Annotated franchising code of conduct 9780409342277, 0409342270

Table of contents :
Full Title
Copyright
Foreword
Publisher’s Note
Acknowledgments
Table of Cases
Table of Contents
Part 1 Introduction
Introduction
The Regulation of Franchising in Australia
Part 2 Competition and Consumer (Industry Codes—Franchising) Regulation 2014
Competition and Consumer (Industry Codes—Franchising) Regulation 2014
Commentary on Regulation 3
Commentary on Regulation 4
Commentary on Regulation 5
Commentary on Clause 2
Commentary on Clause 3
Commentary on Clause 4
Commentary on Clause 5
Commentary on Clause 6
Commentary on Clause 7
Commentary on Clause 8
Commentary on Clause 9
Commentary on Clause 10
Commentary on Clause 11
Commentary on Clause 12
Commentary on Clause 13
Commentary on Clause 15
Commentary on Clause 16
Commentary on Clause 17
Commentary on Clause 18
Commentary on Subdivision C and Clause 19
Commentary on Division 3 and Clause 20
Commentary on Clause 21
Commentary on Clause 22
Commentary on Clause 23
Commentary on Clause 24
Commentary on Clause 25
Commentary on Division 5
Commentary on Clause 26
Commentary on Clause 27
Commentary on Clause 28
Commentary on Clause 29
Commentary on Clause 31
Commentary on Clause 32
Commentary on Clause 33
Commentary on Clause 39
Commentary on Item 7
Commentary on Item 12
Commentary on Item 17
Commentary on Item 21
Part 3 Case Summaries
Case Summaries
Index

Citation preview

Annotated Franchising Code of Conduct

Stephen Giles BEcLLB (Hons), LLM (Monash) Partner Norton Rose Fulbright Australia

LexisNexis Butterworths Australia 2015

AUSTRALIA

ARGENTINA AUSTRIA BRAZIL CANADA CHILE CHINA CZECH REPUBLIC FRANCE GERMANY HONG KONG HUNGARY INDIA ITALY JAPAN KOREA MALAYSIA NEW ZEALAND POLAND SINGAPORE SOUTH AFRICA SWITZERLAND TAIWAN UNITED KINGDOM USA

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National Library of Australia Cataloguing-in-Publication entry

Author: Title: Edition: ISBN: Notes:

Giles, Stephen. Annotated franchising code of conduct. 1st edition. 9780409342260 (pbk). 9780409342277 (ebk). Includes index. CIP entry pending with National Library at time of publication.

© 2015 Reed International Books Australia Pty Limited trading as LexisNexis. This book is copyright. Except as permitted under the Copyright Act 1968 (Cth), no part of this publication may be reproduced by any process, electronic or otherwise, without the specific written permission of the copyright owner. Neither may information be stored electronically in any form whatsoever without such permission. Inquiries should be addressed to the publishers. Typeset in Myriad Pro and Minion Pro. Printed in Australia. Visit LexisNexis Butterworths at www.lexisnexis.com.au.

Foreword The franchise sector makes an outstanding contribution to the Australian economy, directly employing over 460,000 people in 1160 franchise systems and 79,000 franchise units, with an annual turnover of $144 billion, according to the Griffith University Franchising Australia Survey. The Franchising Code of Conduct underpins Australian franchising, and has provided a framework for Australian franchising to grow and develop over the past 20 years. It helps ensure franchisees can invest into franchised businesses with confidence. The Code regulates how franchises are marketed, sold, commenced, established, operated, managed, transferred, extended and ended. The Code contains quite extensive compliance obligations, with penalties and other sanctions applying to companies and individuals involved in any breach of the law. As a consequence it is essential for everyone involved in franchising to have a good working knowledge of the Code. Franchising is a way of doing business that cuts across all industry sectors, and applies to large and small businesses alike. The Code applies in the same manner whether the franchise is for a lawn mowing or courier franchise, a bedding retailer, a fast-food restaurant, a supermarket or convenience store, a motor vehicle repair business, a car dealership or a clothing retailer. There are no distinctions between investments of $10,000 and $2,000,000, or between experienced business owners and first time franchisees. The Code attempts to cope with the challenge of covering all industry sectors and all investment levels, but invariably some of the provisions require practical interpretation to ensure the Code’s stated purpose is achieved. The Annotated Franchising Code of Conduct is a detailed guide to the

development, drafting and interpretation of the Franchising Code of Conduct, and the regulation of Australian franchising in a broader context. It explains the operation of the Code, assists in interpreting the various Code requirements, and includes case references and helpful commentary. It will be useful to lawyers and non-lawyers alike. The author, Stephen Giles, has been at the forefront of the development of the Code, having assisted the Franchise Council of Australia in all dealings with government since the Code was first enacted in 1998. He is recognised by the International Who’s Who of Franchise Lawyers, Chambers Legal Guide and Best Lawyers as Australia’s leading franchising lawyer, and is the former chairman and current director of the FCA. In 2009 he was inducted into the Australian Franchising Hall of Fame in recognition of his outstanding contribution to Australian franchising. The Franchise Council of Australia is pleased to endorse the Annotated Franchising Code of Conduct. The FCA believes it will be a valuable resource for all those involved in franchising, as it is a simple and practical guide to the interpretation of the Code that will be relevant to everyone from franchising lawyers to business executives, bankers, consultants and students alike. Michael Paul CEO and Founder — Pack & Send Chairman — Franchise Council of Australia

Publisher’s Note Legislation The publisher, author and endorsers of this publication each excludes liability for loss suffered by any person resulting in any way from the use of, or reliance of this publication. © LexisNexis. The legislation reproduced in this work does not purport to be an official or authorised version.

Contents Foreword Publisher’s Note Detailed Table of Contents Acknowledgments Table of Cases Part 1

Introduction

Part 2

Competition and Consumer (Industry Codes—Franchising) Regulation 2014

Part 3

Case Summaries

Index

Detailed Table of Contents Foreword Publisher’s Note Contents Acknowledgments Table of Cases Part 1

Introduction Introduction The Regulation of Franchising in Australia

Part 2

Competition and Consumer (Industry Codes—Franchising) Regulation 2014 Competition and Consumer (Industry Codes—Franchising) Regulation 2014 Commentary on Regulation 3 Commentary on Regulation 4 Commentary on Regulation 5 Commentary on Clause 2 Commentary on Clause 3 Commentary on Clause 4 Commentary on Clause 5 Commentary on Clause 6 Commentary on Clause 7 Commentary on Clause 8

Commentary on Clause 9 Commentary on Clause 10 Commentary on Clause 11 Commentary on Clause 12 Commentary on Clause 13 Commentary on Clause 15 Commentary on Clause 16 Commentary on Clause 17 Commentary on Clause 18 Commentary on Subdivision C and Clause 19 Commentary on Division 3 and Clause 20 Commentary on Clause 21 Commentary on Clause 22 Commentary on Clause 23 Commentary on Clause 24 Commentary on Clause 25 Commentary on Division 5 Commentary on Clause 26 Commentary on Clause 27 Commentary on Clause 28 Commentary on Clause 29 Commentary on Clause 31 Commentary on Clause 32 Commentary on Clause 33

Commentary on Clause 39 Commentary on Item 7 Commentary on Item 12 Commentary on Item 17 Commentary on Item 21 Part 3

Case Summaries Case Summaries

Index

Acknowledgments Commonwealth Legislation © Commonwealth of Australia This product includes material supplied under licence to LexisNexis by the Commonwealth of Australia, which retains the copyright to that material pursuant to Copyright Act 1968 (Cth).

Table of Cases References are to paragraph numbers A A Schroeder Music Publishing Co Ltd v Macaulay [1974] 3 All ER 616; [1974] 1 WLR 1308 …. 23.4 ACCC v 4WD Systems Pty Ltd [2003] FCA 850 …. 5.9 ACCC v Kyloe Pty Ltd [2007] FCA 1522 …. 5.9 Agro Holdings Ltd v Flexi-Coil (Aust) Pty Ltd [1999] FCA 1658 …. 5.10 Alstom Ltd v Yokogawa Australia Pty Ltd (No 7) [2012] SASC 49 …. 6.8 Amalgamated Investment and Property Co Ltd v John Walker & Sons Ltd [1976] 3 All ER 509; [1977] 1 WLR 164 …. 25.1 Amoco Australia Pty Ltd v Rocca Bros Motor Engineering Co Pty Ltd (1973) 133 CLR 288; 1 ALR 385; 47 ALJR 681; BC7300033 …. 23.4 Ankar Pty Ltd v National Westminster Finance (Aust) Ltd (1987) 162 CLR 549; 70 ALR 641; 61 ALJR 245; BC8701770 …. 28.1 Apple Computer Australia Pty Ltd v Mekrizis and Others (2003) 44 ACSR 518 …. 5.9 Attorney-General (Cth) v Adelaide Steamship Co Ltd (1913) 18 CLR 30; [1913] AC 781; (1913) 19 ALR 405; [1911-13] All ER Rep 1120 …. 23.4 Austra Tanks Pty Ltd v Running [1982] 2 NSWLR 840; (1983) ATPR ¶40340; (1983) NSW ConvR¶55–130; (1983) Q ConvR¶54–094 …. 23.4 Australian Blue Metal Ltd v Hughes [1963] AC 74, [1963] ALR 113 …. 25.1 Australian Competition and Consumer Commission v Simply No-Knead (Franchising) Pty Ltd (2000) 104 FCR 253; 178 ALR 304; [2000] FCA 1365; BC200005673 …. 23.4

Australian Solar Mesh Sales Pty Ltd v Tomlin Industries Pty Ltd (1991) 2 IPR 447; (1991) AIPC ¶90–824; (1991) ASC ¶56–091; BC9103301 …. 23.4 Automasters Australia Pty Ltd v Bruness Pty Ltd & Anor [2002] WASC 286; [2004] WASCA 229 …. 5.9 B Barber v Pure & Natural (Aust) Pty Ltd (1994) V ConvR 54–490 (Barber) …. 23.4, 25.1 Barlow v Neville Jeffress Advertising Pty Ltd (1994) 4 TasR 391; (1995) ATPR ¶41–376; BC9400495 …. 23.4 Bingham v 7-Eleven Stores Pty Ltd [2003] QCA 402; BC200305270 …. 27 Budget Transport Industries Pty Ltd v Giboland Pty Ltd (1986) ATPR ¶40– 684; ASC ¶55–479 …. 23.4 Burger King Corporation v Hungry Jacks Pty Ltd [2001] NSWCA 187 …. 6.8 Butterworth v Lezemo Pty Ltd (1983) 8 ACLR 737 …. Introduction C Capital Networks Pty Ltd v .au Domain Administration Ltd [2004] FCA 808 …. 5.9 Carr v McDonald’s Australia Ltd (1994) 63 FCR 358; BC9405740 …. 25.1, 27 Cheap As Chips Pty Ltd, ACCC v Leelee Pty Ltd (2000)22 ATPR ¶41–47 …. 23.4 Clark Rubber Franchising Pty Ltd v Greatbay Pty Ltd [2002] VSC 465 …. 5.9 Clifford Davis Management Ltd v WEA Records Ltd [1975] 1 All ER 237; [1975] 1 WLR 61 …. 23.4 Coco v A N Clark (Engineers) Ltd (1968) 1IPR 587; [1968] FSR 415; [1969] RPC 41 …. 23.4 Crawford Fitting Co v Sydney Valve and Fittings Pty Ltd (1988) 14 NSWLR

438 …. 25.1 Creative’s Landscape Design Centre Pty Ltd v Platz (1989) ATPR ¶40–980 …. 25.1 Credit Reference Association of Australia Ltd v Clark (1995) 37 AILR ¶7–005 …. 23.4 Crouch v Shields (1984) ATPR ¶40–481 …. 23.4 D Drake Personnel Ltd v Beddison [1979] VR 13 …. 23.4 D S & N Nominees Pty Ltd v Movieland Franchise Systems Pty Ltd (VSCA, Brooking, Ormiston, Coldrey JJ, 6464/94, 15 September 1994, unreported, BC9406196) …. 23.4 DTR Nominees Pty Ltd v Mona Homes Pty Ltd (1978) 138 CLR 423; 19 ALR 223; 52 ALJR 360; BC7800034 …. 28.1 E Enzed Holdings Ltd v Wynthea Pty Ltd (1984) 4 FCR 450; 57 ALR 167; 3 IPR 619; (1984) AIPC ¶90–144 …. 23.4 Esso Petroleum Co Ltd v Harper’s Garage (Stourport) Ltd [1968] AC 269; [1967] 1 All ER 699; 2 WLR 871 …. 23.4 F Far Horizons Pty Ltd v McDonald’s Australia Ltd [2000] VSC 310 …. 6.8 Federal Commerce and Navigation Co Ltd v Molena Alpha Inc [1979] AC 757; [1979] 1 All ER 307; [1978] 3 WLR 991; [1979] 1 Lloyd’s Rep 201 …. 25.1 Federal Commissioner of Taxation v Murry (1998) 193 CLR 605; 155 ALR 67; 72 ALJR 1065; BC9802402 …. 23.4 Foxeden Pty Ltd v IOOF Building Society Ltd [2003] VSC 356; BC200305526

…. 25.1 G Gallagher v Pioneer Concrete (NSW) Pty Ltd (1993) 113 ALR 159; (1993) ATPR ¶41–216; 46 IR 304; BC9304625 …. 23.4 Garry Rodgers Motors (Aust) Pty Ltd v Subaru (Aust) Pty Ltd [1999] FCA 903 …. 28.1 Greenwood v All States Food Service NSWCA, Gleeson CJ, Handley JA and Cole AJA, 29 April 1994, unreported, BC9404972 …. 25.1 H Hamilton v Casnot Pty Ltd (1981) 5 ACLR 279; (1981) CLC ¶40–704 …. Introduction Hecar Investments No 6 Pty Ltd v Outboard Marine Australia Pty Ltd (1982) 41 ALR 697; 62 FLR 159; (1982) ATPR ¶40–298 …. 25.1 J JF Keir Pty Ltd v Priority Management Systems Pty Ltd (administrators appointed) [2007] NSWSC 789 …. 6.8 JQAT Pty Ltd v Storm [1987] 2 Qd R 162; (1987) ATPR ¶40–812 …. 23.4 K KA & C Smith Pty Ltd v Ward (1998) 45 NSWLR 702 at 722; (1999) ATPR ¶41–717; BC9807379 at [24] …. 23.4 L LBA Financial Services Pty Ltd v Parkinson (VSC, Beach J, 8760/1994, 2 December 1994, unreported, BC9406111) …. 23.4 Legione v Hateley (1983) 152 CLR 406; 46 ALR 1; 57 ALJR 292; BC8300063 …. 25.1

M Manhattan (Asia) Ltd v Dymocks Franchise Systems (China) Ltd [2014] FCA 1143 …. 5.2, 5.9 Master Education Services Pty Ltd v Ketchell [2008] HCA 38 …. 10.1 McPhillips v Ampol Petroleum (Vic) Pty Ltd (1990) ATPR ¶41–014 …. 25.1 Milchas Investments Pty Ltd v Larkin (1989) 96 FLR 464; [1989] ANZ ConvR 530; (1989) ATPR ¶40–956 at 50,434; BC8902077 …. 25.1 Moorgate Tobacco Co Ltd v Philip Morris Ltd (No 2) (1984) 156 CLR 414; 56 ALR 193; 3 IPR 545; BC8400490 …. 23.4 Munchies Management Pty Ltd v Belperio (1988) 58 FCR 274; 84 ALR 700; (1989) ATPR ¶40–926 …. 25.1 Murray Pest Management Pty Ltd v A & J Bilske (2012) 165 NTR 28; [2012] NTSC 5; BC201200066 …. 23.4 N Nordenfelt v Maxim Nordenfelt Guns & Ammunition Co Ltd [1894] AC 535; [1891-4] All ER Rep 1; (1894) 63 LJ Ch 908; 71 LT 489 …. 23.4 O Orton v Melman [1981] 1NSWLR 583 at 587; (1981) ATPR ¶40–250 at 43– 257 and 43–258 …. 23.4 P PouletFrais Pty Ltd v The Silver Fox Company Pty Ltd [2005] (Lenard’s case) FCAFC 131 …. 10.2 Prontaprint Plc v Landon Litho Ltd [1987] FSR 315 at 324 …. 23.4 Q Quadramain Pty Ltd v Sevastapol Investments Pty Ltd (1976) 133 CLR 390; 8

ALR 555; 50 ALJR 475; BC7600029 …. 23.4 Queensland Co-op Milling Association v Pamag Pty Ltd (1973) 133 CLR 260; 1 ALR 47; 47 ALJR 342; BC7300014 …. 23.4 R Rafferty v Time 2000 West Pty Ltd (No 4) [2010] FCA 725 …. 5.9 Rafferty and Another v Madgwicks (2012) 287 ALR 437 …. 5.9 Ranoa Pty Ltd v BP Oil Distribution Ltd (1989) 91 ALR 251 …. 23.4, 25.1 Reck v Gilham [1995] 1 Qd R 302; (1994) ATPR ¶41–309 …. 23.4 Renard Constructions (ME) Pty Ltd v Minister for Public Works (1992) 26 NSWLR 234 …. 25.1 Rentokil Pty Ltd v Lee (1995) 66 SASR 301; 183 LSJS 444; (1996) ATPR ¶41– 451; BC9502273 …. 23.4 Ron Hodgson (Holdings) Pty Ltd v Westco Motors (Distributors) Pty Ltd (1980) 29 ALR 307; ATPR ¶40–143 …. 25.1 S Security Storage Pty Ltd v Neilson (NSWSC, McLelland CJ, 5195/1993, 25 November 1993, unreported, BC9302338) …. 23.4 Shevill v Builders Licensing Board (1982) 149 CLR 620; 42 ALR 305; 56 ALJR 793; BC8200097 …. 28.1 SPAR Licensing Pty Ltd v MIS Qld Pty Ltd [2014] FCAFC 50 …. 5.2, 17.1 Stokely-Van Camp Inc v New Generation Beverages Pty Ltd (1998) 44 NSWLR 607 at 613 …. 23.4 Stowar v Myer Stores Ltd (t/as Grace Bros) (1993) 50 IR 9 …. 23.4, 25.1 Streeter v Pacific-Seven Pty Ltd (1985) 9 ACLR 790; 3 ACLC 430 …. Introduction Subway Systems Australia Pty Ltd v Thorpe [2000] QSC 099 …. 5.10

T Taylor v Johnson (1983) 151 CLR 422; 45 ALR 265; 57 ALJR 197; BC8300058 …. 25.1 TCN Channel 9 Pty Ltd v Hayden Enterprises Pty Ltd (1989) 16 NSWLR 130; BC8902190 …. 23.4 The Body Shop International Plc v Rawle (1992) 27 IPR 255 …. 25.1 Top Performance Motors Pty Ltd v Ira Berk Qld Pty Ltd (1975) 5 ALR 465; 24 FLR 286; 1 TPC 1; ATPR ¶40–004 …. 25.1 Triangle Corp Pty Ltd v Carnsew (1994) 29 IPR 69; (1994) AIPC ¶91–099; BC9406540 …. 23.4 V Video Ezy International Pty Ltd v Sedema Pty Ltd [2014] NSWSC 143 …. 6.8 W Waltons Stores (Interstate) Ltd v Maher (1988) 164 CLR 387; 76 ALR 513; 62 ALJR 110; BC8802656 …. 25.1 Wan v McDonald (1992) 33 FCR 491; 105 ALR 473; ANZ ConvR 385; BC9203291 …. 25.1 Workplace Safety Australia v Simple OHS Solutions Pty Ltd [2013] NSWSC 1936; [2015] NSWSCA 84 …. 5.9 Z Zane Solar Systems Australia Pty Ltd v Carlile Solar Products Pty Ltd (FCA, Drummond J, 12 July 1994, unreported, BC9406849) …. 23.4

[page 1]

Part 1 Introduction

[page 3]

INTRODUCTION The Franchising Code of Conduct (the Code) is a mandatory industry code enacted and prescribed as the Competition and Consumer (Industry Codes— Franchising) Regulation 2014 (Cth) under s 51AE of the Competition and Consumer Act 2010 (CCA). It applies to conduct occurring on or after 1 January 2015 in relation to a franchise agreement entered into (or renewed, extended or transferred) from 1 October 1998. The previous code (the Old Code), the Trade Practices (Industry Codes—Franchising) Regulations 1998 (Cth), was repealed contemporaneously with the introduction of the Code. The Code has evolved in a fairly unstructured manner. The Old Code, introduced in 1998, featured various concepts drawn from regulatory frameworks in other countries, with some input from industry bodies and franchising practitioners. The Old Code was amended in a reasonably ad hoc manner on several occasions prior to the comprehensive review conducted by Alan Wein in 2013.1 Wein’s recommendations were then distilled by the government into the Code after a reasonably extensive period of industry consultation. The Code still remains open to significant interpretation. The fundamental reason for this is that franchising is not a business in itself, but a way of doing business. Just as businesses in different industries have widely varied characteristics, so it is that franchise systems in different industries will have significant variation in structure and format. The express words of a single code can therefore not be expected to perfectly address such a wide variety of

circumstances. A lawn mowing business, where the franchisee spends a relatively small amount of money — generally less than the value of a new motor vehicle — is regulated in exactly the same manner as a motor vehicle dealership, where stock and fit-out costs can run into the hundreds of thousands of dollars. A real estate agency is very different in a business sense to a convenience store or a casual dining restaurant, let alone a drama academy, a gymnasium or a gutter cleaning business. In some franchise arrangements, the franchise agreement is long term, whereas in others the franchisees are free to leave at will. Yet the law applies in the same manner to each. Another challenge for the sector is that franchisees are frequently new to business, and the franchising universe spreads across the whole of Australia. Professional advisers are often drawn from the community where the franchise is to operate, and may themselves not be particularly experienced in handling franchising [page 4] transactions. Yet there is a statutory expectation that prospective franchisees obtain legal and business advice.2 The Australian Competition and Consumer Commission (ACCC) oversees the operation of the Code, and has strong investigative and enforcement powers. However, the ACCC does not have the power to make interpretive rulings, let alone grant dispensation when a provision of the Code has application in a manner that appears somewhat perverse. This creates challenges in a sector where most franchisors, and almost all franchisees, are small businesses. They do not have the time or resources to challenge any interpretation of the Code. Some efforts have been made to clarify the application of the Code. The Code was issued with an Information Statement,3 and the ACCC has produced its

own interpretive material.4 The courts have provided guidance in some areas. This annotated Code endeavours to collate and enhance this additional material, and provide some interpretative guidance based on the limited but growing number of decided cases, international jurisprudence where applicable and the author’s practical experience over 30 years of legal practice.

