorelle Frazer of Griffith University for the Franchise Council of Australia confirmed that there were now approximately 960 business format franchise systems in Australia and the growth rate in franchising from 2002 to 2004 was about 13%. The franchising sector now turns over approximately $128 billon dollars or 14% of GDP. These figures are sure to have increased since then, meaning that the franchise sector is now an even bigger part of our economy.

Franchising is regulated by a specific legislation. The Franchising Code of Conduct (‘the ‘Code’) regulates parties to “franchise agreements”.

The definition of “franchise agreement” under the Code is broad and covers most arrangements involving the licensing of a name and operation of a business system. Whilst some parties prefer to have a simple “licence” or “distribution” agreement”, one or more of the elements listed below must be absent from such an arrangement for it to be outside the ambit of the Code.

• There is an agreement. This can be written, oral and or implied - usually there will be an agreement.
• That agreement grants 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 its associate.
• The business will be substantially or materially associated with a trademark, advertising or commercial symbol owned or specified by the franchisor or its associate.
• There is a requirement to pay a fee or other payment prior to or during the term of the agreement such as an initial capital investment fee, payment for goods or services, royalty fee or training fee.
• The Code governs certain conditions of the franchise agreement such as sale of franchised businesses, termination and dispute resolution. It does not govern commercial terms such as the amount of fees that will be charged, the level of support and the extent of assistance to be given, the length of the franchise agreement etc.

Under the Code franchisors are required to provide certain information to franchisees, namely;

• Disclosure documents to potential franchisees prior to their entry into a franchise or the renewal or extension of their franchise agreements, and to franchisees during the term of their agreements (upon request). The document sets out important information about the business, the franchisor, contact details of other franchisees, and costs associated with the franchise.
• Audited statements of any marketing or advertising funds run for the franchised business
• Copies of certain documents relating to the lease of premises by the franchisees

It is important that you have an understanding of this code before you sign any contracts or hand over any money to a franchisor.  If the franchisor does not follow the regulations listed in the Code, it is recommended that you seek further advice from your lawyer or suspend your negotiations with them.

For more information on the Code, visit the Franchise Council of Australia.

Prepared by Elisabeth Ritchie, Partner, Home Wilkinson Lowry

www.hwl.com.au  

Elisabeth Ritchie is the head of the firm's Franchising and Licensing Cell. The firm provides specialist advice to both franchisors and franchisees. Elisabeth regularly advises in relation to the set up and purchase of franchises, as well as presenting franchise workshops and seminars.
For further details please contact Elisabeth by email here or (02) 9334 8649.