THE REGULATION OF FRANCHISING IN AUSTRALIA The challenge of franchise regulation Almost from the time business format franchising became a significant method of carrying out business in Australia, there have been calls for specific regulation of franchising activities. Business conduct has always been subject to regulation. The prohibition in broad, general and restrained terms of ‘misleading or deceptive conduct’ in trade or commerce has had a significant influence on the franchising sector. It has, until recently, enabled those who have opposed specific regulation of franchising to argue that sufficient legislative protections already existed. It has been argued that franchising was simply a way of carrying on business and should not be singled out for special attention, as this would unfairly discriminate against those who chose to carry on business using franchising techniques. When business format franchising activities came to prominence in Australia in the 1970s, it was against the backdrop of substantial small business failures and increasing dominance by larger organisations. Franchising was embraced [page 5] as a means by which a small business owner could prosper as part of a larger

network. Reduced business independence was seen as a small price to pay for the security of being part of a viable larger network. As franchising has grown and developed, the government has been cautious to avoid imposing too much regulatory discipline lest the entrepreneurial spirit that is a feature of franchising be constrained. However, in recent times, it is clear that there is more widespread acceptance of the view that some regulatory framework is necessary. A number of factors set franchising activities apart, if only to enable them to be separately identified. From the perspective of regulation, it has been the following factors that have stirred concern at various stages and taken some of the gloss from the positive impact of franchising: There can be a substantial interdependence between the businesses operated by the franchisor and the franchisee. In the extreme cases, this interdependence has been characterised as economic captivity, and businesses operated by the franchisees have failed in their business as a result of the interdependence and through no fault of their own. There may be an inequality of power and control which, if misused (such as via the power of termination), could see a franchisee unfairly prejudiced. Franchised businesses are often ‘sold’ in circumstances where there is a prepayment for presumed goodwill and a substantial investment by the franchisee before a business exists. As such, the sale of a franchise is not so much the sale of a business but the sale of an investment opportunity. The need to balance entrepreneurship and business creation and accept an element of risk needs to be weighed against any special risks arising due to any of the circumstances outlined above. It should certainly not be the role of the government to remove risk, and the commercial risks and decisions are usually best assessed and handled by the parties concerned. The government remains reluctant to impede the growth and development of franchising, but has become less tolerant of inappropriate behaviour at the margins.

The nature of franchise regulation Governments all over the world have grappled with the challenge of regulating franchising. Some countries, such as England, New Zealand, Singapore and Hong Kong, have chosen not to regulate franchising at all. Others, such as the United States, Canada, China, Malaysia, Korea and Indonesia, have complex and comprehensive legislation. One of the most difficult issues in franchising regulation is deciding what to actually regulate. In essence, a franchise arrangement is a business contract. Do you regulate the content of the contract, the process that gives rise to the formation of the contract, the conduct of the parties to the contract, or a mixture? Noting the success of franchising as a business model that is arguably the only proven means that enables small business to compete against large corporations, [page 6] it is important to regulate without killing off the goose that lays the golden eggs. Regulation should not be allowed to stifle legitimate entrepreneurial behaviour. The existence of general CCA prohibitions on unconscionable conduct and misleading or deceptive conduct arguably create a strong framework to address conduct issues. However, there is also a need to provide information to assist parties to make an informed decision, including financial information concerning the franchisor and details of establishment and operating costs. Legislative intervention has tended to focus on disclosure of information rather than the contract itself or the conduct of the parties. Australia has itself experienced almost every form of regulation: no regulation, de facto regulation through the corporations legislation,5 a voluntary industry code of conduct,6 and, since 1998, a mandatory industry

code of conduct7 that is essentially black letter law. From 1 January 2015, a new Franchising Code of Conduct8 has applied, alongside amendments to the CCA9 that introduced a new penalties regime to some of the Code provisions. When viewed alongside the general prohibitions on misleading or deceptive conduct10 and unconscionable conduct11 contained in the CCA, Australia now has one of the most comprehensive regulatory frameworks in the world.

Regulation under the Companies Act Until 1981, franchising was regulated only by the general laws governing all commercial activities (the only exception being the regulation imposed on retail petroleum franchising through the Petroleum Retail Marketing Franchise Act 1980 (Cth), which was repealed in 2006 and replaced by the oilcode under the Trade Practices (Industry Codes-Oilcode) Regulations 2006 (Oilcode)). Then, in 1981, the Supreme Court of Western Australia held in Hamilton v Casnot Pty Ltd,12 that an advertisement for a cleaning franchise was subject to regulation under the ‘prescribed interest’ provisions of the then Companies Act 1981 (Cth), which dealt with the offering to the public of certain ‘investment schemes’. The decision had the effect of subjecting franchising to an inappropriate regime of quasi-regulation. The National Companies and Securities Commission (NCSC) assumed jurisdiction and required franchisors to comply with a number of statutory requirements. Whatever the problems which had resulted from the absence of regulation, they were not resolved by the arbitrary, complex, onerous and inappropriate regulation [page 7] pursuant to the prescribed interest provisions which, between 1981 and 1987, imposed a regime not specifically structured for franchising. These provisions prohibited a company from issuing a ‘prescribed interest’ unless the company

was a public company, had issued a prospectus, had in place an approved trust deed and had appointed an approved trustee. The promoter and relevant employees were also required to hold dealers and dealers’ representatives licences. Further, the legislation specified certain quite significant requirements to be inserted into the franchise documentation. Compliance with these requirements imposed substantial cost upon a franchisor, and significant civil and criminal sanctions applied to a breach of any of the requirements. The problems created for the franchising sector were somewhat ameliorated by the NCSC (now the Australian Securities and Investments Commission (ASIC)), which had the power to exempt a company from compliance. The NCSC accepted arguments that a franchisee was seeking a business opportunity rather than making a passive investment, and hence it was appropriate for there to be less protection. The acquisition of a franchise was known to carry certain risks, which a franchisee was better equipped to assume and indeed influence than a passive investor. Accordingly, the NCSC issued a formal release (NCSC PS 118), which provided that franchisors would be exempt provided they complied with certain less onerous requirements. The NCSC was required to approve the franchise agreement and disclosure document before the exemption could apply. By the mid-1980s, the situation had become unworkable. The NCSC PS 118 requirements, which were less onerous but nevertheless inappropriate for franchising, were avoided if there was no ‘offer to the public’ and there was an emerging judicial divergence of opinion among state Supreme Courts as to whether the sale of franchises actually constituted ‘prescribed interests’.13 The quasi-regulated era was brought to an end by the removal of franchising from the scope of the Companies Act by legislative amendment in 1987.14 Accordingly, until the introduction of the voluntary Franchising Code of Practice in 1993, franchising operated in a deregulated era, governed only by the general laws regulating all commercial activity.

Voluntary regulation A Franchising Task Force was established in 1990 to ‘examine impediments to the growth and efficiency of the franchising sector’ and to ‘examine and report on the potential of self-regulatory codes for countering marketing failure in franchising, focusing on Business Format Franchising’. Among its recommendations was the enactment of a self-regulatory code of practice administered and maintained by a council of representatives from all areas of the franchising sector. This [page 8] recommendation was ultimately accepted by the Commonwealth, state and territory governments, and the Code of Practice came into operation on 1 February 1993 (Code of Practice).15 There were five versions of this code during its short life, the updates primarily as a result of improvements and clarifications rather than of changes of major significance. Registration was voluntary. Non-compliance led to deregistration, but did not prevent that franchisor from operating as a franchisor. The body entrusted with the administration and enforcement of the Code of Practice, the Franchising Code Council (FCC), had no power to deregister any party who failed to comply with the code, and the standards of conduct operated as ethical standards to which participants in the franchising sector should aspire, rather than mandatory provisions to which participants had to comply under threat of deregistration. Individuals on the FCC were also concerned about their personal liability should they take action against a franchisor, as they did not have statutory indemnity. The Gardini Report,16 released in March 1995, identified two major weaknesses in the Code of Practice — its lack of coverage across the franchise sector and the failure of the ‘standards of conduct’ provisions to address

serious franchise problems. In December 1996, the FCC ceased its activities and appointed a voluntary administrator. The Code of Practice lapsed with the FCC’s demise, and Australia was again returned to a deregulated environment where franchising was regulated only by the general laws regulating all commercial activity.

The mandatory industry code In May 1997, the House of Representatives Standing Committee on Industry, Science and Technology (appointed in June 1996 with wide terms of reference to report on business conduct issues in fair trading in general and franchising in particular) handed down a report. This report, Finding a Balance: Towards Fair Trading in Australia, was so damning in its condemnation of practices within the franchising sector that the government had no practical option but to act decisively.17 Its New Deal: Fair Deal reform package, released in September 1997, contained initiatives of great significance to the franchising sector, including the enactment of a ‘business unconscionability’ provision (modelled on the ‘consumer unconscionability’ provision of s 51AB of the Trade Practices Act 1974 (Cth) (TPA), now s 21 of the Australian Consumer Law (ACL) (as contained in Sch 2 of the CCA) and the introduction of a mandatory Franchising Code of Conduct by regulations prescribed under the TPA pursuant to a new Pt IVB to be added [page 9] to the TPA, to provide the legislative basis for industry Codes of Conduct (Trade Practices (Industry Codes—Franchising) Regulations 1998). Two exposure drafts of the Old Code were released for public comment — the first modelled closely on the voluntary Franchising Code of Practice and the second a more comprehensive document moving significantly beyond

prior disclosure obligations to regulation of the franchisor/franchisee relationship. The final form of the Old Code prescribed by regulations came into effect in stages — on 1 July 1998 and 1 October 1998 — and was amended in October 2001, March 2008 and July 2010. January 1 2015 saw the enactment of a new Code that was structurally and conceptually similar to the Old Code but contained a number of variations and new provisions. The current Code is a mandatory industry code enacted and prescribed as the Competition and Consumer (Industry Codes— Franchising) Regulation 2014 under s 51AE of the CCA.18 It applies to conduct occurring on or after 1 January 2015 in relation to a franchise agreement entered into (or renewed, extended or transferred) from 1 October 1998.19 The Old Code was repealed contemporaneously with the introduction of the Code.

1. Review of the Franchising Code of Conduct: Report to: the Hon Gary Gray AO MP, Minister for Small Business, and the Hon Bernie Ripoll MP, Parliamentary Secretary for Small Business, Commonwealth of Australia, Canberra, 30 April 2013. 2. See cl 10(2) of the Code. Clause 10(2)(a) provides that a franchisor cannot enter into a franchise agreement until it receives a written statement from an independent legal adviser, business adviser or accountant stating that person has provided advice to the prospective franchisee. Pursuant to cl 10(2)(b), if the franchisee does not wish to obtain such advice, it must sign a statement to the effect that it was told to seek such advice but decided not to do so. 3. Annexure 2 of the Code. 4. For example, see ACCC, The Franchisor Compliance Manual, Commonwealth of Australia, Canberra, 2014; and ACCC, The Franchisee Manual, Commonwealth of Australia, Canberra, 2014. 5. Close Corporations Act 1989 (Cth). 6. Franchising Code of Practice 1993 (Cth). 7. Trade Practices (Industry Codes—Franchising) Regulations 1998 (Cth). 8. Competition and Consumer (Industry Codes—Franchising) Regulation 2014 (Cth). 9. Competition and Consumer Amendment (Industry Code Penalties) Act 2014 (Cth). 10. Section 18 of the Australian Consumer Law (as contained in Sch 2 of the Competition and Consumer Act 2010 (Cth)). 11. See note 10 above, ss 20 and 21.

12. (1981) 5 ACLR 279; (1981) CLC ¶40–704. 13. Butterworth v Lezemo Pty Ltd (1983) 8 ACLR 737; 1 ACLC 1306; Streeter v Pacific-Seven Pty Ltd (1985) 9 ACLR 790; 3 ACLC 430. 14. Victorian Statutory Rule 172 of 1987. 15. Franchising Code of Practice 1993 (Cth). 16. Review of the Franchising Code of Practice, AGPS, Canberra, October 1994. 17. Finding a Balance: Towards Fair Trading in Australia, Report to the House of Representatives Standing Committee on Industry, Science and Technology, Canberra, May 1997. 18. The Competition and Consumer Act 2010 is the successor to the TPA. 19. See cl 4 of the Code.

[page 11]

Part 2 Competition and Consumer (Industry Codes— Franchising) Regulation 2014 Current to 1 June 2015

[page 12]

Contents 1 2 3 4 5 6

Name Commencement Authority Code of conduct Transitional—clause 8 Transitional—continued appointment of mediation adviser

Schedule 1—Franchising Code of Conduct Part 1—Introduction Division 1—Preliminary 1 Name of code 2 Purpose of code 3 Application Division 2—Definitions 4 Definitions 5 Meaning of franchise agreement Division 3—Obligation to act in good faith 6 Obligation to act in good faith Part 2—Disclosure requirements before entry into a franchise agreement Division 1—Application 7 Application of Part—master franchisors Division 2—Disclosure document 8 Franchisor must maintain a disclosure document 9 Franchisor to give documents to a franchisee or prospective franchisee

10 Franchisee or prospective franchisee to give advice to franchisor before entering into franchise agreement Division 3—Information statement 11 Franchisor to give information statement to prospective franchisee Part 3—Franchise agreements Division 1—Application 12 Application of Part—master franchisors Division 2—Franchisor’s obligations Subdivision A—Disclosure obligations 13 Copy of lease etc 14 Copy of other agreements 15 Copy of financial statements 16 Disclosure document 17 Disclosure of materially relevant facts Subdivision B—Notification obligations 18 End of term arrangements Subdivision C—Record keeping obligations 19 Keeping certain information and documents [page 13] Division 3—Terms of franchise agreement 20 Prohibition on release from liability etc 21 Jurisdiction for settling disputes 22 Costs of settling disputes 23 Effect of restraint of trade clause if franchise agreement not extended Division 4—Transfer of franchise agreement 24 Request for franchisor’s consent to transfer

25 Franchisor’s consent to transfer Division 5—Termination of franchise agreement 26 Termination—cooling off period 27 Termination—breach by franchisee 28 Termination—no breach by franchisee 29 Termination—special circumstances Division 6—Miscellaneous 30 Capital expenditure 31 Marketing and advertising fees 32 Disclosure of former franchisee details 33 Association of franchisees or prospective franchisees Part 4—Resolving disputes Division 1—General 34 Internal complaint handling procedure 35 Resolving disputes 36 When a party is taken to be trying to resolve a dispute 37 Right to bring proceedings unaffected Division 2—Internal complaint handling procedure 38 Notification of dispute 39 Mediation Division 3—Code complaint handling procedure Subdivision A—Notification of dispute 40 Notification of dispute Subdivision B—Mediation 41 Mediation 42 Termination of mediation 43 Costs of mediation Division 4—Mediation appointments 44 Mediation adviser

45 Mediator Annexure 1—Disclosure document for franchisee or prospective franchisee 1 First page 2 Franchisor details 3 Business experience 4 Litigation 5 Payments to agents [page 14] 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22

Existing franchises Master franchises Intellectual property Franchise site or territory Supply of goods or services to a franchisee Supply of goods or services by a franchisee Supply of goods or services—online sales Sites or territories Other payments Marketing or other cooperative funds Financing Unilateral variation of franchise agreement Arrangements to apply at the end of the franchise agreement Amendment of franchise agreement on transfer of franchise Earnings information Financial details Updates

23 Receipt Annexure 2—Information statement for prospective franchisee

[page 15]

Competition and Consumer (Industry Codes—Franchising) Regulation 2014 1

Name

This is the Competition and Consumer (Industry Codes—Franchising) Regulation 2014.

2

Commencement

This instrument commences on 1 January 2015.

3

Authority

This instrument is made under section 51AE of the Competition and Consumer Act 2010.

COMMENTARY ON REGULATION 3 3.1

Pecuniary penalties

Section 51AE(2) also provides that the industry code may prescribe pecuniary penalties not exceeding 300 penalty units for breach. See also s 51ACB, which provides that a corporation must not, in trade or commerce, contravene an

applicable industry code, and s 51ACA(1), which defines a related contravention of an applicable industry code. A person engages in conduct that constitutes a related contravention if the person aids, abets, counsels, procures, induces, conspires with others or is in any way directly or indirectly knowingly concerned in or a party to a contravention of a code by a corporation.

4

Code of conduct

For section 51AE of the Competition and Consumer Act 2010, the code set out in Schedule 1: (a) is prescribed; and (b) is a mandatory industry code.

[page 16]

COMMENTARY ON REGULATION 4 4.1

An industry code

Section 51AE(1) provides that the government may by regulation prescribe an industry code, and declare an industry code to be a mandatory industry code. The logic for establishing this legislation as an industry code is somewhat contorted. According to the Explanatory Statement that accompanies the Annotated Franchising Code of Conduct (the Code) (Explanatory Statement, Select Legislative Instrument No. 168, 2014 at p 1), industry codes are ‘co-regulatory measures, designed to achieve minimum standards of conduct in an industry where there is an identifiable problem to address. Industry codes can be used as an alternative to primary legislation in

instances where market failure has been identified.’ This seems to have moved away from the original intent, being to codify agreed self-regulatory arrangements or be a form of ‘light touch’ regulation. In 1998, a mandatory code was introduced largely as a result of the collapse of the previous voluntary industry code, and the perceived need to increase levels of compliance by making the obligations mandatory. However, the provisions of the current Code now differ quite dramatically from the previous voluntary industry code, and the introduction of substantial penalties under the Competition and Consumer Act 2010 (CCA) for breach of the Code makes it clear that the Code is very much black letter law.

5

Transitional—clause 8 (1) Subclause 8(1) of the new code does not apply if a franchisor has an existing disclosure document. (2) If a franchisor has an existing disclosure document: (a) the existing disclosure document may be given under the new code before 1 November 2015; and (b) the franchisor must update the existing disclosure document so that it complies with subclauses 8(3), (4) and (5) of the new code by 31 October 2015; and (c) the requirements of subclause 8(6) of the new code apply to a financial year that begins on or after 1 January 2015. (3) In this section: existing disclosure document means a franchisor’s disclosure document (within the meaning of the old code) that exists on 1 January 2015. new code means the Franchising Code of Conduct set out in Schedule 1 to this instrument.

old code means the Franchising Code of Conduct set out in the Schedule to the Trade Practices (Industry Codes — Franchising) Regulations 1998 as in force immediately before 1 January 2015.

[page 17]

COMMENTARY ON REGULATION 5 5.1

Regulation 5(1)

This means a disclosure document that is compliant with the Trade Practices (Industry Codes—Franchising) Regulations 1998 (Cth) (Old Code) as at 31 December 2014, although it would have been useful to add the word ‘compliant’ to make it perfectly clear. Similarly, it would have been helpful to add the words ‘continue to’ before ‘be given’ in cl 5(2)(a) to make it clear that the existing disclosure document had to be compliant as at 31 December under the Old Code to gain the benefit of the transitional arrangements.

5.2

Regulation 5(2)(c)

For franchisors with a financial year ending other than on June 30, the effect of this provision is essentially to enable a franchisor to defer updating until 31 October 2015, but then to require an additional update for the 2015 financial year as well. So the benefit is largely illusory. Franchisors with a June 30 financial year will be able to take advantage of the concession. However, most franchisors that do not have a June 30 year end are likely to choose to update as normal for the end of their 2014 financial year (that is, by 30 April 2015 for a December 31 financial year). This interpretation also is consistent with the decision in SPAR Licensing Pty Ltd v MIS Qld Pty Ltd [2014] FCAFC 50, where the court held that there was a requirement to provide updated

financial information where it becomes available after disclosure, but before the franchisee signs the franchise agreement. It is also consistent with the new cl 17 of the Code, which has been introduced to essentially codify the SPAR Licensing obligation.

6

Transitional—continued appointment of mediation adviser

The appointment of a mediation adviser for the purposes of Part 4 of the Franchising Code of Conduct set out in the Schedule to the Trade Practices (Industry Codes—Franchising) Regulations 1998 that is in force immediately before 1 January 2015, has effect, despite the repeal of those regulations, as if it were an appointment of a mediation adviser for the purposes of Part 4 of the Franchising Code of Conduct set out in Schedule 1 to this regulation.

[page 18]

Schedule 1—Franchising Code of Conduct Note: See section 4.

Part 1—Introduction Division 1—Preliminary 1

Name of code

This code is the Franchising Code of Conduct.

2

Purpose of code

The purpose of this code is to regulate the conduct of participants in franchising towards other participants in franchising.

COMMENTARY ON CLAUSE 2 2.1 The Code is a legislative instrument for the purposes of the Legislative Instruments Act 2003. Further, to avoid doubt, s 51ACA(3) of the CCA declares that franchising is an industry for the purposes of Pt IVB of the CCA, and franchisors and franchisees are participants in the industry of franchising, whether or not they are also participants in another industry.

This legislative clarification has probably avoided lengthy debate in some future court hearing given that franchising is arguably not an industry as such, but rather a method of doing business conducted across various different industry sectors.

3

Application (1) Subject to subclause (4), this code applies to conduct occurring on or after 1 January 2015 (other than to discharge an outstanding obligation that arose under the old code) in relation to a franchise agreement entered into on or after 1 October 1998. (2) However, this code does not apply to a franchise agreement: (a) to which another mandatory industry code, prescribed under section 51AE of the Competition and Consumer Act 2010, applies; or [page 19] (b) if (i)

the franchise agreement is for goods or services that are substantially the same as those supplied by the franchisee before entering into the franchise agreement; and

(ii) the franchisee has supplied those goods or services for at least 2 years immediately before entering into the franchise agreement; and (iii) sales under the franchise are likely to provide no more than 20% of the franchisee’s gross turnover for goods

or services of that kind for the first year of the franchise. (3) Paragraph (2)(b) ceases to apply to a franchise agreement if: (a) sales under the franchise provide more than 20% of the franchisee’s gross turnover for the goods or services for 3 consecutive years; and (b) the franchisee tells the franchisor that paragraph (a) of this subclause applies. (4) The provisions of this code mentioned in column 2 of the following table in relation to an item do not apply to a franchise agreement mentioned in column 1 of the item: Provisions of this code that do not apply to certain franchise agreements Column 1 Column 2 Item If a franchise agreement these provisions do not apply to the is entered into … agreement … 1 on or after 1 March 2008 (a) subclause 21(2); and but before 1 January 2015 (b) clauses 22 and 23 2

on or after 1 October (a) paragraph 20(1)(b); and 1998 but before 1 March (b) subclause 21(2); and 2008 (c) clauses 22 and 23 (5) However, subclause (4) ceases to apply in relation to a franchise agreement mentioned in column 1 of the table in that subclause if the agreement is varied or transferred on or after 1 January 2015. (6) In this clause: old code means the Franchising Code of Conduct set out in the

Schedule to the Trade Practices (Industry Codes — Franchising) Regulations 1998 as in force immediately before 1 January 2015.

[page 20]

COMMENTARY ON CLAUSE 3 3.1

Clause 3(1)

The Code also applies to a franchise agreement renewed, extended or transferred on or after 1 October 1998. The Explanatory Statement at p 3 notes that the Code ‘has been drafted to provide the greatest possible coverage of existing and future franchise agreements’. The initial exposure draft of the Code essentially provided for the Old Code and the Code to exist simultaneously. This framework would have caused significant additional compliance cost and confusion, and was replaced by the current framework in the final legislation. It is also possible for the parties to agree that the Code apply to a franchise agreement, regardless of when they entered into their agreement. Indeed the Australian Competition and Consumer Commission (ACCC) has developed a template deed of variation that can be signed. See .

3.2

Clause 3(2)

The government again in 2014 rejected industry calls for additional exemptions, such as for sophisticated investors or franchisees taking on an additional franchise. There is also no power for the ACCC to exempt a party from compliance with the Code.

3.3

Clause 3(2)(a)

The most relevant example is the Competition and Consumer (Industry Codes — Oilcode) Regulation 2006, which is a mandatory industry code that regulates the conduct of wholesalers and fuel resellers who are involved in the sale, supply or purchase of declared petroleum products, such as unleaded petrol and diesel.

3.4

Clause 3(2)(b)(iii)

Note that it is necessary to satisfy each of the three elements. This exemption appears to be intended to cover arrangements common in rural communities where a business will represent numerous brands, but is not fairly seen as a franchisee of any particular brand. It is so narrow that it is difficult to satisfy. For example, a new brand cannot satisfy the exemption as it would fail the first two elements.

3.5

Clause 3(4)

These carve-outs have been made to avoid the risk of contravening s 51(xxxi) of the Commonwealth of Australia Constitution Act 1900 (Cth) concerning the acquisition of property by the Commonwealth on just terms. Initially, the government proposed many more carve-outs, but industry submissions made it clear that to the greatest extent possible the franchise sector preferred having [page 21] a single code to apply to all franchise agreements rather than having two codes applying simultaneously.

3.6

Clause 3(5)

Note that the Code contains a broader definition of ‘extend’ compared to the Old Code. The Old Code only caught extensions to the scope or term of a franchise, whereas the new definition includes material changes to the agreement or the rights or liabilities of a party to a franchise agreement.

[page 22]

Division 2—Definitions 4

Definitions (1) In this code: ABN has the same meaning as in the A New Tax System (Australian Business Number) Act 1999. associate, for a franchisor, means a person: (a) who: (i)

is a director or related body corporate, or a director of a related body corporate, of the franchisor; or

(ii) for a franchisor that is a proprietary company— directly or indirectly owns, controls, or holds with power to vote, at least 15% of the issued voting shares in the franchisor; or (iii) is a partner of the franchisor; and (b) whose relationship with the franchisor is relevant to the franchise system, including because: (i)

the person supplies goods or services to a franchisee; or

(ii) the person gives the franchisee a right to occupy premises, whether under a lease or otherwise; or (iii) the person owns intellectual property used in the franchise system; or

the person is involved in market research, market (iv) testing, market development, sales promotion or management of the franchise system. disclosure document has the meaning given by clause 8. electronic signature of a person means the unique identification of the person in an electronic form. engage in conduct means: (a) do an act; or (b) omit to perform an act. extend: (a) in relation to the scope of a franchise agreement, means a material change to: (i)

the terms and conditions of the agreement; or

(ii) the rights of a person under or in relation to the agreement; or (iii) the liabilities that would be imposed on a person under or in relation to the agreement; or [page 23] (b) in relation to the term of a franchise agreement, occurs when the period of the agreement is extended, other than because of an option exercisable by the franchisee during the term of the agreement. financial year, in relation to a franchisor and a franchise, means a period of 12 months in respect of which financial statements relating to the franchise are prepared for the franchisor.

franchise includes the following: (a) the rights and obligations under a franchise agreement; (b) a master franchise; (c) a subfranchise; (d) an interest in a franchise. franchise agreement has the meaning given by clause 5. franchisee includes the following: (a) a person to whom a franchise is granted; (b) a person who otherwise participates in a franchise as a franchisee; (c) a subfranchisor in its relationship with a franchisor; (d) a subfranchisee in its relationship with a subfranchisor. franchise system includes a business system in which a franchisor grants a franchise to a franchisee. franchisor includes the following: (a) a person who grants a franchise; (b) a person who otherwise participates in a franchise as a franchisor; (c) a subfranchisor in its relationship with a subfranchisee; (d) a subfranchisor in a master franchise system; (e) a subfranchisor in its relationship with a franchisee. interest in a franchise includes a legal or beneficial interest in: (a) a franchise agreement or a franchised business, whether arising as a result of a guarantee of a franchisee’s obligations under the agreement or otherwise; or

(b) shares or voting rights in a corporation, not being a listed corporation, that owns a franchised business; or (c) units or voting rights in a unit or other trust that owns a franchised business; or (d) the capital or income of a partnership that owns a franchised business. master franchise means a franchise in which the franchisor grants to a subfranchisor the right: [page 24] (a) to grant a subfranchise; or (b) to participate in a subfranchise. motor vehicle means a vehicle that uses, or is designed to use, volatile spirit, gas, oil, electricity or any other power (except human or animal power) as the principal means of propulsion, but does not include a vehicle used, or designed to be used, on a railway or tramway. Note: Examples of motor vehicles are as follows: (a) motor car; (b) motorcycle; (c) tractor; (d) motorised farm machinery; (e) motorised construction machinery; (f)

aircraft;

(g) motor boat.

motor vehicle dealership means a business of buying, selling, exchanging or leasing motor vehicles that is conducted by a person other than a person who is only involved as a credit provider, or provider of other financial services, in the purchase, sale, exchange or lease. obligation to act in good faith: see clause 6. prospective franchisee means a person who deals with a franchisor for the right to be granted a franchise. renew, in relation to a franchise agreement, occurs when the franchisee exercises an option during the term of the agreement to renew the agreement. serious offence means: (a) an offence under any law of the Commonwealth or a State or a Territory for which, if the act or omission had taken place in the Jervis Bay Territory, a person would be liable, on first conviction, to imprisonment for a period of not less than 5 years; or (b) a contravention of any provision of the Corporations Act 2001. Note: Jervis Bay Territory is mentioned because it is a jurisdiction in which the Commonwealth has control over the criminal law. significant capital expenditure: see subclause 30(2). subfranchisor means a person who is: (a) a franchisee in relation to a master franchise; and (b) a franchisor in relation to a subfranchise granted under the master franchise.

[page 25] trade mark has the meaning given by the Trade Marks Act 1995. Note: A trade mark is a sign (including any letter, word, name, signature, numeral, device, brand, heading, label, ticket, aspect of packaging, shape, colour, sound or scent (or any combination of these)) used, or intended to be used, to distinguish goods or services dealt with or provided in the course of trade by a person from goods or services so dealt with or provided by any other person (see section 17 of the Trade Marks Act 1995). transfer, in relation to a franchise agreement, includes a situation in which: (a) the agreement is terminated on the basis that a new franchise agreement is entered into between the franchisor and prospective transferee; or (b) the franchisee’s rights and obligations under the agreement are assigned to a prospective transferee; or (c) the agreement contemplates a transfer in specified circumstances and those circumstances happen. (2) In this code, the following terms have the meanings given by the Corporations Act 2001: ACN ARBN body corporate consolidated entity director externally-administered body corporate

insolvent under administration listed corporation misconduct officer proprietary company registered company auditor registered office related body corporate small proprietary company

COMMENTARY ON CLAUSE 4 4.1

Clause 4(1)(associate)

The very broad definition of ‘associate’ poses challenges for large corporate groups that have a franchise network as part of a broader business. The Old [page 26] Code simply provided that ‘the relationship with the franchisor is relevant to the franchise system, including supplying goods, real property or services to a franchisee’. However, subcl (b) is now significantly more specific, and (ii) and (iv) in particular have the potential to capture a much broader class of associate and indicate a legislative intent to expand the range of potential ‘associates’ for the purposes of the Code.

4.2

Clause 4(1)(extend)

This is an important change that in (a) expands the previous interpretation of ‘scope’ by making it clear that any material change to agreement terms, rights of a person or liabilities of a person will extend the scope, and in (b) addresses uncertainty created in the Old Code where words such as ‘renew’ and ‘extend’ were used interchangeably.

4.3

Clause 4(1)(extend)(a)(iii)

Note that this definition is broader than in the Old Code, and will catch changes relevant to guarantors and third parties. It could also catch changes to an operations manual, or to other collateral documents.

4.4

Clause 4(1)(financial year)

This change makes it clear that franchisors are entitled to use their financial year, not the June 30 financial year, for the purposes of their accounts and corresponding disclosure updating obligations.

4.5

Clause 4(1)(franchise)

The use of an inclusive definition means that not only are the following categories of arrangements caught within the definition of a franchise, but the definition is left open. Curiously there is no mention in the core cl 5 definition of a ‘franchise agreement’ of a ‘franchise’, and the definitions of franchise, franchisee and franchisor seem circuitous and perhaps unnecessarily complex. The problems created by these definitions are most obvious when considered in the context of obligations to disclose to a potential franchisee. How is it possible to precisely determine at the point of disclosure who is ‘participating in a franchise as a franchisor’, or who has ‘an interest in a franchise’?

4.6

Clause 4(1)(interest in a franchise)(a)

The new wording in the Code makes it clear that a guarantor is considered to have some form of legal or beneficial interest in a franchise. Accordingly, franchisors need to be cognisant of any changes to a guarantor, not just an owner. However, the use of the inclusive definition means that others could be considered to have an interest in a franchise agreement or a franchised business. Arguably, if a guarantor is considered to have an interest in a franchise, so could conceivably an employee, a financier or a supplier in certain circumstances. [page 27]

4.7

Clause 4(1)(master franchise)(b)

The concept of master franchising has had a troubled history within the Code. Previous versions of the Code attempted to regulate it as a separate type of relationship, but that proved problematic. The current version of the Code sensibly seeks to see it as a form of franchise agreement, rather than some separate arrangement, and seeks to identify it largely to facilitate reduced compliance costs: refer to cl 7. The Code now also includes provisions that require additional disclosure: see Items 6 and 7 in Annexure 1.

4.8

Clause 4(1)(prospective franchisee)

Presumably, such a definition is limited to someone that ultimately intends to become the franchisee either directly or through an associated legal entity, but the use of the term ‘deals’ appears to invite a broader interpretation that could include professional advisers and agents.

4.9

Clause 4(1)(renew)

There is now a clear distinction between renewal and extension of term.

4.10

Clause 4(2)(related body corporate)

A holding company or a subsidiary of a body corporate will constitute a related body corporate, as will a body corporate that is the subsidiary of a holding company of another company (Corporations Act 2001 (Cth) s 50).

4.11

Clause 4(2)(small proprietary company)

In accordance with s 45A(2) of the Corporations Act, a proprietary company is a small proprietary company for a financial year if it satisfies at least two of the following: the consolidated revenue for the financial year of the company and the entities it controls (if any) is less than $25 million, or any other amount prescribed by the regulations for the purposes of this paragraph; the value of the consolidated gross assets at the end of the financial year of the company and the entities it controls (if any) is less than $12.5 million, or any other amount prescribed by the regulations for the purposes of this paragraph; or the company and the entities it controls (if any) have fewer than 50, or any other number prescribed by the regulations for the purposes of this paragraph, employees at the end of the financial year. [page 28]

5

Meaning of franchise agreement (1) A franchise agreement is an agreement:

(a) that takes the form, in whole or part, of any of the following: (i)

a written agreement;

(ii) an oral agreement; (iii) an implied agreement; and (b) in which 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; and (c) under which the operation of the business will be substantially or materially associated with a trade mark, advertising or a commercial symbol: (i)

owned, used or licensed by the franchisor or an associate of the franchisor; or

(ii) specified by the franchisor or an associate of the franchisor; and (d) under which, before starting or continuing the business, the franchisee must pay or agree to pay to the franchisor or an associate of the franchisor an amount including, for example: (i)

an initial capital investment fee; or

(ii) a payment for goods or services; or (iii) a fee based on a percentage of gross or net income whether or not called a royalty or franchise service fee; or (iv) a training fee or training school fee; but excluding:

(v) payment for goods and services supplied on a genuine wholesale basis; or (vi) repayment by the franchisee of a loan from the franchisor or an associate of the franchisor; or (vii) payment for goods taken on consignment and supplied on a genuine wholesale basis; or (viii) payment of market value for purchase or lease of real property, fixtures, equipment or supplies needed to start business or to continue business under the franchise agreement. (2) For subclause (1), each of the following is taken to be a franchise agreement: (a) the transfer or renewal of a franchise agreement; (b) the extension of the term or the scope of a franchise agreement; (c) a motor vehicle dealership agreement. [page 29] (3) However, any of the following does not in itself constitute a franchise agreement: (a) an employer and employee relationship; (b) a partnership relationship; (c) a landlord and tenant relationship; (d) a mortgagor and mortgagee relationship; (e) a lender and borrower relationship; (f)

the relationship between the members of a cooperative that

is registered, incorporated or formed under any of the following laws: (i)

the Corporations Act 2001;

(ii) the Co-operatives Act 1992 (NSW); (iii) the Co-operatives Act 1996 (Vic.); (iv) the Cooperatives Act 1997 (Qld); (v) the Co-operatives Act 2009 (WA); (vi) the Co-operatives Act 1997 (SA); (vii) the Cooperatives Act 1999 (Tas.); (viii) the Cooperatives Act 2002 (ACT); (ix) the Co-operatives Act 1997 (NT).

COMMENTARY ON CLAUSE 5 5.1

Clause 5(1)(a)(iii)

There needs to be an agreement as that term is normally understood at law, as opposed to an invitation to treat or an offer. This distinction is relevant in the context of the various compliance obligations contained in the Code, which require a reference point; for example, the obligation to provide a disclosure document.

5.2

Clause 5(1)(b)

It is important to note that the right has to be to carry on a business that offers, supplies or distributes goods or services, as opposed to a hobby or pastime. Similarly, the agreement must grant the right to carry on that business. So the Code would not apply to an agreement if a party already has a right to carry on such a business.

The prohibition from contravening a mandatory industry code contained in s 51ACB of the CCA does not apply unless the relevant franchise is a franchise agreement granting the franchisee the right to carry on the franchise business in Australia: see Manhattan (Asia) Ltd v Dymocks Franchise Systems (China) Ltd [2014] FCA 1143. [page 30]

5.3

Clause 5(1)(c)

Note that it is the operation of the business that must be associated with the trade mark. So a product distribution agreement where a party is granted the right to sell products that carry a trade mark would not be a franchise where the operation of the business is not substantially or materially associated with the trade mark. Almost all distribution arrangements have products or services identified with a trade mark, but the new code only applies where the operation of the business is substantially or materially associated with a trade mark, advertising or commercial symbol.

5.4

Clause 5(1)(d)

The term ‘an amount’ is quite broad. Obviously even $1 would constitute ‘an amount’, and arguably an indemnity clause where a franchisee is obliged to pay a franchisor damages in certain circumstances could constitute such ‘an amount’. Although it is not clear precisely how a court will interpret this requirement, it does seem clear that Parliament intended that this would be a very low threshold test.

5.5

Clause 5(1)(d)(v)

The Code has clarified a problem area of the Old Code such that what is

important is whether there is a genuine wholesaling arrangement, not just that the price charged is at or below normal wholesale pricing. That said, there is no definition of what might constitute a genuine wholesaling arrangement.

5.6

Clause 5(1)(d)(viii)

Note that if such items are provided at above, or below, market value, the exclusion would not apply. Although some common sense would presumably be applied to the provision, it does allow a court to consider whether amounts that would otherwise be characterised as franchise fees are in fact being disguised in other payments.

5.7

Clause 5(2)(c)

Increasingly, motor vehicle arrangements are being seen as requiring additional regulation. For example, the New South Wales Government enacted the Motor Dealers and Repairers Act 2013 (NSW), which contains among other things, prohibitions on unfair contract terms and unjust conduct. The 2013 Wein Report also signalled out the motor vehicle sector as deserving a specific review as issues were raised that appeared to relate to the motor vehicle sector rather than the franchise sector as a whole. Note in the context of this definition that the definition of a ‘motor vehicle dealership’ in cl 7 of the Code is quite broad, as motor vehicle is defined as ‘a vehicle that uses, or is designed to use, volatile spirit, gas, oil, electricity or any other power (except human or animal power) as the principal means of propulsion …’ The Code gives specific examples of motor vehicles: motor cars, motor cycles, tractors, motorised farm machinery, motorised construction machinery, aircraft, and motor boats. [page 31]

5.8

Clause 5(3)(f)

This exclusion should not be seen as exempting all cooperatives, but rather to require consideration of the nature of the arrangement under cl 5 of the Code. Although cooperative arrangements are not automatically cooperatives, it is likely that many cooperatives will be caught by the Code because the nature of their arrangements meet the requirements of the cl 5 definition of a franchise agreement.

5.9

Case law — meaning of a franchise agreement

In Automasters Australia Pty Ltd v Bruness Pty Ltd [2002] WASC 286; [2004] WASCA 229, an auto repair arrangement was held to be a franchise, and the plaintiff was held to have terminated the agreement in circumstances that were wrongful and did not comply with the Code requirements. The court found that in terminating the franchise agreement, the plaintiff had acted capriciously and unreasonably in circumstances where there was not a sufficient basis to terminate the agreement. The court found that the franchisor’s conduct was unconscionable, declared that the franchise agreement was not terminated and awarded damages to the franchisee. In Clark Rubber Franchising Pty Ltd v Greatbay Pty Ltd [2002] VSC 465 a settlement agreement and purchase agreement arising out of a mediation were both held not to be franchise agreements, as neither agreement granted any party the right to carry on a business under a system or marketing plan. In ACCC v 4WD Systems Pty Ltd [2003] FCA 850, the respondent was found to have breached the Code in relation to an agreement that granted the other party the right to distribute parts for four-wheel drive vehicles. The court stated that the ‘likelihood’ that sales of the relevant goods would comprise no more than 20% of turnover in the first year for the purposes of the exemption,

must be assessed at the date the franchise agreement is entered, rather than assessing the actual percentage in hindsight. In Apple Computer Australia Pty Ltd v Mekrizis (2003) 44 ACSR 518 a reseller agreement was held not to be a franchise agreement, as there was no payment or agreement to pay an amount to the plaintiff in the franchise agreement. The court held that there must be a term in the agreement (or the manual) establishing an obligation to pay an amount. Invoices for services rendered during the term were not sufficient to satisfy the test, as they were payments for goods or services at or below their usual wholesale price and therefore excluded from the test. In Capital Networks Pty Ltd v .au Domain Administration Ltd [2004] FCA 808, the court found that an agreement pertaining to domain name registrar accreditation did not constitute a franchise agreement, as there was no system or marketing plan, and the business was not substantially or materially associated with a trade mark. In determining whether a system or marketing plan existed, the court drew on dictionary definitions and United States franchising legislation, authorities and [page 32] jurisprudence. It was noted that while United States franchising legislation did not directly replicate the wording of the Code, there were ‘marked similarities’ and therefore certain factors relevant in the United States could be used as indicators in Australia. The case was the first in Australia to provide a comprehensive list of factors that indicate the existence of a system or marketing plan. The court stated that the requirement will not be met if the system or marketing plan relates only to ‘a minute or insubstantial part of the business’. In finding that the business was not substantially or materially associated with a trade mark, the use of a logo indicating accreditation was not sufficient to meet the test.

In ACCC v Kyloe Pty Ltd [2007] FCA 1522, the court found that an ice drink distribution business was not a franchise. The court reflected on the Capital Networks case and agreed that the factors set out in the judgment were ‘helpful indicators’ of the existence of a system or marketing plan. The court stated that the list was not intended to be exhaustive, but ‘does serve to focus attention on the type of matters which will inform a judgment on whether the necessary system or marketing plan exists in a particular case’. The court found that the sub-distributors were left to determine their own business plans, and the distributors only had the right to make ‘helpful suggestions’ as to what might be incorporated into such plans. While the respondent provided guidance and sales materials, there was no sales or marketing plan and an insufficient degree of control over how the business was conducted. In Rafferty v Madgwicks [2012] FCAFC 37; Time 2000 Systems (Aust) Pty Ltd v Rafferty [2010] FCA 1179, a relationship agreement relating to the sale of modular accommodation units was found to constitute a franchise agreement. The court provided a list of factors which indicate the presence of a system or marketing plan. The system or marketing plan need not be set out in the agreement itself or even be in existence at the time of entering the agreement. It is sufficient that the agreement would enable the franchisor to substantially determine, control or suggest that the business be carried out under a system or marketing plan, including by requiring the franchisee to comply with a policies and procedures manual. The franchisor was found to have breached the Code and engaged in misleading or deceptive conduct by failing to comply with the disclosure requirements. The franchisor was ordered to repay all monies paid by the appellant. The court found that Madgwicks was not knowingly concerned in the misleading or deceptive conduct of its client nor was it guilty of misleading or deceptive conduct for failing to advise the other parties, as the firm did not know that the relationship agreement was a franchise agreement at the time. In Workplace Safety Australia v Simple OHS Solutions Pty Ltd [2013] NSWSC 1936; [2015] NSWSCA 84, a software distribution agreement was held to be a

franchise agreement. The distribution agreement conferred upon the respondent the exclusive right to procure renewals and sales of software subscription packages, which constituted the right to carry on the business of offering services. It is not essential for all of the indicia in Rafferty to be present in order to establish the existence of a system or marketing plan — the court must consider the agreement [page 33] as a whole. The court found that the appellant had the power and right to control all aspects of the marketing and selling of the software subscription packages. The respondent was entitled to recover the loss suffered as a result of its entry into the distribution agreement, as it would not have done so had the appellant complied with the Code. In Manhattan (Asia) Ltd v Dymocks Franchise Systems (China) Ltd [2014] FCA 1143, an interlocutory application to have a statement of claim struck out, the court held that the Code did not apply to a franchise agreement for the operation of a Hong Kong-based business. The business was wholly operated in Hong Kong and therefore the agreement did not confer a right to carry on the business of offering, supplying or distributing goods or services in Australia. The court accepted the notion that the franchisor’s conduct could give rise to an implied term that the franchisor would comply with the Code, notwithstanding that it did not in fact apply.

5.10

Relevant interlocutory proceedings

In Agro Holdings Ltd v Flexi-Coil (Aust) Pty Ltd [1999] FCA 1658, an injunction hearing regarding a dealership agreement, the court held that it was more probable than not that the agreement was not a franchise agreement and refused the application for an interim injunction. The court

stated that the elements of the definition of ‘franchise agreement’ in the Code are cumulative. In Subway Systems Australia Pty Ltd v Thorpe [2000] QSC 099, a striking out application regarding an area development agreement, the court held that there was an arguable case that the agreement was a franchise agreement. The court stated that a ‘franchise’ for the purposes of the Code must arise from the terms of a ‘franchise agreement’ within the definition under the Code and there is not a different and broader concept of ‘franchise’.

[page 34]

Division 3—Obligation to act in good faith 6

Obligation to act in good faith Obligation to act in good faith (1) Each party to a franchise agreement must act towards another party with good faith, within the meaning of the unwritten law from time to time, in respect of any matter arising under or in relation to: (a) the agreement; and (b) this code. This is the obligation to act in good faith. Civil penalty: 300 penalty units. (2) The obligation to act in good faith also applies to a person who proposes to become a party to a franchise agreement in respect of: (a) any dealing or dispute relating to the proposed agreement; and (b) the negotiation of the proposed agreement; and (c) this code. Matters to which a court may have regard (3) Without limiting the matters to which a court may have regard

for the purpose of determining whether a party to a franchise agreement has contravened subclause (1), the court may have regard to: (a) whether the party acted honestly and not arbitrarily; and (b) whether the party cooperated to achieve the purposes of the agreement. Franchise agreement cannot limit or exclude the obligation (4) A franchise agreement must not contain a clause that limits or excludes the obligation to act in good faith, and if it does, the clause is of no effect. (5) A franchise agreement may not limit or exclude the obligation to act in good faith by applying, adopting or incorporating, with or without modification, the words of another document, as in force at a particular time or as in force from time to time, in the agreement. Other actions may be taken consistently with the obligation (6) To avoid doubt, the obligation to act in good faith does not prevent a party to a franchise agreement, or a person who proposes to become such a party, from acting in his, her or its legitimate commercial interests. (7) If a franchise agreement does not: (a) give the franchisee an option to renew the agreement; or (b) allow the franchisee to extend the agreement; this does not mean that the franchisor has not acted in good faith in negotiating or giving effect to the agreement.

[page 35]

COMMENTARY ON CLAUSE 6 6.1

Explanatory Statement

The Explanatory Statement at p 19 notes that the obligation to act in good faith is not intended as a panacea for all potential misconduct in the franchising relationship. Further it does not replace or amend the prohibitions contained in the Australian Consumer Law, such as those relating to unconscionable conduct, or other prohibitions more generally. Rather, it is intended to provide a flexible mechanism for addressing opportunistic and unfair conduct in franchising that may fall below the threshold of more serious misconduct provisions within the Australian Consumer Law or the CCA. However, such a statement is in fact at odds with the wording of the new provision, which essentially codifies the common law duty of good faith that would be implied into most franchise agreements. There is certainly no reference in cl 6 to either ‘opportunistic or unfair conduct’ and the current state of the common law duty of good faith would currently not extend to such conduct.

6.2

Clause 6(1)

It is unusual for there to be a pecuniary penalty attached to such a nebulous concept as good faith. Although ignorance of the law has never been regarded as a defence, the good faith obligation arguably imposes an obligation to remain aware of developments in the common law. It would also appear that only the parties to a franchise agreement are subject to a pecuniary penalty,

not any person who ‘proposes to become a party to a franchise agreement’, as is covered by subcl (2).

6.3

Clause 6(2)(b)

The law has typically resisted the temptation to consider there to be an implied obligation to negotiate in good faith. With such a prescriptive predisclosure regime, and existing prohibitions on misleading or deceptive conduct, it is hard to envisage a situation where a party complies with these obligations, but does not act in good faith.

6.4

Clause 6(3)(b)

The purposes of the agreement may be difficult to determine, and may merit specific wording in the franchise agreement to endeavour to prevent undesirable purposes being implied by a court.

6.5

Clause 6(4)

This does not, however, mean that it is not possible to constrain the impact of the good faith obligation by carefully considering express obligations in a franchise agreement. Obvious areas where additional drafting may be appropriate would be in relation to pre-contractual negotiations and dispute resolution. [page 36]

6.6

Clause 6(6)

The ACCC notes in its comments on good faith at that good faith requires a party to have due regard to the rights and interests of the

other party, but it does not require a party to act in the interests of the other party or act in its own legitimate commercial interests. Although the intent is to make it clear that parties may still act in their own interests, it may be harder than normal in a franchise relationship to determine where ‘legitimate commercial interests’ end and unlawful conduct begins. The word ‘legitimate’ provides some scope for argument — does legitimate mean ‘lawful’, or is there some moral or commercial interpretation required?

6.7

Clause 6(7)

This provision is intended to make it clear that a franchisor is entitled to decline to grant an option or extension. However, the clause does not totally rule out any good faith claim, particularly if other factors are present.

6.8

Commentary—meaning of good faith

This section includes comments made in relation to the good faith obligation by the government and the ACCC. For a more comprehensive consideration of the law of good faith and franchising, refer to Franchising Law and Practice.1 The ACCC has published material indicating its view of the good faith obligation.2 It notes that parties should ask themselves, in the context of considering whether conduct is in good faith: Have you been honest with the other party? Have you considered the other party’s interests? Have you made timely decisions? Have you consulted with the other party regarding issues/proposed changes? Do you have a contractual right to act in that way? Are you imposing conditions on the other party? Are those conditions necessary to protect your interests?

Where a dispute has arisen, have you attempted to resolve the dispute either directly with the other party, or through mediation? Are you acting for some ulterior purpose?3 Although these provide helpful practical guidance, it would seem that several of the indicators extend beyond the current state of the common law duty, [page 37] for example the suggestion to question whether decisions are timely, or whether consultation has occurred. Similarly, the references to conditions necessary to protect the interests of a party are more relevant to unfair contract legislation than to good faith. Based on the cases to date, the duty to act in good faith requires a party to act reasonably and not for a capricious or irrelevant purpose when exercising its powers under the relevant agreement.4 The courts have held business dealings to be not in good faith when they involve one party acting for some ulterior motive, or in a way that undermines or denies the other party the benefits of a contract.5 The ACCC has included two examples to illustrate their view. Although it should be noted that both cases involved determinations by the court on a consent order basis, rather than in circumstances where the court decided after hearing detailed opposing arguments, the practical reality is that the cases have enhanced relevance given that few franchise systems will have the economic means to challenge the ACCC viewpoint. In Far Horizons Pty Ltd v McDonald’s Australia Ltd [2000] VSC 310, the franchisor of a takeaway food franchise system entered into a franchise agreement that gave the franchisee the right to operate a franchised business at a specific location. The franchisee did not have an exclusive territory and there was no limit on the franchisor’s ability to open new stores. The

franchisee did not have a right to be considered to own and operate additional stores. However, under the franchisor’s expansion policy, an existing franchisee would be eligible to operate another store if they satisfied certain criteria, including compliance with the franchisor’s standards of operation. During the agreement, reviews of the franchisee’s store indicated that it was not meeting the necessary standards required for the franchisee to be eligible to operate another store. This led to issues between the franchisee and franchisor. A year later, the franchisor decided to open a new store in the vicinity of the franchisee’s store due to perceived commercial benefits of expanding its system. The franchisee was not offered the right to operate the new stores. In this instance, the franchisor’s decision to open the stores was motivated by the perceived commercial advantage to the franchisor in opening new stores. [page 38] The franchisor has acted in good faith as its actions were based on the pursuit of its legitimate business interests In Video Ezy International Pty Ltd v Sedema Pty Ltd [2014] NSWSC 143, the franchisor of a video rental franchise system granted a franchisee an exclusive licence over a particular territory. The franchisor was not allowed to be involved in the rental and/or sale of video products, or a business of a similar nature, within the franchisee’s territory. During the agreement, a business that was related to the franchisor sold DVDs via its website to consumers who lived in the franchisee’s territory. The franchisor did not take any action to prevent these online sales. By allowing its related business to sell DVDs within the franchisee’s territory, the franchisor has not acted in good faith as it failed to remain loyal to the

promise of the franchise agreement. Harrison AJ at [72] found that Video Ezy International had an obligation to act in good faith ‘in relation to Sedema, in relation to its contractual obligations to remain loyal to, comply with honest standards of conduct, and act reasonably in relation to the promise of exclusivity in the territories by not competing against Sedema.’ By allowing its related businesses to compete with Sedema, the franchisor had failed to act with the required standard of good faith.

[page 39]

Part 2—Disclosure requirements before entry into a franchise agreement Division 1—Application 7

Application of Part—master franchisors

A master franchisor need not comply with the requirements of this Part in relation to a subfranchisee.

COMMENTARY ON CLAUSE 7 7.1

Application of Part

This amendment to the Old Code is intended to significantly reduce compliance costs by avoiding the previous requirement to provide to a subfranchisee (such as a franchisee of a party such as a master franchisee that has itself received a franchise from someone else) disclosure documents from both the master franchisee (such as the franchisor of the franchisee) and the franchisor (such as the head franchisor) or a joint disclosure document.

Division 2—Disclosure document 8

Franchisor must maintain a disclosure

document Disclosure document to inform franchisee or prospective franchisee (1) A franchisor must create a document (a disclosure document) relating to a franchise that complies with subclauses (3), (4) and (5). Civil penalty: 300 penalty units. (2) The purpose of a disclosure document is to: (a) give a prospective franchisee, or a franchisee proposing to: (i)

enter into a franchise agreement; or

(ii) renew a franchise agreement; or (iii) extend the term or scope of a franchise agreement; information from the franchisor to help the franchisee to make a reasonably informed decision about the franchise; and (b) give a franchisee current information from the franchisor that is material to the running of the franchised business. [page 40] Content and form of disclosure document (3) Information in a disclosure document must: (a) comply with the following: (i)

be set out in the form and order of Annexure 1;

(ii) use the headings and numbering of Annexure 1; (iii) if applicable—include additional information under

the heading “Updates”; or (b) comply with the following: (i)

if particular items are applicable—use the headings and numbering of Annexure 1 for those items;

(ii) if particular items are not applicable—include an attachment that sets out the headings and numbering of Annexure 1 for those items. (4) A disclosure document must be signed by the franchisor, or a director, officer or authorised agent of the franchisor. (5) A disclosure document must also have a table of contents based on the items in Annexure 1, indicating the page number on which each item begins. If the disclosure document attaches other documents, the table of contents must list these other documents too. Maintaining a disclosure document (6) After entering into a franchise agreement, the franchisor must update the disclosure document within 4 months after the end of each financial year. Civil penalty: 300 penalty units. (7) However, the franchisor need not update the disclosure document after the end of a financial year if: (a) the franchisor did not enter into a franchise agreement, or only entered into 1 franchise agreement, during the year; and (b) the franchisor does not intend, or if the franchisor is a company, its directors do not intend, to enter into another franchise agreement in the following financial year.

(8) Despite subclause (7), if a request is made under subclause 16(1), the franchisor must update the disclosure document so that it reflects the position of the franchise as at the end of the financial year before the financial year in which the request is made. Civil penalty: 300 penalty units.

COMMENTARY ON CLAUSE 8 8.1

Clause 8(3)(b)(i)

This amendment to the Old Code enables franchise systems to streamline their disclosure document if certain sections are inapplicable. Annexure 1 is somewhat [page 41] oriented to fixed retail businesses, so the amendment is likely to help mobile or service-based franchise systems and foreign franchise systems where the local party is intended to undertake much of the market due diligence and establishment work.

8.2

Clause 8(3)(b)(ii)

The ACCC Franchisor Compliance Manual notes that if no applicable information exists for a particular item, the applicable headings can be deleted from the disclosure document. However, the deleted headings must be listed in an attachment so the franchisee is aware of the information that has not been provided.

8.3

Clause 8(6)

The definition of ‘financial year’ in cl 3 makes it clear this means the franchisor’s financial year.

8.4

Clause 8(7)(b)

Although the word ‘intend’ is used, if the franchisor does in fact enter into another franchise agreement, it will need to update its disclosure document. Clause 9(1) makes it clear that a disclosure document must be updated. Intent may be relevant to whether the update is under cl 8(6) or 8(7).

9

Franchisor to give documents to a franchisee or prospective franchisee (1) A franchisor must give: (a) a copy of this code; and (b) a copy of the disclosure document: (i)

as updated under subclause 8(6); or

(ii) if subclause 8(7) applies—updated to reflect the position of the franchise as at the end of the financial year before the financial year in which the copy of the disclosure document is given; and (c) a copy of the franchise agreement, in the form in which it is to be executed; to a prospective franchisee at least 14 days before the prospective franchisee: (d) enters into a franchise agreement or an agreement to enter into a franchise agreement; or (e) makes a non-refundable payment (whether of money or of

other valuable consideration) to the franchisor or an associate of the franchisor in connection with the proposed franchise agreement. Civil penalty: 300 penalty units. [page 42] (2) If a franchisor or franchisee proposes to: (a) renew a franchise agreement; or (b) extend the term or scope of a franchise agreement; the franchisor must give to a franchisee (within the meaning of paragraph (a) of the definition of that expression) the documents mentioned in subclause (1) at least 14 days before renewal or extension of the franchise agreement. Civil penalty: 300 penalty units. (3) A franchisor is taken to have complied with the requirements of this clause even if, during the relevant 14-day or longer period, changes are made to a franchise agreement: (a) to give effect to a franchisee’s request; or (b) to fill in required particulars; or (c) to reflect changes of address or other circumstances; or (d) for clarification of a minor nature; or (e) to correct errors or references.

COMMENTARY ON CLAUSE 9

9.1

Clause 9(1)(c)

This wording often creates practical problems where there are changes to the agreement after disclosure, but before signing. The provision was originally inserted to address concerns that franchisees were being provided with template agreements that did not contain adequate detail, or franchisors were seeking to make material changes to the template documentation prior to actual signing. Arguably, the word ‘form’ gives some latitude, but the ACCC Franchisor Compliance Manual makes it clear that only minor changes are permitted. An agreement change to require a franchisee to meet new sales targets and reporting obligations would prohibit the franchisor from entering into the agreement or accepting a non-refundable deposit until 14 days after the franchisee received the updated agreement.

9.2

Clause 9(2)

This amended provision makes it very clear that disclosure must be given on renewal or extension, and essentially the same documents provided. Note that the expanded definition of ‘extension’ now includes material variations to the franchise agreement.

9.3

Clause 9(3)(e)

This provision addresses to some extent the problems created by the strict wording of the Old Code, but the term ‘franchisee’s request’ is more narrow than [page 43] the wording requested in industry submissions, being ‘non-material changes’ or changes to give effect to ‘negotiated amendments’. Accordingly there will

still be circumstances where unnecessary double disclosure will be required. The ACCC Franchisor Compliance Manual gives examples of changes that are permissible, being changes made as a result of negotiations, such as the franchisee requesting a longer agreement term, and changes to the registered office of the franchisee. However, franchisor-instigated commercial changes are not permitted.

10 Franchisee or prospective franchisee to give advice to franchisor before entering into franchise agreement (1) The franchisor must not: (a) enter into a franchise agreement; or (b) renew or transfer a franchise agreement; or (c) extend the term or scope of a franchise agreement; or (d) enter into an agreement to: (i)

enter into a franchise agreement; or

(ii) renew or transfer a franchise agreement; or (iii) extend the term or scope of a franchise agreement; or (e) receive a non-refundable payment (whether of money or of other valuable consideration) under a franchise agreement or an agreement to enter into a franchise agreement; 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 this code.

Before a franchise agreement is entered into, the franchisor must (2) have received from the prospective franchisee: (a) signed statements, that the prospective franchisee has been given advice about the proposed franchise agreement or franchised business, by: (i)

an independent legal adviser; or

(ii) an independent business adviser; or (iii) an independent accountant; or (b) for each kind of statement not received under paragraph (a), a signed statement by the prospective franchisee that the prospective franchisee: (i)

has been given that kind of advice about the proposed franchise agreement or franchised business; or

(ii) has been told that that kind of advice should be sought but has decided not to seek it. (3) Subclause (2): (a) does not apply to: [page 44] (i)

the renewal of a franchise agreement; or

(ii) the extension of the term or scope of a franchise agreement; and (b) does not prevent the franchisor from requiring any or all of the statements mentioned in paragraph (2)(a). (4) In this clause, a reference to a prospective franchisee includes a reference to a prospective transferee.

COMMENTARY ON CLAUSE 10 10.1

Clause 10(1)(e)

However, in Master Education Services Pty Ltd v Ketchell [2008] HCA 38, the High Court held that while there was an obligation to obtain a written statement from a franchisee under s 11(1) of the Old Code, a failure to do so did not render the franchise agreement void.

10.2

Clause 10(2)(b)(ii)

The decision in PouletFrais Pty Ltd v The Silver Fox Company Pty Ltd [2005] (Lenard’s case) FCAFC 131 indicates that the franchisor does not assume all risks associated with the business from the franchisee. There is an onus on the franchisee to seek to understand the legal and financial risks associated with the franchise.

[page 45]

Division 3—Information statement 11 Franchisor to give information statement to prospective franchisee (1) A franchisor must give a copy of the information statement set out in Annexure 2 to a prospective franchisee. (2) The information statement must be set out in size 11 font and be contained on no more than 2 pages. (3) A copy of the information statement is to be given to a prospective franchisee as soon as practicable after the prospective franchisee formally applies or expresses an interest in acquiring a franchised business. (4) To avoid doubt, the requirements of this clause do not apply in relation to: (a) the renewal of a franchise agreement; or (b) the extension of the term or scope of a franchise agreement.

COMMENTARY ON CLAUSE 11 11.1

Clause 11(3)

The government notes at p 10 of the Explanatory Statement that ‘this is a generic statement designed to inform prospective franchisees of the risks and rewards in franchising before they make the psychological commitment to

enter into a franchise agreement,’ The Franchisor Compliance Manual produced by the ACCC notes that a franchisor would not be expected to provide an information statement where a franchisor receives an unsolicited phone call from a prospective franchisee asking general questions about its franchise system and the caller says that they would like to think about it. On the other hand if the franchisee asks detailed questions and then completes an application form, the franchisor must provide the information statement as soon as practicable after they receives the completed form.

[page 46]

Part 3—Franchise agreements Division 1—Application 12 Application of Part—master franchisors A master franchisor need not comply with the requirements of this Part in relation to a subfranchisee.

COMMENTARY ON CLAUSE 12 12.1

Application of Part

The intent of this provision is that in a multi-tiered franchise network involving a master franchisor (sometimes also called a ‘franchisor’), a franchisee appointed by the master franchisor (sometimes also called a ‘master franchisee’) and a sub-franchisee appointed by the franchisee (sometimes also called a ‘franchisee’), the master franchisor does not need to give disclosure to the sub-franchisee. Put another way, the primary disclosure obligation in relation to a franchise agreement rests with the party granting the franchise to the party receiving such a grant. It is then up to the disclosing party to explain the nature and details of the arrangement under items 7 and 8 of the disclosure document.

[page 47]

Division 2—Franchisor’s obligations Subdivision A—Disclosure obligations 13 Copy of lease etc Occupying premises under lease (1) If a franchisee leases premises from the franchisor or an associate of the franchisor for the purposes of a franchised business, the franchisor or the associate must give to the franchisee: (a) either: (i)

a copy of the lease; or

(ii) a copy of the agreement to lease; and (b) details of any incentive or financial benefit that the franchisor or associate is entitled to receive as a result of the lease or agreement to lease. Civil penalty: 300 penalty units. (2) The copy and details must be given within 1 month after the lease or agreement to lease is signed by the parties. Civil penalty: 300 penalty units. Occupying premises without lease (3) If the franchisee occupies, without a lease, premises leased by the franchisor or an associate of the franchisor, the franchisor or the

associate must give to the franchisee: (a) both: (i)

a copy of the franchisor’s lease or agreement to lease or of the associate’s lease or agreement to lease; and

(ii) details of any incentive or financial benefit that the franchisor or associate is entitled to receive as a result of the lease or agreement to lease; or (b) all of the following: (i)

a copy of the documents that give the franchisee the right to occupy the premises;

(ii) written details of the conditions of occupation; (iii) details of any incentive or financial benefit that the franchisor or associate is entitled to receive as a result of the franchisee’s right to occupy the premises. Civil penalty: 300 penalty units. (4) The copy and details must be given within 1 month after: (a) the occupation commences; or [page 48] (b) for the documents mentioned in subparagraph (3)(b)(i)— the documents are signed by the parties. Civil penalty: 300 penalty units. Incentive or financial benefit (5) In this clause, the details of any incentive or financial benefit must include the name of the business providing the incentive or

financial benefit.

COMMENTARY ON CLAUSE 13 13.1

Clause 13(1)(b)

The new obligation to disclose lease incentives or benefits is important, and covers benefits such as fit-out allowances and volume rental rebates.

13.2

Clause 13(2)

The Explanatory Statement at p 27 provides an example that shows this is a strict time requirement. Accordingly, it would be prudent to provide a copy of the lease once it is signed by the franchisor rather than wait until all parties sign, particularly as some landlords can be quite tardy in returning lease documentation to tenants. The fact that the landlord has not returned the lease is no excuse under cl 13(2). Landlords also need to be mindful of the time requirement, as in certain circumstances a tardy landlord could be considered to have aided or abetted a breach of the Code for the purposes of the CCA.

14 Copy of other agreements (1) If a franchise agreement requires: (a) the franchisee; or (b) directors, shareholders, beneficiaries, owners or partners of the franchisee; to enter into an agreement of a kind mentioned in subclause (2), the franchisor must give to the franchisee a copy of the agreement.

Civil penalty: 300 penalty units. (2) The franchisor must give to the franchisee a copy of the following kinds of agreements: (a) a lease (other than a lease of premises which is covered by clause 13) or hire purchase agreement; (b) an agreement under which the franchisee gains ownership of, or is authorised to use, any intellectual property; [page 49] (c) a security agreement, including a guarantee, mortgage, security deposit, indemnity, loan agreement or obligation to provide a bank guarantee to a third party; (d) a confidentiality agreement; (e) an agreement not to carry on business within an area or for a time after the franchise agreement is terminated. (3) The agreement must be given: (a) at least 14 days before the day on which the franchise agreement is signed, if it is available at that time; or (b) if it is not available at that time—when it becomes available.

15 Copy of financial statements (1) If a franchise agreement provides that a franchisee must pay money to a marketing or other cooperative fund, the franchisor must: (a) within 4 months after the end of the last financial year, prepare an annual financial statement detailing all of the

fund’s receipts and expenses for the last financial year; and (b) ensure that the statement includes sufficient detail of the fund’s receipts and expenses so as to give meaningful information about: (i)

sources of income; and

(ii) items of expenditure, particularly with respect to advertising and marketing expenditure; and (c) have the statement audited by a registered company auditor within 4 months after the end of the financial year to which it relates; and (d) give to the franchisee: (i)

a copy of the statement, within 30 days of preparing the statement; and

(ii) copy of the auditor’s report, if such a report is required, within 30 days of preparing the report. Civil penalty: 300 penalty units. (2) A franchisor does not have to comply with paragraph (1)(c) in respect of a financial year if: (a) 75% of the franchisor’s franchisees in Australia, who contribute to the fund, have voted to agree that the franchisor does not have to comply with the paragraph in respect of the financial year; and (b) that agreement is made within 3 months after the end of the financial year. (3) If a franchise agreement provides that a franchisee must pay money to a marketing or other cooperative fund, the reasonable costs of administering and auditing the fund must be paid from the fund.

[page 50]

COMMENTARY ON CLAUSE 15 15.1

Clause 15(1)(b)

This amendment to the Code makes it clear that ‘meaningful information’ is required as to the items of expenditure. The revised requirement for franchisee votes on audits to be annually, rather than each three years, provides additional protection. The government notes at p 29 of the Explanatory Statement that ‘the underpinning objective is to allow franchisees to determine, in an equitable manner, whether further scrutiny is warranted for marketing and cooperative funds for a particular financial year.’

15.2

Clause 15(2)(b)

The Explanatory Statement at p 29 provides that there is no prescribed process for conducting franchisee votes, which ‘recognises the diverse nature and structure of franchise systems and provides flexibility for voting to be conducted in the best way that suits the franchise.’ That said, the section is clear that the calculations must be made against the franchisees that contribute to the fund, not just 75 per cent of those that attend any particular meeting. The ACCC Franchisor Compliance Manual notes that where a franchisor operates a company outlet or business, the franchisor gets one vote per outlet as if there were separate franchises for each business.

16 Disclosure document

Upon receiving a written request from a franchisee, a franchisor (1) must give to the franchisee a disclosure document: (a) if subclause 8(8) applies—within 2 months of the date of the request; and (b) in any other case—within 14 days of the date of the request. Civil penalty: 300 penalty units. (2) However, a request under subclause (1) can be made only once every 12 months.

COMMENTARY ON CLAUSE 16 16.1

Clause 16(1)(a)

See cl 8(8), which provides that the exemption from updating granted under cl 8(7) is subject to any request made by a franchisee under cl 16(1), and in such case the franchisor must update the disclosure document so that it reflects the position of the franchise as at the end of the financial year before the financial year in which the request is made. Clause 16(1)(a) simply provides the franchisor with a longer period of time to effect the update. [page 51]

16.2

Clause 16(2)

Although slightly ambiguous, this means each franchisee can only make one request per annum, rather than limiting all franchisees collectively to one request.

17 Disclosure of materially relevant facts Financial details (1) If: (a) either: (i)

a statement or declaration referred to in item 21 of Annexure 1 is made; or

(ii) a document referred to in that item comes into existence; and (b) the statement or declaration is not reflected in, or the document is not provided together with, a disclosure document that has been updated under subclause 8(6); the franchisor must give to a prospective franchisee a copy of the statement, declaration or document, as soon as reasonably practicable, but in any event, before the prospective franchisee enters into a franchise agreement with the franchisor. Civil penalty: 300 penalty units. Other matters (2) If a disclosure document does not mention a matter mentioned in subclause (3), the franchisor must tell a franchisee or prospective franchisee about the matter, in writing, within a reasonable time (but not more than 14 days) after the franchisor becomes aware of it. Civil penalty: 300 penalty units. (3) For subclause (2), the matters are the following: (a) change in majority ownership or control of:

(i)

the franchisor or an associate of the franchisor; or

(ii) the franchise system; (b) proceedings by a public agency, a judgment in criminal or civil proceedings or an award in an arbitration against the franchisor, a franchisor director, an associate of the franchisor or a director of an associate of the franchisor, in Australia alleging: (i)

breach of a franchise agreement; or

(ii) contravention of trade practices law; or (iii) contravention of the Corporations Act 2001; or (iv) unconscionable conduct; or [page 52] (v) misconduct; or (vi) an offence of dishonesty; (c) a judgment against the franchisor or an associate of the franchisor, other than for unfair dismissal of an employee, under: (i)

Part 3 of the Independent Contractors Act 2006; or

(ii) a law of a State or Territory that regulates workplace relations or independent contractors; (d) civil proceedings in Australia against the franchisor, a franchisor director, an associate of the franchisor or a director of an associate the franchisor, by at least 10%, or 10, of the franchisees in Australia of the franchisor (whichever is the lower);

(e) any judgment that is entered against the franchisor or an associate of the franchisor in Australia, and is not discharged within 28 days, for at least: (i)

for a small proprietary company—$100 000; or

(ii) for any other company—$1 000 000; (f)

any judgment that is entered against the franchisor or an associate of the franchisor in a matter mentioned in item 4 of Annexure 1;

(g) the franchisor or an associate of the franchisor becoming an externally-administered body corporate; (h) a change in the intellectual property, or ownership or control of the intellectual property, that is material to the franchise system; (i)

the existence and content of:

(ii) any undertaking given by the franchisor or an associate of the franchisor under section 87B of the Competition and Consumer Act 2010; and (iii) any order made by the Federal Court of Australia under that section in relation to such an undertaking. (4) For paragraphs (3)(b), (c), (d), (e) and (f), the franchisor must tell the franchisee: (a) the names of the parties to the proceedings; and (b) the name of the court or tribunal; and (c) the case number; and (d) the general nature of the proceedings. (5) For paragraph (3)(g), the franchisor must tell the franchisee the name and address of the administrator, controller or liquidator.

Note: Nothing in this code affects the operation of Part VIIC of the Crimes Act 1914 (which includes provisions that, in certain circumstances, relieve persons from the requirement to disclose spent convictions and require persons aware of such convictions to disregard them).

[page 53]

COMMENTARY ON CLAUSE 17 17.1

Clause 17(1)

So, for example, if a franchisor provides a disclosure document that is up to date at the time it is provided, but a new financial report becomes available prior to the franchisee signing, the new report must be provided. This amendment is intended to partially codify and clarify the obligation confirmed in SPAR Licensing Pty Ltd v MIS Qld Pty Ltd [2014] FCAFC 50, that updated financial information must be provided if it becomes available after disclosure and prior to signing the franchise agreement. At p 31 of the Explanatory Statement, the government notes that ‘financial details, such as the franchisor’s solvency statement and financial reports, are often critical to the prospective franchisee’s ability to make a reasonably informed decision about the franchise. This is particularly the case if those updated financial details reveal a significant downturn in the franchisor’s financial position that is not reflected in the disclosure document which was given to the franchisee.’ That said, the ACCC Franchisor Compliance Manual notes that the obligation to provide the new financial report is irrespective of whether the report shows an improvement or deterioration of the franchisor’s financial position.

17.2

Clause 17(2)

Clause 17 must be read in conjunction with item 22 of Annexure 1, which requires a franchisor to update any information given under cl 17 if this has changed between the date of preparation of the disclosure document and the date when this was provided under the Code. (Refer to p 31 of the Explanatory Statement.)

17.3

Clause 17(3)(a)(i)

Note the new requirement to disclose such change in relation to an associate, and also in relation to ‘the franchise system’. There is potential for this change to cause problems where there are a diverse number of associates. It is now very clear that disclosure must extend beyond changes purely to the franchisor entity. The same applies to the disclosure obligations below, which now extend to associates.

Subdivision B—Notification obligations 18 End of term arrangements (1) The franchisor of a franchise agreement must notify the franchisee, in writing, whether the franchisor intends to: (a) extend the agreement; or (b) enter into a new agreement. (2) The franchisor’s notice must be given: [page 54] (a) if the term of the franchise agreement is 6 months or longer —at least 6 months before the end of the term of the

agreement; and (b) if the term of the franchise agreement is less than 6 months —at least 1 month before the end of the term of the agreement. Civil penalty: 300 penalty units. (3) Unless the franchisor does not intend to extend the franchise agreement, the franchisor’s notice must include a statement to the effect that, subject to subclause 16(2), the franchisee may request a disclosure document under clause 16. Civil penalty: 300 penalty units.

COMMENTARY ON CLAUSE 18 18.1

Notification obligation

In addition to this notification obligation, a franchisor must include information in item 18 of the disclosure document as to the process to apply in determining arrangements to apply at end of term. This information includes whether the franchisee will have the option to renew or extend the franchise agreement or receive compensation, and whether (and if so at what price) the franchisor will purchase stock, marketing material, equipment and other assets at end of term. Details of rights to sell the business and any first right of refusal must be provided, and explicit warnings must be included where the franchisee does not have various rights. (For full details, see item 18 of Annexure 1.)

Subdivision C—Record keeping obligations 19 Keeping certain information and documents

(1) If this code requires a franchisee or prospective franchisee, or allows a franchisee or prospective franchisee, to give something to a franchisor in writing, the franchisor must keep the written thing or a copy of it. (2) If a franchisor: (a) makes a statement or claim in the franchisor’s disclosure document; and (b) relies on a document to support the statement or claim; the franchisor must keep the document. (3) A franchisor must keep the written thing or document for at least 6 years after it is created.

[page 55]

COMMENTARY ON SUBDIVISION C AND CLAUSE 19 19.1

Subdivision C-Record keeping obligations

The Code has extensive record keeping obligations. These obligations are specific to franchising matters, and are in addition to, and not in replacement of, any other record keeping obligations that exist under companies, taxation or other legislation. From a practical perspective, these requirements link to the ACCC’s enhanced investigative and auditing powers. Section 51ADD of the CCA provides that the ACCC may require any information that is required to be kept, generated or published or a document under an industry code to be provided for inspection and auditing. The obligation extends beyond

franchise agreements and disclosure documents to the Information Statement in Annexure 2 and the various Code certificates. It would include any notices or requests from franchisees, such as a request for extension of term or transfer, but not to normal day-to-day communications between the franchisor and the franchisee. Similarly, general record keeping needs to be considered in the context of the ACCC’s power to issue a substantiation notice6 requiring a person to give information or produce documents that could be capable of substantiating or supporting a claim or representation made by the person. Parties need to keep records and retain sufficient information to enable them to comply with a substantiation notice. In the context of a disclosure document, this ought to include information relevant to the figures included or statements made in the disclosure document. A substantiation notice must be complied with within 21 days of notice. If a person does not respond to a substantiation notice, or does not respond within the compliance period, the ACCC may issue an infringement notice resulting in a penalty of $3300 for a body corporate other than a listed corporation or $660 for an individual. Alternatively, the court may order payment of a civil or criminal penalty of up to $16,500 for a body corporate other than a listed corporation or $3300 for an individual. Civil or criminal penalties of $27,500 for a body corporate and $5500 for an individual may apply where false or misleading information or documentation is provided to the ACCC in response to a substantiation notice.

19.2

Clause 19(1)

Note that this requirement is directly linked to the ACCC’s enhanced investigative and auditing powers. Section 51ADD of the CCA provides that the ACCC may require any information that is required to be kept, generated or published or a document under an industry code to be provided for inspection and auditing. The obligation extends beyond franchise agreements

and disclosure documents to the Information Statement in Annexure 2 and the various Code certificates. It would include any notices or requests from franchisees, such as a request for extension of term or transfer, but not to normal day-to-day communications between the franchisor and the franchisee.

[page 56]

Division 3—Terms of franchise agreement 20 Prohibition on release from liability etc (1) A franchise agreement must not require a franchisee to sign: (a) a general release of the franchisor from liability towards the franchisee; or (b) a waiver of any verbal or written representation made by the franchisor. Note: See subclauses 3(4) and (5). (2) However, subclause (1) does not prevent a franchisee from settling a claim against the franchisor after entering into a franchise agreement. (3) If a franchise agreement contains a general release or waiver in contravention of subclause (1), the general release or waiver is of no effect, even if signed by the franchisee.

COMMENTARY ON DIVISION 3 AND CLAUSE 20 20.1

Division 3—Terms of franchise agreement

The Code generally does not seek to regulate the content of a franchise agreement, with the fundamental principle of freedom of contract underpinning the terms of the franchise agreement. However, there are some

clauses that are either prohibited or rendered unenforceable by operation of the Code. In this context, it should be noted that unless otherwise specified in the particular clause of the Code, this applies to all franchise agreements, not just franchise agreements entered into on or after 1 January 2015.

20.2

Clause 20(2)

Although not specifically stated, the clear implication to be drawn from this subclause and the limitation of subcl (1) to a ‘franchise agreement’ is that settlement of a claim and any associated settlement document can include a general release or waiver.

21 Jurisdiction for settling disputes (1) A franchise agreement may contain a clause that: (a) if a party to the agreement wishes to bring an action or proceedings in relation to a dispute under the agreement, requires the party to bring the action or proceedings in a State or Territory in which the franchised business is based; or (b) if a party to the agreement wishes to refer a dispute under the agreement to mediation, requires the mediation to be conducted in a State or Territory in which the franchised business is based. [page 57] (2) A franchise agreement must not contain a clause that: (a) requires a party to the agreement to bring an action or

proceedings in relation to a dispute under the agreement: (i)

in any State or Territory outside that in which the franchised business is based; or

(ii) in any jurisdiction outside Australia; or (b) requires the mediation of a dispute under the agreement to be conducted: (i)

in any other State or Territory outside that in which the franchised business is based; or

(ii) in any jurisdiction outside Australia. Note: See subclauses 3(4) and (5). (3) If a franchise agreement contains a clause in contravention of subclause (2), the clause is of no effect.

COMMENTARY ON CLAUSE 21 21.1

Clause 21(2)

Note the required connection to the franchise agreement. Nothing in the Code prohibits a party from actually choosing to issue legal proceedings in its chosen state or territory, or prohibits a court ordering mediation or dispute resolution in a manner contrary to the provisions of the Code.

22 Costs of settling disputes A franchise agreement must not contain a clause that requires the franchisee to pay to the franchisor costs incurred by the franchisor in relation to settling a dispute under the agreement, and if it does, the clause is of no effect.

Note: See subclauses 3(4) and (5).

COMMENTARY ON CLAUSE 22 22.1

Explanatory Statement

The Explanatory Statement on p 33 notes that ‘this provision is intended to capture clauses in franchise agreements that require the franchisee to pay for costs associated with settling a dispute, such as the franchisor’s legal costs, travel costs, mediator fees and venue hire. It is not intended to prevent the parties entering into an agreement in relation to the franchisor’s costs at any time after the franchise agreement has been entered into.’ Similarly, it remains open for a franchisor to [page 58] seek reimbursement from a franchisee for the costs associated with breach of a franchise agreement, including issuing a notice of breach or notice of termination. The preparation of a dispute notice on the other hand would probably be caught by being ‘associated with settling a dispute’.

23 Effect of restraint of trade clause if franchise agreement not extended (1) A restraint of trade clause in a franchise agreement has no effect after the agreement expires if: (a) the franchisee had given written notice to the franchisor seeking to extend the agreement on substantially the same terms as those:

(i)

contained in the franchisor’s current franchise agreement; and

(ii) that apply to other franchisees or would apply to a prospective franchisee; and (b) the franchisee was not in breach of the agreement or any related agreement; and (c) the franchisee had not infringed the intellectual property of, or a confidentiality agreement with, the franchisor during the term of the agreement; and (d) the franchisor does not extend the agreement; and (e) either: (i)

the franchisee claimed compensation for goodwill because the agreement was not extended, but the compensation given was merely a nominal amount and did not provide genuine compensation for goodwill; or

(ii) the agreement did not allow the franchisee to claim compensation for goodwill in the event that it was not extended. (2) Subclause (1) also applies in respect of a restraint of trade clause that is incorporated into a franchise agreement: (a) by reference to another document; or (b) by another document physically attached to the agreement. Note: See subclauses 3(4) and (5).

COMMENTARY ON CLAUSE 23 23.1

Clause 23(1)

This is not defined, but the Explanatory Statement notes on p 33 that ‘in the context of franchising a restraint of trade clause seeks to impose a restriction on a franchise’s ability to open a business similar to the one conducted under the [page 59] franchise agreement once the franchise arrangement has ended.’ So a clause that purely restricts the use of proprietary confidential information or intellectual property would not be included. Page 34 of the Explanatory Statement notes that the clause ‘does not apply to other restraint clauses, such as those that prevent a former franchisee from approaching staff of the franchisor or using the franchise’s intellectual property.’ On this basis, the clause would presumably also not apply to a non-solicitation clause in relation to specific customers. The apparent intent is to enable the franchisee to carry on a competing business if an extension of the franchise agreement is not granted. However, some limitations in relation to use of confidential information, systems and intellectual property would still appear lawful.

23.2

Clause 23(1)(a)

The notice requirement is important, and the franchisor must keep records of all such notices under cl 19.

23.3

Clause 23(1)(a)(ii)

It should be noted that the franchisee is not entitled to a continuation on its current terms, but must accept the terms available to incoming franchisees.

23.4

Clause 23(1)(e)(i)

Although not stated, this presumably refers to the franchisee’s goodwill, rather than the aggregate value of the goodwill of the franchised business assessed on a going concern basis on the assumption that the franchise agreement is extended. The Explanatory Statement on p 34 notes that ‘subparagraph 23(1)(e)(i) does not mean that a franchisee will be assumed to have contributed to the goodwill in the franchised business and does not create a right to be compensated for any such contribution.’ Note that the compensation can be nominal if it is ‘genuine compensation’. There may be circumstances where the franchisee has no goodwill, such as where the franchisor controls the premises, brand and system. Although it might be argued that a franchisee that has no right to continue to operate the business using the brand and system ought not be considered to have goodwill assessed on a going-concern basis, the intention of the provision appears to be broader. On pp 34 and 35 of the Explanatory Statement, it is noted that ‘where it can be shown that the former franchisee has contributed to the growth of the franchised business and has thereby generated goodwill in the franchised business, it is considered reasonable that the former franchisee be compensated for that, if it is to be limited by a restraint of trade clause. Whether the compensation offered is genuine should be decided having regard to the circumstances of the case.’ Given the considerable uncertainty surrounding the nature and calculation of goodwill, it would be prudent to attempt to clarify exactly how goodwill is to be calculated if enforcement of a restraint clause is important. [page 60] Clause 23 of the Code alters the common law position. At common law it is settled that a franchisee has no general right to payment for goodwill upon termination or expiry of the franchise term: see Ranoa Pty Ltd v BP Oil Distribution Ltd (1989) 91 ALR 251, where the court held that an oil company

franchisee had no right of compensation for goodwill lost when a service station lease and dealer trading agreement were not renewed. The concept of goodwill is somewhat fraught in the franchising context. In Federal Commissioner of Taxation v Murry (1998) 193 CLR 605; 155 ALR 67; BC9802402, the majority judgment noted (at ALR 68, BC [4]) that the essential quality of goodwill is that it has no independent existence apart from the business to which it attaches: Goodwill is inseparable from the conduct of a business. It may derive from identifiable assets of a business, but it is an indivisible item of property, and it is an asset that is legally distinct from the sources — including other assets of the business — that have created the goodwill. Because that is so, goodwill does not inhere in the identifiable assets of a business, and the sale of an asset which is a source of goodwill, separate from the business itself, does not involve any disposition of the goodwill of the business. In Murray Pest Management Pty Ltd v A & J Bilske (2012) 165 NTR 28; [2012] NTSC 5; BC201200066, Mildren J held that a franchise does not constitute a lease of goodwill as goodwill cannot exist separately to a business to which it is attached. However, ‘the business of the franchisee’ is capable of generating goodwill, because it is a business just as the business of the plaintiff is also capable of generating goodwill.7 Any analysis of cl 23 has to be undertaken in the context of the law of goodwill, and the apparent need for goodwill to attach to a business or assets. Clause 23 is likely to present challenges to those charged with the responsibility of calculating goodwill in circumstances where an asset such as the right to operate under a franchise agreement and use a name has ended.

Restraint of trade at law The Code requirements supplement common law and statute as they apply to

restraints of trade in franchising. Indeed, it is important to have a good understanding of the law of restraint of trade to properly assess the implications of [page 61] the various provisions of the Code. For example, if a party is already unlikely to be unable to enforce a restraint of trade provision, it is less critical that consideration be given to inserting a provision to allow for a franchisee to claim compensation under cl 23 of the Code. The common law and statutory position in relation to restraints of trade is summarised below, with some case notes included to demonstrate how the courts have applied the law. For a more detailed discussion, refer to Ch 17 of Franchising Law and Practice.8

The common law The common law position on restraints of trade remains essentially as outlined in the landmark English House of Lords decision in Nordenfelt v Maxim Nordenfelt Guns & Ammunition Co Ltd [1894] AC 535; (1894) 63 LJ Ch 908; 71 LT 489 (Nordenfelt). The test was laid down by Lord McNaughten (at AC 565): All interference with individual liberty of action in trading, and all restraints of trade of themselves, if there is nothing more, are contrary to public policy, and therefore void. That is the general rule. But there are exceptions: restraints of trade … may be justified by the special circumstances of a particular case. It is a sufficient justification, and indeed it is the only justification, if the restriction is reasonable — reasonable, that is, in reference to the interests of the parties concerned and reasonable in reference to the interests of the public, so framed and so guarded as to afford adequate

protection to the party in whose favour it is imposed, while at the same time it is in no way injurious to the public.9 In Nordenfelt, it was held that the restraint imposed on the vendor of a business that he would not compete with the purchaser of that business anywhere in the world for 25 years was reasonably necessary to enable the purchaser to enjoy what it had acquired. Relevant factors in reaching the decision were: the fact that the vendor received in excess of £200,000 by way of purchase price; the parties had reached agreement on the terms of the restraint and the purchasers were merely seeking protection for what they had acquired; the seller had a worldwide reputation in a specialist area (designing and manufacturing quick firing guns); and there was no threat to the public interest in freedom of trade relative to these other factors. The High Court of Australia in Amoco Australia Pty Ltd v Rocca Bros Motor Engineering Co Pty Ltd (1973) 133 CLR 288; 1 ALR 385; BC7300033 commented [page 62] that the principles established in decisions such as the Nordenfelt case, above, require that two tests must be satisfied in order to justify a restraint of trade (ALR at 400 and 401): the restraint must be reasonable in the interest of the parties in that it affords no more than adequate protection to the covenantee, while at the same time it is in no way injurious to the public; and the court must form its own judgment in dealing with the question of reasonableness between the parties, bearing in mind issues such as the proprietary interest to be protected, the investment by the parties and any other relevant circumstance.10

Restrictive covenants in franchise agreements In relation to restrictive covenants in franchise agreements, Austin J in KA & C Smith Pty Ltd v Ward (1998) 45 NSWLR 702 at 722; (1999) ATPR ¶41–717; BC9807379 stated (at [24]) that: To assess the reasonableness of the restraint clause, it is necessary to identify the legitimate interests which the clause seeks to protect. This is not a case where the purchaser of a business seeks to protect the goodwill which it has acquired by restraining the vendor from competing; nor is it a case where an employer seeks to protect its confidential information by restraining a former employee from working for a competitor. A franchise agreement has some of the elements of both of these cases, although it is a commercial arrangement closer to the former than the latter: Prontaprint Plc v Landon Litho Ltd [1987] FSR 315 at 324; Stokely-Van Camp Inc v New Generation Beverages Pty Ltd (1998) 44 NSWLR 607 at 613. In my opinion, the franchisor has an interest at stake which is analogous to the purchaser’s goodwill. It has an interest in protecting the patronage built up through the operation of the franchise, which may be lost if the franchisee is permitted to compete without restriction. The franchisor also has an interest in preserving the confidentiality of confidential information provided to the franchisee, which could be used by the franchisee to compete with the franchisor if there were no restraint. However, the franchisee has an interest in protecting the goodwill of its business. The customers are customers of the franchisee’s business, though the franchisor also has an “interest” in the customers since they are attracted to the business as a franchise business. The question is whether the restraint clause in the second franchise agreement is too wide, given the nature of the franchisor’s interest and the need to balance the interests of franchisor and franchisee.

In Murray Pest Management Pty Ltd v A & J Bilske (2012) 165 NTR 28; [2012] NTSC 5; BC201200066, the defendant had entered into a franchise agreement [page 63] under which it was granted the right to operate a pest control business in Katherine in the Northern Territory. The husband and wife directors of the franchisee resolved not to renew the franchise and, mindful of post-franchise restraints, incorporated a new company and leased its vehicles, plant and equipment to a new company they incorporated which commenced carrying on a pest control business after expiry of the franchise term. Although the court was prepared to find that the employees were bound by the restraint, notwithstanding that they had not signed a written restraint, the court held that the restraint was void as it was too wide. Where it is possible to establish a substantial link between telephone numbers and the franchise, the courts have held a sufficient link with the franchisor to require a franchisee to change their telephone number and transfer the other number into the name of the franchisor: Budget Transport Industries Pty Ltd v Giboland Pty Ltd (1986) ATPR ¶40–684; ASC ¶55–479; Zane Solar Systems Australia Pty Ltd v Carlile Solar Products Pty Ltd (FCA, Drummond J, 12 July 1994, unreported, BC9406849). If the franchisor wishes to maintain control of the premises from which the franchise business is conducted, the franchisor needs to ensure that there are appropriate provisions contained in the franchise agreement to facilitate this arrangement. D S & N Nominees Pty Ltd v Movieland Franchise Systems Pty Ltd (VSCA, Brooking, Ormiston, Coldrey JJ, 6464/94, 15 September 1994, unreported, BC9406196) (Movieland) and Barber v Pure & Natural (Aust) Pty Ltd (1994) V ConvR ¶54–490 (Barber) illustrate the difficulties a franchisor can have in obtaining immediate access even where provisions exist. In the Movieland case, above, a franchisee was successful on an interlocutory basis

in preventing the enforcement of a clause requiring the franchisee to assign the lease to the franchisor on termination, whereas in Barber, above, the franchisor had actually terminated the franchisee’s licence, moved into possession, and changed the locks on the premises. However, the court found that on the balance of convenience, the franchisee should run the business until trial, given allegations by the franchisee as to misleading and deceptive conduct by the franchisor.

Other cases In Rentokil Pty Ltd v Lee (1995) 66 SASR 301; 183 LSJS 444; BC9502273, Lee had been employed by Rentokil as a sales consultant in South Australia in the area of sanitary hygiene. She was required, inter alia, to secure contracts with potential customers and to renew contracts with existing customers, in each instance for periods of about two years. Her various designated territories covered a large proportion of South Australia. In the course of her employment, Lee dealt with thousands of Rentokil’s existing and potential customers and had access to commercially sensitive confidential information of the company in the nature of client files, price lists and computer lists of customers. Lee had signed a written ‘non-competition deed’ which contained non-disclosure provisions and restrained her from working ‘in any capacity’ in certain streams of business for one year [page 64] within South Australia after her employment terminated. The Full Court of the Supreme Court of South Australia held that the restraint was reasonable and that the deed was enforceable.11 In Barlow v Neville Jeffress Advertising Pty Ltd (1994) 4 TasR 391; (1995) ATPR ¶41–376; BC9400495, the managing director of an advertising agency,

sold to another advertising agency, was employed by the purchaser on terms which prevented him from engaging in certain conduct with specified clients. The Tasmanian Court of Appeal held that this restraint was enforceable. In Credit Reference Association of Australia Ltd v Clark (1995) 37 AILR ¶7– 005, the defendant left the Credit Reference Association of Australia (CRAA). Seven out of 15 major clients followed her, having been contacted by the defendant using a client list prepared by the defendant while she was in the employment of CRAA. To some extent, this case turns on its own facts, and relates not so much to the breach of a restrictive covenant but the use by a party of confidential information belonging to another party in breach of an obligation of fidelity. It was important that evidence was provided demonstrating that some of the activities conducted by the defendant had occurred prior to her cessation of employment. Damages of $200,000 were assessed, based on a loss of income. In Crouch v Shields (1984) ATPR ¶40–481, a contract of sale of a business contained a restrictive covenant which prohibited the vendor from being engaged in a similar business within 40 kilometres for five years. Two years later, the vendor advised the purchaser that it intended to open a new business approximately 400 metres from the previous premises. The vendor contended that the period of five years was excessive, and that a maximum period which could be regarded as reasonable was 18 months. The vendor argued that the question of reasonableness should be approached by considering how long it would take a person entering into a ladies hairdressing business to build up a relationship with customers. The court considered that the period of covenants should be such a length as to permit the plaintiff to take full advantage of the goodwill which she purchased. While five years was excessive, a period of three years would be reasonable. An injunction [page 65]

was granted, despite there being only 10 months to run on the restraint, as the court did not feel damages would be an appropriate remedy.12 For cases relevant to the drafting of restrictive covenants, see JQAT Pty Ltd v Storm [1987] 2 Qd R 162; (1987) ATPR ¶40–812 and Austra Tanks Pty Ltd v Running [1982] 2 NSWLR 840; (1983) ATPR ¶40–340; Q ConvR ¶54–094. See also Ch 17 of Franchising Law and Practice.13 In the United Kingdom, in Prontaprint plc v Landon Litho Ltd [1987] FSR 315, a former franchisee had, subsequent to the expiration of the franchise agreement, continued to conduct a similar business from the same premises from which it had previously operated business in the capacity of a franchisee in breach of a restrictive covenant in the franchise agreement. The court granted interlocutory relief to the franchisor, noting that the franchisee was not just purchasing know-how and goodwill pursuant to the franchise agreement, but was purchasing a protected interest under the franchise. The court felt that covenants in relation to franchise agreements are more closely related to those which relate to the sale of property than they are to those which relate to an employer/employee relationship. The court further considered that the franchisor should be permitted to continue to enjoy the benefit of the goodwill attaching to the name ‘Prontaprint’ by granting a further franchise to another person in the area in question as well as preventing competition from the former franchisee. Reck v Gilham [1995] 1 Qd R 302; (1994) ATPR ¶41–309, where the relationship was more akin to an employment relationship, in that the franchisee provided considerable personal exertion as part of the business, the court was not inclined to enforce a restrictive covenant. See also Drake Personnel Ltd v Beddison [1979] VR 13, where the court found that the confidentiality sought to be protected was no more than that which was proposed in a normal professional person and as such was inadequate to justify the covenant. Similarly, in A Schroeder Music Publishing Co Ltd v Macaulay [1974] 3 All ER 616; [1974] 1 WLR 1308 and Clifford Davis Management Ltd v WEA Records Ltd [1975] 1 All ER 237; [1975] 1 WLR 61,

manifestly unfair terms, grossly inadequate consideration, absence of independent advice, and a ‘gravely impaired bargaining position’ were all factors that combined to render the covenant unenforceable.

The Competition and Consumer Act The unconscionability regime under s 21 of the ACL is influential in Australia in this context. At the very least, it is clear in Australia that the ‘interpretation’ [page 66] of restraint will be subject to all relevant circumstances. Factors such as the extent of bargaining between the parties, the circumstances of termination and the other consequences of termination will be relevant. It appears, for example, that where an agreement has been terminated by the purportedly restrained party because of a breach of contract by the other party, a restraint of trade clause will not be enforced: see TCN Channel 9 Pty Ltd v Hayden Enterprises Pty Ltd (1989) 16 NSWLR 130; BC8902190. See also Australian Competition and Consumer Commission v Simply No-Knead (Franchising) Pty Ltd (2000) 104 FCR 253; 178 ALR 304; BC200005673; the 1998 ACCC proceedings against Cheap As Chips Pty Ltd, ACCC v Leelee Pty Ltd (2000) 22 ATPR ¶41–47; Stowar v Myer Stores Ltd (t/as Grace Bros) (1993) 50 IR 9; and Gallagher v Pioneer Concrete (NSW) Pty Ltd (1993) 113 ALR 159; ATPR ¶41216; BC9304625. Similarly, irrespective of a restraint of trade clause in the franchise agreement, or its enforceability, the misleading or deceptive conduct provision in s 18 of the ACL may be used by a franchisor to prevent an ex-franchisee from using ‘items’ associated with the franchise system in competition with it. In Enzed Holdings Ltd v Wynthea Pty Ltd (1984) 4 FCR 450; 57 ALR 167; (1984) AIPC ¶90–144, an injunction preventing an ex-franchisee from

competing after termination of the franchise was not granted, but the court found breaches of ss 52 and 53 of the (former) Trade Practices Act (TPA) where the franchisee did not remove any entry containing the Enzed name from the local telephone directory. In Australian Solar Mesh Sales Pty Ltd v Tomlin Industries Pty Ltd (1991) 2 IPR 447; AIPC ¶90–824; BC9103301, a franchisor successfully used s 52 of the (former) TPA to prevent a franchisee from utilising the image and ‘get up’ of the franchisor after termination of a franchise agreement. In Budget Transport Industries Pty Ltd v Giboland Pty Ltd (1986) ASC ¶55– 479; ATPR ¶40–684, the franchisor successfully restrained a franchisee from using the telephone number which pertained to the franchised business. In addition to, or instead of, imposing a restraint on competition on a former franchisee, a franchisor may also seek to restrain the use of confidential information. An obligation to keep information confidential may arise from the general law pursuant to a general equitable jurisdiction or to contract. The general law confidentiality obligation requires that: the information has the necessary quality of confidence or secrecy; the information must have been imparted in circumstances which import an obligation of confidence; and the recipient of the information must use the information or threaten to use the information without the consent of the ‘owner’.14 [page 67]

Division 4—Transfer of franchise agreement 24 Request for franchisor’s consent to transfer

(1) A person may request, in writing, that a franchisor consent to the transfer of a franchise agreement. (2) A request must be accompanied by all information that the franchisor would reasonably require and expect to be given to make an informed decision. (3) If the franchisor requires further information to make an informed decision, the franchisor may, in writing, request the person to provide specified information relevant to making the decision.

COMMENTARY ON CLAUSE 24 24.1

Clause 24(2)

This amendment to the Code has addressed problems under the Old Code where a franchisee requested consent and the 42-day period commenced running, but the franchisor did not have sufficient detail to properly consider the transfer request.

25 Franchisor’s consent to transfer Giving consent (1) A franchisor must advise, in writing, a person who has made a request under clause 24 for consent to the transfer of a franchise agreement: (a) whether consent is given, and if not, give reasons why not; and (b) if consent is given—whether the franchisor’s consent is

subject to one or more conditions being satisfied. (2) A franchisor must not unreasonably withhold consent to the transfer of a franchise agreement. (3) A franchisor may reasonably withhold consent in the following circumstances: (a) the proposed transferee is unlikely to be able to meet the financial obligations that the proposed transferee would have under the franchise agreement; (b) the proposed transferee does not meet a reasonable requirement of the franchise agreement for the transfer of the franchise agreement; (c) the proposed transferee does not meet the selection criteria of the franchisor; [page 68] (d) the proposed transferee does not agree, in writing, to comply with the obligations of the franchisee under the franchise agreement; (e) the franchisee has not paid or made reasonable provision to pay an amount owing to the franchisor; (f)

the franchisee has not remedied a breach of the franchise agreement;

(g) the franchisor has not received from the proposed transferee a written statement that the transferee has received, read and had a reasonable opportunity to understand the disclosure document and this code. Paragraphs (a) to (g) do not limit the circumstances in which a

franchisor’s consent may be reasonably withheld. Consent taken to be given (4) If the franchisor does not advise the person, in writing, that the franchisor does not consent to the transfer of the franchise agreement within 42 days of the later of: (a) the date the request is made; and (b) if the franchisor seeks further information—the date the last of the information is provided to the franchisor; then: (c) the franchisor is taken to have given consent; and (d) that consent cannot be revoked under subclause (5). Revoking consent (5) Within 14 days of giving consent, the franchisor may revoke it by advising the person, in writing, that the franchisor’s consent is revoked and the reasons why consent has been revoked. (6) The franchisor must not unreasonably revoke the franchisor’s consent. However, the franchisor may reasonably revoke consent in the circumstances set out in subclause (3). Definition (7) In this clause: transferee means a franchisee who seeks to acquire a franchise business through the transfer of the franchise agreement.

COMMENTARY ON CLAUSE 25

25.1

Clause 25(4)(b)

Note that the franchisor must request further information to avoid the strict application of the 42-day period, or enable it to revoke consent.

[page 69]

Division 5—Termination of franchise agreement 26 Termination—cooling off period (1) A franchisee may terminate an agreement (being either a franchise agreement or an agreement to enter into a franchise agreement) within 7 days after the earlier of: (a) entering into the agreement; and (b) making any payment (whether of money or of other valuable consideration) under the agreement. (2) Subclause (1) does not apply to: (a) the transfer or renewal of an existing franchise agreement; or (b) the extension of the term or scope of an existing franchise agreement. (3) If the franchisee terminates an agreement under subclause (1), the franchisor must, within 14 days, repay all payments (whether of money or of other valuable consideration) made by the franchisee to the franchisor under the agreement. Civil penalty: 300 penalty units. (4) However, the franchisor may deduct from the amount repaid under subclause (3) the franchisor’s reasonable expenses if the expenses or their method of calculation have been set out in the agreement.

27 Termination—breach by franchisee (1) This clause applies if: (a) a franchisee breaches a franchise agreement; and (b) the franchisor proposes to terminate the franchise agreement. (2) The franchisor must: (a) give to the franchisee reasonable notice, in writing, that the franchisor proposes to terminate the franchise agreement because of the breach; and (b) tell the franchisee what the franchisor requires to be done to remedy the breach; and (c) allow the franchisee a reasonable time to remedy the breach. Civil penalty: 300 penalty units. (3) For paragraph (2)(c), the franchisor does not have to allow more than 30 days. (4) If the breach is remedied in accordance with paragraphs (2)(b) and (c), the franchisor cannot terminate the franchise agreement because of that breach. (5) Part 4 (resolving disputes) applies in relation to a dispute arising from termination under this clause. [page 70]

28

Termination—no breach by franchisee (1) This clause applies if: (a) a franchisor terminates a franchise agreement:

(i)

in accordance with the agreement; and

(ii) before it expires; and (iii) without the consent of the franchisee; and (b) the franchisee has not breached the agreement. (2) For subparagraph (1)(a)(iii), a condition of a franchise agreement that a franchisor can terminate the franchise agreement without the consent of the franchisee is not taken to be consent. (3) Before terminating the franchise agreement, the franchisor must give reasonable written notice of the proposed termination, and reasons for it, to the franchisee. Civil penalty: 300 penalty units. (4) Part 4 (resolving disputes) applies in relation to a dispute arising from termination under this clause.

29

Termination—special circumstances (1) Despite clauses 27 and 28, a franchisor may terminate a franchise agreement without complying with either clause if the agreement gives the franchisor the right to terminate the agreement should the franchisee: (a) no longer hold a licence that the franchisee must hold to carry on the franchised business; or (b) become bankrupt, insolvent under administration or an externally-administered body corporate; or (c) in the case of a franchisee that is a company—become deregistered by the Australian Securities and Investments Commission; or (d) voluntarily abandon the franchised business or the franchise

relationship; or (e) be convicted of a serious offence; or (f)

operate the franchised business in a way that endangers public health or safety; or

(g) act fraudulently in connection with the operation of the franchised business. (2) Despite clauses 27 and 28, a franchisor may terminate a franchise agreement without complying with either clause if, at the time of termination, the franchisor and the franchisee mutually agree to the agreement’s termination. Note: This clause does not give rise to a right of termination; such a right must be in the franchise agreement itself. [page 71]

COMMENTARY ON DIVISION 5 26.1

Division 5—Termination of franchise agreement

The Code provisions dealing with termination of a franchise agreement need to be considered in the context of the general legal position. Although the Code provides quite a comprehensive framework for termination of franchise agreements there are other ways in which a franchise agreement can be terminated. These issues are discussed below. For a more detailed discussion of termination of the franchise relationship, see Ch 16 of Franchising Law and Practice.

Termination on reasonable notice

Most franchise agreements contain a defined term. Subject to the agreement of the parties, and subject to the compliance requirements of the Code discussed in Div 4, the franchise agreement will expire or terminate at the end of the fixed term. The decision in Ranoa Pty Ltd v BP Oil Distribution Ltd (1989) 91 ALR 251 confirmed this to be the case in the context of franchise agreement for a BP petrol station, and the provisions of the Code (and indeed the Oilcode) are consistent with this decision. Often franchise agreements contain a holding over clause similar to that contained in most leases, which essentially confirms expiry or termination at the end of the fixed term, but then converts the arrangement to a month-tomonth contract that can be terminated by either party. However, where there is no defined term there is a general presumption against an agreement continuing indefinitely. The courts will look to the intentions of the parties, but in the absence of some other apparent agreement will allow termination of a franchise agreement on reasonable notice. Clause 28 of the Code also permits termination on reasonable notice. What is reasonable is a matter for determination having regard to all relevant circumstances.15 In considering the appropriate period of notice required to terminate a franchise where the agreement is silent, a court is likely to consider the following matters: the wording of the franchise agreement or any correspondence, to examine whether any insight is given to the intention of the parties; any statements made by either party during the contractual process or the term of the arrangement to date; the duration of other contractual arrangements entered into by the franchisor; [page 72]

the amount of capital and other investment made by the franchisee, and the length of time the franchisee has had to enjoy an adequate return on capital; the frequency and the amount of any payments made by the franchisee; the existence of any incomplete contracts binding on the franchisee; the consequences to each party of termination; the amount of time it would take for the parties to effectively disassociate themselves from each other; and any prior warnings or indication a franchisor has provided to the franchisee as to expiration of the agreement. The period of notice must be sufficiently long to enable the recipient of the notice to: deploy its labour and equipment in alternative employment; carry out its commitments; bring negotiations to fruition; wind up the association in a businesslike manner; and recoup extraordinary expenditure or effort. A guide to the application of these principles can be found in the comments of Lord Devlin in Australian Blue Metal Ltd v Hughes [1963] AC 74; [1963] ALR 113. After commenting that the relevant time for considering the reasonable notice period is the date the contract is made, Lord Devlin indicated (at ALR 99) that a key determinant of the notice period would be ‘the desire that both parties may be expected to have to cushion themselves against sudden change, giving themselves time to make alternative arrangements of a sort similar to those which are being terminated’.

Termination by operation of law A court has the ability pursuant to several pieces of legislation at the

Commonwealth and state level to provide a franchisor or a franchisee with a right to terminate a franchise agreement in certain circumstances. The most important legislation is the CCA (including Sch 2, the ACL) and the Industrial Relations Act 1996 (NSW). Section 244 of the ACL provides the court with the power, among other things, to declare the whole or part of a franchise agreement void, either from the start of the agreement or from a specific date. This remedy is available where a party has engaged in misleading or deceptive conduct or made false or misleading misrepresentations in breach of s 18 of the ACL. Section 244 of the ACL confers upon the court a wide discretion to make orders in relation to conduct which infringes the relevant sections of the Act. In Wan v McDonald (1992) 33 FCR 491; 105 ALR 473; BC9203291, the court declared void certain contractual arrangements between the parties in addition to awarding damages. However, it should be noted that in many cases a court will see damages as an appropriate remedy: see Milchas Investments Pty Ltd v Larkin (1989) 96 FLR 464; (1989) ATPR ¶40–956 at ¶50,434; BC8902077 and McPhillips v Ampol Petroleum (Vic) Pty Ltd (1990) ATPR ¶41–014 at ¶51,257. In exercising its discretion, a court will be [page 73] cautious and require strict evidence justifying an order terminating the contract: see Munchies Management Pty Ltd v Belperio (1988) 58 FCR 274; 84 ALR 700; (1989) ATPR ¶40–926; and Creative’s Landscape Design Centre Pty Ltd v Platz (1989) ATPR ¶40–980.

Restricting termination Termination which may otherwise be possible at common law may be prevented or inhibited by the intervention of specific statutory provisions. A

party may not be able to terminate a franchise agreement, or refuse to renew a franchise agreement, if to do so would breach specific legislative provisions. In certain provisions of the CCA, and especially Sch 2, the ACL may affect the franchisor’s right of termination, if that right is being exercised for a reason or purpose which is in breach of the Act. For example, if a franchisee requests a franchisor to terminate the franchise agreement of a neighbouring franchisee, or if the franchisor is in competition with the franchisee itself, this conduct may breach the cartel provisions contained in ss 44ZZRF–44ZZRK of the CCA. If a motivating factor in deciding to terminate a franchise was the price discounting activities undertaken by a franchisee, termination could be considered to be in breach of the resale price maintenance provisions of the CCA. Section 47 of the CCA also needs to be considered in the context of termination, particularly subs (3). This section, broadly speaking, prohibits the refusal by a corporation to buy goods or services for competitive reasons. In a franchise situation, a franchisor may not be able to. Certainly, any attempt by a franchisor to terminate a franchise by reason of the franchisee acquiring goods or services from outside the franchisor’s preferred list of suppliers would need to be very carefully considered given the breadth of application s 47 of the CCA. Whether the CCA will operate to prevent termination will depend on the circumstances of each case. In Ron Hodgson (Holdings) Pty Ltd v Westco Motors (Distributors) Pty Ltd (1980) 29 ALR 307; ATPR ¶40–143, the franchisor gave 90 days’ notice of termination under a franchise agreement to a car dealer franchisee. Although the court found that the franchisor had good reasons for termination, he also found that, on the evidence, discounting activities conducted by the franchisee were a substantial and operative reason for termination. Despite the fact that the franchise agreement provided the franchisor with the ability to terminate in the manner in which the franchisor purported to terminate, the court held that

termination was to be prevented as it breached former s 48 of the (former) TPA. On the other hand, in Top Performance Motors Pty Ltd v Ira Berk Qld Pty Ltd (1975) 5 ALR 465; 24 FLR 286; ATPR ¶40–004, the Federal Court held that termination of a franchise was within the franchisor’s contractual rights, and the exercise of the rights to protect the franchisor’s legitimate trade and business interests was not taking advantage of its market power [page 74] within s 46 of the former TPA (now s 46 of the CCA). Similarly, the court refused to find a breach of s 45 of the (former) TPA. In Hecar Investments No 6 Pty Ltd v Outboard Marine Australia Pty Ltd (1982) 41 ALR 697; 62 FLR 159; (1982) ATPR ¶40–298, a supplier was unable to refuse to supply outboard motors to a retailer because that retailer carried outboard motors from another manufacturer. It was considered that the refusal to supply was in breach of s 47 of the (former) TPA. Sections 237 and 238 of the CCA (formerly s 87 of the TPA) may be used by a court to prevent termination where the party seeking to terminate the contract has breached a relevant provision of the Act. Examples where termination may be prevented would include: conduct by the party seeking to terminate which was misleading or deceptive, in breach of s 18 of the ACL; and unconscionable conduct by the party seeking to terminate, in breach of s 22 of the ACL. Sections 237 and 238 of the CCA are discretionary provisions. The offending

breach of the CCA would need to be relevant to the issue of termination. However if, for example, a franchisor misleads a franchisee into signing an agreement based on false earnings claims, it is likely that a court will not permit the franchisor to terminate the franchise agreement despite any contractual provision to the contrary, if the basis for termination is nonpayment of moneys to the franchisor. The conduct of the franchisor in such circumstances could conceivably breach s 18 or 22 of the ACL. Care needs to be taken when making an application under s 237 or 238 of the CCA for a discretionary remedy. For example, in McPhillips v Ampol Petroleum (Vic) Pty Ltd (1990) ATPR ¶41–014, the court refused to extend the term of a franchise agreement where there had been representations made that the agreement would be renewed. The court felt damages would be an adequate remedy. In Barber v Pure & Natural (Aust) Pty Ltd (1994) V ConvR ¶54–490, the court granted an interlocutory injunction to prevent termination of a franchise agreement. This case demonstrates that, on an interlocutory or interim basis, a court will normally grant an application to prevent termination where an applicant can demonstrate there are serious issues to be tried. Given the time it takes for cases to come to trial, this may be sufficient to resolve the matters in dispute. The New South Wales Industrial Relations Commission has power under s 106 of the Industrial Relations Act 1996 (NSW) to vary contracts in New South Wales where persons perform work in an industry if the Industrial Relations Commission considers the contract to be unfair, harsh or unconscionable. Those provisions apply to termination provisions. In Stowar v Myer Stores Ltd t/as Grace Bros (1993) 50 IR 9, 32 applications were made by truck owner/drivers in respect of termination without compensation by Grace Bros of their contracts after its delivery contract was awarded to Linfox.

[page 75] Cullen J held that ‘questions of fairness and standards of business morality are proper factors to be taken into account in the exercise of discretion pursuant to the section’ and concluded that Grace Bros’ conduct was unfair, harsh and unconscionable within the meaning of the statute. There was no evidence to indicate that the risk taken by the truck owner/drivers as to termination of their contracts was ever made known to the drivers, and there was a compelling inference of the existence of an assurance by Grace Bros that the contract had a market value which was available to the truck drivers upon termination of their contracts. The Code modifies the application of these principles: Clause 27 of the Code provides that, where there has been a breach of the franchise agreement, the franchisor must give the franchisee reasonable notice of its intention to terminate, tell the franchisee how to remedy the breach and allow the franchisee reasonable time to remedy the breach. Clause 28 of the Code provides that, where there has not been a breach of the franchise agreement, the franchisor must give reasonable notice of the proposed termination, and reasons for it, to the franchisee. Clause 29 of the Code sets out a number of circumstances in which the franchisor is exempted from the requirement to give reasonable notice. As franchising is a contractual relationship, the same principles which govern termination of other commercial contracts will apply to franchise agreements. The law recognises that franchise agreements may be able to be terminated in the following circumstances: If a party breaches or repudiates the agreement. If the franchise agreement was entered into as a result of

misrepresentation or other serious misconduct. If the contract is frustrated, illegal or based upon fundamental mistakes. If the franchise agreement is unfair, unconscionable or unlawful according to Commonwealth or state legislation. It is possible that a contract may be terminated by operation of law. For example, in the New South Wales dairy industry, a number of contracts containing exclusive regions and various statutory protections for suppliers and distributors of milk had to be withdrawn on deregulation of the industry. Once deregulation occurred, the existing contractual relationships were unenforceable because the contracts would have breached ss 45 and 47 of the then TPA, now ss 45 and 47 of the CCA.

Repudiation The courts have recognised the unique nature of the franchise relationship, and permitted termination when the relationship has fundamentally broken down. In The Body Shop International Plc v Rawle (1992) 27 IPR 255, the court allowed termination on the basis of repudiation by the franchisee. The franchisee, who operated five stores, began behaving quite strangely. She took substantial personal [page 76] control of the business, attempted to have her staff attend courses by a religious organisation with which she had become associated, became hostile towards The Body Shop and generally began acting in a manner which The Body Shop considered to be inappropriate. Things came to a head; she closed all her stores and sacked 50 staff. She later reopened some stores with new untrained staff. In the process, she also built up a debt with The Body Shop of over £400,000.

The court held that the notice terminating the franchise was not legally effective, but found that the company was entitled to terminate immediately under normal contractual principles by treating the defendant’s conduct as a repudiation of the contract.16 Although there was no definitive acceptance of repudiation, the court found that by issuing the writ against the defendant, even though it may have been based on other grounds, The Body Shop accepted the repudiation. The court rejected the defendant’s argument that by continuing to supply the product, and by issuing the notices of breach based on the agreement, The Body Shop had affirmed the contract.

Frustration, mistake or misrepresentation The concept of frustration is allied to that of mistake. A franchise agreement may be terminated where there is a fundamental mistake either as to the subject matter of the contract, the contents of a contract where the other party is aware of the mistake and deliberately sets out to ensure that the first party does not become aware of the existence of the mistake, or where in special circumstances both parties have made the same mistake: see Taylor v Johnson (1983) 151 CLR 422; 45 ALR 265; 57 ALJR 197; BC8300058. The mistake must relate to the time of contract formation: see Amalgamated Investment and Property Co Ltd v John Walker & Sons Ltd [1976] 3 All ER 509; [1977] 1 WLR 164. In the event of a mistake, a court may set aside the contract and make orders for the adjustments of the rights of their respective parties: see Solle v Butcher [1950] 1 KB 671; [1949] 2 All ER 1107; Lukacs v Wood (1978) 19 SASR 520; [1979] ANZ ConvR 89. A court may also allow termination if, during pre-contractual negotiations, a misrepresentation is made by one party which induces the other to enter into the contract. There are three categories of misrepresentation: innocent, negligent, and fraudulent. While at common law each will give rise to possible rights of termination, the inclusion of a provision in the franchise agreement

negating any representations can limit any claims to those based on fraudulent misrepresentation. Section 18 of the ACL, which prevents misleading or deceptive conduct, has rendered the law of misrepresentation far less important. [page 77]

Termination for breach of an implied term As with all contracts, it is possible to terminate a contract for breach of an express or implied term. It is possible to terminate a franchise agreement for breach of an implied term provided appropriate notice is given in accordance with the Code requirements. In considering whether any terms should be implied into the franchise agreement, either to provide a party with a right of termination, or to prevent a party from exercising a right of termination that might otherwise exist in certain circumstances, the courts will apply the principles enunciated in cases such as Renard Constructions (ME) Pty Ltd v Minister for Public Works (1992) 26 NSWLR 234. Unless the parties otherwise agree, all contracts are presumed to intend to include terms implied by custom, terms implied by reference to previous dealings between the parties, and terms necessary for the effective operation of the contract. In addition, and notwithstanding the agreement of the parties to the contrary, all contracts will include terms implied by legislation and terms implied by law. Depending upon the law and the legislation, these implied terms may or may not be excludable. In Greenwood v All States Food Service NSWCA, Gleeson CJ, Handley JA and Cole AJA, 29 April 1994, unreported, BC9404972, the court permitted a franchisor to terminate for breach of an implied term where the franchisee purchased a franchise to deliver fruit and vegetables. The court found that there was an implied term in the franchise agreement, which was

fundamental to the operation of the franchisor’s business, that the franchisees would cooperate with the warehouse system to enable all franchisees to access the warehouse and receive their delivery loads. The franchisee did not cooperate and termination was justified. However, in Carr v McDonald’s Australia Ltd (1994) 63 FCR 358; BC9405740, the court refused to permit McDonalds to terminate the franchise of a franchisee who had allegedly sexually harassed employees during a training period prior to taking on a franchise. The applicant had not signed a franchise agreement, and the consequences of termination were such that in all the circumstances, particularly in view of the lack of proof of such conduct by the applicant, a term would not be implied.

Estoppel The principles of estoppel may apply to prevent termination of a franchise. In the leading case of Legione v Hateley (1983) 152 CLR 406; 46 ALR 1; BC8300063, the High Court prevented termination of a contract where the parties seeking to terminate had promised not to exercise certain rights, including the right of termination, and the other party relied upon that promise. Estoppel has been raised in a number of cases in the petroleum industry where franchisors have attempted to terminate a franchise. However, it is also possible to use the principles of estoppel in other situations in a franchise relationship.17 [page 78] It is not possible to set out definitive rules as to how estoppel may apply in a franchising context, as the range of circumstances is so vast as to make such an exercise pointless. What is necessary is to understand that a party must be

consistent in its conduct and avoid misleading the other party expressly or by necessary implication. The case of Foxeden Pty Ltd v IOOF Building Society Ltd [2003] VSC 356; BC200305526 involved the application of the estoppel principles to prevent termination in the franchising context. The agency agreement between the second plaintiff and IOOF was meant to be an interim agreement between the parties with the intention being to execute a franchise agreement in the near future. The terms of the agency agreement provided for termination by either party upon giving the other party 60 days’ written notice. Upon the purchase of IOOF by Bendigo Bank, which was prior to a formal franchise agreement being executed by the parties, IOOF sought to terminate the agreement on 60 days’ written notice. Habersberger J held that the Taylors had relied on the representations made on behalf of IOOF and that the Taylors had suffered detriment as a result. IOOF was therefore estopped from relying on the clause that gave it the power to terminate on 60 days’ written notice. In the absence of this clause, there was no express agreement on duration or whether the relationship could be terminated. In the circumstances, Habersberger J found that, given the particular relationship of the parties, there was an implied term that the agreement could be terminated on reasonable notice. A period of 12 months’ notice was held to be reasonable in these circumstances. Arguments of waiver are also used, often in conjunction with estoppel, to indicate that a party had accepted conduct and had waived its rights to take strict action under the terms of the franchise agreement. This argument was raised in The Body Shop (see above), where the franchisor had continued to supply product and continued to deal with the franchisee notwithstanding that it had purported to terminate the franchise. The court held that such conduct was merely the franchisor complying with its obligations under the franchise agreement to avoid being in breach itself.

The argument of waiver was also used in Foxeden, see above, where IOOF claimed that there was no breach of the agency agreement as it had been validly terminated by notice. The court held that, as the agreement had continued to operate for another five months after the purported notice had been served, the parties had simply allowed the notice to lapse and thereafter it ceased to have any effect.

Notices Any notice of termination given to a franchisee must be clear and unequivocal. In Foxeden (see above), IOOF sought to rely on a number of events as constituting notice of termination — oral notice that IOOF was likely to be sold to Bendigo Bank, the public announcement of the sale of IOOF to Bendigo Bank and a [page 79] conversation between a representative of IOOF and the plaintiff in which it was stated that ‘the agency would be closed down’. The agreement also required that any notice be in writing. Not surprisingly the court held that this was insufficient. A mere statement of intent could not constitute valid notice of termination, particularly as there was no necessary reason for this event to cause the agreement to be terminated; nor do general announcements to the world at large. This reasoning is followed in cl 27 of the Code, which requires that the notice must give to the franchisee reasonable notice, in writing, that the franchisor proposes to terminate the franchise agreement because of the breach. So the use of the word ‘may terminate’ would be insufficient.

COMMENTARY ON CLAUSE 26

26.2

Clause 26(4)

There is also an obligation to disclose in the disclosure document. Note that disclosure must be in the agreement, not just the disclosure document.

COMMENTARY ON CLAUSE 27 27.1

Termination

To terminate for breach, it is essential to clearly establish that the breach has occurred, that any required notice has been served within the prescribed time limits, and the breach is at law sufficient to justify termination. In Carr v McDonald’s Australia Ltd (1994) 63 FCR 358; BC9405740, the franchisor was unable to establish beyond doubt that the breach had actually occurred, or that any breach would have justified termination of the agreement to grant the applicant a franchise. Mr Carr had been advised by McDonald’s that he was an approved applicant for a McDonald’s store. He had commenced training, and was awaiting allocation of a store. During the training period, allegations of sexual harassment of staff were made by one or more employees. At the time, Mr Carr had not signed a franchise agreement. The court found that McDonald’s had failed to establish that the allegations of sexual harassment had in fact occurred. It considered that McDonald’s had unlawfully decided not to proceed to grant Mr Carr a franchise, and that termination of the verbal agreement between McDonald’s and Mr Carr caused Mr Carr substantial damage. It is also apparent from the judgment that the court was not satisfied that Mr Carr was in fact bound by the extensive obligations contained in the franchise agreement and the various procedure manuals. Given the importance to McDonald’s of a reputation for integrity and a workplace free of sexual harassment, the court may have been

prepared to find that, if it had been proven that Mr Carr acted improperly, the conduct would be sufficient to justify termination. However, [page 80] the court did not need to decide the point, and it must remain doubtful whether such conduct would be sufficient to justify termination. The termination would be even more unlikely to be permitted in the current environment in light of s 22 of the ACL. The need for a franchisor to particularise and be able to prove a breach in order to terminate was raised in Bingham v 7-Eleven Stores Pty Ltd [2003] QCA 402; BC200305270. The franchisor in that case terminated the franchise agreement on the grounds of fraudulent stock transfer. The franchisee requested details of the alleged fraudulent conduct; however, the franchisor was unable, or refused, to provide such details. The franchisee successfully applied for an injunction to restrain the termination. The Queensland Court of Appeal held that a right to terminate given by a franchise agreement is a negative stipulation and the onus is on the franchisor to prove that a breach has occurred. As the franchisor had insufficient evidence of the alleged fraud, in this case the termination was not able to proceed on these grounds. The court considered an allegation of fraud to be serious regardless of the circumstances, and that this was an additional reason for requiring conclusive evidence before termination could be effective. Importantly, from a franchising perspective, it is established that the parties to a contract are free to stipulate that the performance of a particular obligation, or of all obligations, is essential to the contract, even if objectively it has little importance.18 Care needs to be taken in drafting franchise agreements, as by indicating that the breach of a particular term can give rise to a right of termination may be considered indicative that the other terms of the contract are not essential.19

COMMENTARY ON CLAUSE 28 28.1

Clause 28(3)

In Garry Rodgers Motors (Aust) Pty Ltd v Subaru (Aust) Pty Ltd [1999] FCA 903, the court concluded that Subaru had not engaged in unconscionable conduct in terminating a dealership, notwithstanding that reasons had not been provided as required by cl 22 of the Old Code, as the dealer was well aware of the substantive reasons. However, the hearing was on an application for interlocutory relief and in the context of alleged unconscionable conduct. The case could possibly be decided differently now that there is a specific penalty applying to this provision in the Code. [page 81]

COMMENTARY ON CLAUSE 29 29.1

Clause 29(2)

The words ‘at the time of termination’ were added to the Code with effect from 1 January 2015 to make it clear that agreement to termination must occur at the time, not in advance.

Division 6—Miscellaneous 30 Capital expenditure (1) A franchisor must not require a franchisee to undertake significant capital expenditure in relation to a franchised business during the term of the franchise agreement.

(2)

For the purpose of subclause (1), significant capital expenditure excludes the following: (a) expenditure that is disclosed to the franchisee in the disclosure document that is given to the franchisee before: (i)

entering into or renewing the agreement; or

(ii) extending the term or scope of the agreement; (b) if expenditure is to be incurred by all or a majority of franchisees—expenditure approved by a majority of those franchisees; (c) expenditure incurred by the franchisee to comply with legislative obligations; (d) expenditure agreed by the franchisee; (e) expenditure that the franchisor considers is necessary as capital investment in the franchised business, justified by a written statement given to each affected franchisee of the following: (i)

the rationale for making the investment;

(ii) the amount of capital expenditure required; (iii) the anticipated outcomes and benefits; (iv) the expected risks associated with making the investment.

31 Marketing and advertising fees (1) A franchisor must maintain a separate bank account for marketing fees and advertising fees contributed by franchisees. (2) If a franchisor operates one or more units of a franchised business, the franchisor must pay marketing fees and advertising

fees on behalf of each unit on the same basis as other franchisees. (3) Despite any terms of a franchise agreement, marketing fees or advertising fees may only be used to: [page 82] (a) meet expenses that: (i)

have been disclosed to franchisees under paragraph 15.1(f) of the disclosure document; or

(ii) are legitimate marketing or advertising expenses; or (iii) have been agreed to by a majority of franchisees; or (b) pay the reasonable costs of administering and auditing a marketing fund.

COMMENTARY ON CLAUSE 31 31.1

Clause 31(1)

This clause should be read in conjunction with cl 15 and item 15 of Annexure 1. Clause 15 and item 15 refer to ‘a marketing or other cooperative fund’, but cl 31 refers to ‘marketing or advertising fees’. So payments into an ‘other cooperative fund’ do not require a separate bank account. Contributions do not have to be paid directly into the bank account, but should be paid or transferred into the bank account without set-off or deduction. It should be noted that the requirement does not change the nature of the funds, which once paid will (depending on the wording of the agreement, but typically) still be the property of the franchisor, as opposed to being trust moneys. Further, the requirement does not extend to retaining the funds separately in the bank account, or paying expenses from the separate bank account. Franchisors are

free to deal with the funds, with the Code simply imposing the obligation to enable the tracking of contributions. This requirement is essentially a legacy of the 2013 Wein Report20 recommendation that marketing funds be held as trust funds.

31.2

Clause 31(2)

This requirement does not apply to associates of a franchisor, but only the franchisor itself. Such associated parties may be franchisees, but there is no obligation to require all franchisees to pay into the fund on the same basis. Further, if (as is not uncommon) franchisees pay at different rates, a franchisor is entitled to consider ‘the basis’ on which the franchisor units should pay and is not necessarily obliged to pay at the highest, average or even current rate.

31.3

Clause 31(3)(b)

These requirements have been tightened by the amendments to the Code that take effect from 1 January 2015. It will be necessary to establish a separate fund if [page 83] a franchisor seeks that franchisees pay into a fund fees that are not to be spent on advertising and marketing.

32 Disclosure of former franchisee details (1) A former franchisee may give a franchisor a written request that the former franchisee’s details not be disclosed to a prospective

franchisee. (2) If such a request is made, the franchisor must not disclose the former franchisee’s details to a prospective franchisee. (3) A franchisor must not engage in conduct with the intention of influencing a former franchisee to make, or not make, such a request. Civil penalty: 300 penalty units.

COMMENTARY ON CLAUSE 32 32.1

Clause 32(3)

This amendment to the Code, effective 1 January 2015, is intended to counter the practice by some franchise systems of actively encouraging some franchisees, such as disgruntled former franchisees, to make the request under subcl (1). It would seem that it is also no longer possible for this to be a negotiated element of any dispute settlement or mediation unless it is entirely the franchisee’s idea. Note that breach of this provision attracts a pecuniary penalty.

33 Association of franchisees or prospective franchisees A franchisor must not engage in conduct that would restrict or impair: (a) a franchisee or prospective franchisee’s freedom to form an association; or (b) a franchisee or prospective franchisee’s ability to associate with other franchisees or prospective franchisees for a lawful purpose.

Civil penalty: 300 penalty units.

COMMENTARY ON CLAUSE 33 33.1

Restrict or impair

The much broader words ‘restrict or impair’ take effect from 1 January 2015 and replace the Old Code obligation not to ‘induce’ a franchisee or prospective franchisee. A pecuniary penalty applies.

[page 84]

Part 4—Resolving disputes Division 1—General 34 Internal complaint handling procedure A franchise agreement must provide for a complaint handling procedure that complies with Division 2 of this Part.

35 Resolving disputes A party to a franchise agreement (the complainant) who has a dispute with another party to the franchise agreement may: (a) take action under the agreement’s complaint handling procedure; or (b) take action in accordance with the procedure set out in Division 3 of this Part.

36 When a party is taken to be trying to resolve a dispute (1) A party will be taken to be trying to resolve a dispute if the party approaches the resolution of the dispute in a reconciliatory manner, including doing any of the following: (a) attending and participating in meetings at reasonable times; (b) not taking action during the dispute, including by providing

inferior goods, services, or support, which has the effect of damaging the reputation of the franchise system; (c) not refusing to take action during the dispute, including not providing goods, services or support, if the refusal to act would have the effect of damaging the reputation of the franchise system; (d) if a mediation process is being used to try to resolve the dispute—both: (i)

making the party’s intention clear, at the beginning of the process, as to what the party is trying to achieve through the process; and

(ii) observing any obligations relating to confidentiality that apply during or after the process. (2) To avoid doubt, if a mediation process is being used to try to resolve the dispute, subclause (1) applies whether the mediation is conducted under this code or otherwise.

37 Right to bring proceedings unaffected This Part does not affect the right of a party to a franchise agreement to bring legal proceedings, whether under the franchise agreement or otherwise. [page 85]

Division 2—Internal complaint handling procedure 38 Notification of dispute (1) The complainant must tell the respondent in writing:

(a) the nature of the dispute; and (b) what outcome the complainant wants; and (c) what action the complainant thinks will resolve the dispute. (2) The parties should then try to agree about how to resolve the dispute. (3) If the parties cannot agree how to resolve the dispute within 3 weeks, either party may refer the matter to a mediator for mediation under: (a) a franchise agreement; or (b) this code. (4) If the parties cannot agree on who should be the mediator, either party may ask the mediation adviser to appoint a mediator. Note: The mediation adviser is appointed by the Minister, see clause 44.

39 Mediation (1) Subject to subclause (2), a mediator appointed for a dispute may decide the time and place for mediation. (2) The mediation must be conducted in Australia. (3) The parties must attend the mediation. Civil penalty: 300 penalty units. (4) For subclause (3), a party is taken to attend mediation if the party is represented at the mediation by a person who has the authority to enter an agreement to settle the dispute on behalf of the party. (5) The parties must try to resolve the dispute. Note:

For when a party is taken to be trying to resolve a

dispute, see clause 36. (6) After the mediation has started, the mediator must advise the mediation adviser, within 28 days, of that fact.

COMMENTARY ON CLAUSE 39 39.1

Clause 39(2)

This applies only to mediations under the Code. [page 86]

39.2

Clause 39(3)

The imposition of a pecuniary penalty for failure to attend mediation is significant, and applies to franchisees as well as franchisors.

Division 3—Code complaint handling procedure Subdivision A—Notification of dispute 40 Notification of dispute (1) The complainant must tell the respondent in writing: (a) the nature of the dispute; and (b) what outcome the complainant wants; and (c) what action the complainant thinks will resolve the dispute. (2) The parties should then try to agree about how to resolve the dispute.

(3) If the parties cannot agree how to resolve the dispute within 3 weeks, either party may refer the matter to a mediator for mediation under: (a) a franchise agreement; or (b) this code. (4) If the parties cannot agree on who should be the mediator, either party may ask the mediation adviser to appoint a mediator. Note: The mediation adviser is appointed by the Minister, see clause 44.

Subdivision B—Mediation 41 Mediation (1) Subject to subclause (2), a mediator appointed for a dispute may decide the time and place for mediation. (2) The mediation must be conducted in Australia. (3) The parties must attend the mediation. Civil penalty: 300 penalty units. (4) For subclause (3), a party is taken to attend mediation if the party is represented at the mediation by a person who has the authority to enter an agreement to settle the dispute on behalf of the party. (5) The parties must try to resolve the dispute. Note: For when a party is taken to be trying to resolve a dispute, see clause 36. (6) After the mediation has started, the mediator must advise the mediation adviser, within 28 days, of that fact.

[page 87]

42 Termination of mediation (1) This clause applies to the mediation of a dispute if: (a) at least 30 days have elapsed after the day that mediation began; and (b) the dispute has not been resolved. (2) The mediator may terminate the mediation at any time unless satisfied that a resolution of the dispute is imminent. (3) However, if either party asks the mediator to terminate the mediation, the mediator must do so. (4) If the mediator terminates the mediation of a dispute under this clause, the mediator must issue a certificate stating: (a) the names of the parties; and (b) the nature of the dispute; and (c) that the mediation has finished; and (d) that the dispute has not been resolved. (5) The mediator must give a copy of the certificate to: (a) the mediation adviser; and (b) each of the parties to the dispute.

43 Costs of mediation (1) The parties are equally liable for the costs of mediation under this Subdivision unless they agree otherwise. (2) The parties must pay for their own costs of attending the mediation.

(3) In this clause: costs of mediation under this Subdivision include the following: (a) the cost of the mediator; (b) the cost of room hire; (c) the cost of any additional input (including expert reports) agreed by both parties to be necessary to conduct the mediation.

Division 4—Mediation appointments 44 Mediation adviser The Minister is to appoint a mediation adviser for this Part. Note: The mediation adviser appointed under the previous Franchising Code of Conduct is continued, see section 6 of this instrument.

45 Mediator Within 14 days of: [page 88] (a) a referral under subclause 38(3) or 40(3); or (b) a request under subclause 38(4) or 40(4); the mediation adviser must appoint a mediator for the dispute.

Penalties and Enforcement The Code and the CCA give the ACCC strong enforcement powers. The

ACCC issued the Compliance and Enforcement Policy in February 2015, which outlines the principles it adopts to achieve legislative compliance. As the ACCC is a government body constrained by limited resources, the Compliance and Enforcement Policy outlines the areas of work which it is currently prioritising. Among these areas is ensuring compliance with the Code. Specific pecuniary penalties of 300 penalty units (currently $51,000) apply in the event of a breach of a number of Code provisions. These penalties can be awarded by a court in the event of a successful prosecution for breach of the Code. In addition, a court can order injunctions to stop conduct or require some action to be taken, and/or compensation, damages and costs to be paid. Individuals can be disqualified from managing corporations for a period of time, and a court can make such other orders as it shall think fit. The ACCC is also empowered to issue infringement notices (currently $8500 for a corporation and $1700 for an individual) where it has reasonable grounds to believe a party has contravened a penalty provision of the Code. These are akin to on-the-spot fines. If the recipient of an infringement notice makes the required payment, the matter is at an end. Infringement notices are more likely to be issued in situations where the conduct in question is less serious, non-symptomatic or the relevant facts are largely uncontentious. The ACCC also has power under s 87B of the CCA to accept court enforceable written undertakings from the person who has committed a contravention. A subsequent breach of this undertaking may prompt the ACCC to apply for a court order requiring payment to the government of any financial benefit obtained by the person that is directly or indirectly attributable to the breach. The ACCC has the power to issue a notice requiring the production of information that must be kept, generated or published under the Code — including any documents that have been produced to support statements

made within the disclosure document. This provides the ACCC the ability to obtain, for example, disclosure documents and franchise agreements. The ACCC can also issue a substantiation notice to a franchisor requiring them to provide information or documentation that substantiates claims or representations made to a franchisee or prospective franchisee.

[page 89]

Annexure 1—Disclosure document for franchisee or prospective franchisee Note: See subclause 8(3).

1

First page 1.1 On the first page: (a) in bold upper case: DISCLOSURE DOCUMENT FOR FRANCHISEE OR PROSPECTIVE FRANCHISEE; and (b) the franchisor’s: (i)

name; and

(ii) business address and phone number; and (iii) ABN, ACN or ARBN (or foreign equivalent if the franchisor is a foreign franchisor); and (c) the signature of the franchisor, or of a director, officer or authorised agent of the franchisor; and (d) the preparation date of the disclosure document; and (e) the following statement: This disclosure document contains some of the information you

need in order to make an informed decision about whether to enter into a franchise agreement. It should be read together with the information statement you have received. Entering into a franchise agreement is a serious undertaking. Franchising is a business and, like any business, the franchise (or franchisor) could fail during the franchise term. This could have consequences for the franchisee. A franchise agreement is legally binding on you if you sign it. You are entitled to a waiting period of 14 days before you enter into this agreement. If this is a new franchise agreement (not the transfer or renewal of a franchise agreement, nor the extension of the term or the scope of a franchise agreement), you will be entitled to a 7 day “cooling off” period after signing the agreement, during which you may terminate the agreement. If you decide to terminate the agreement during the cooling off period, the franchisor must, within 14 days, return all payments (whether of money or of other valuable consideration) made by you to the franchisor under the agreement. However, the franchisor may [page 90] deduct from this amount the franchisor’s reasonable expenses, if the expenses or their method of calculation have been set out in the agreement. Take your time, read all the documents carefully, talk to other franchisees and assess your own financial resources and

capabilities to deal with the requirements of the franchised business. You should make your own enquiries about the franchise and about the business of the franchise. You should get independent legal, accounting and business advice before signing the franchise agreement. It is often prudent to prepare a business plan and projections for profit and cash flow. You should also consider educational courses, particularly if you have not operated a business before.

2

Franchisor details 2.1 The franchisor’s: (a) name; and (b) address, or addresses, of registered office and principal place of business in Australia; and (c) ABN, ACN or ARBN (or foreign equivalent if the franchisor is a foreign franchisor). 2.2 The name under which the franchisor carries on business in Australia relevant to the franchise. 2.3 A description of the kind of business operated under the franchise. 2.4 The number of years that the franchise or franchise system has operated in Australia. 2.5 The name, ABN, ACN or ARBN, address of registered office and principal place of business of each associate of the franchisor that is a body corporate (if any).

2.6

The name and address of each associate of the franchisor that is not a body corporate (if any), and if applicable, each associate’s ABN or ARBN.

2.7 A description of the relationship between: (a) each associate mentioned in item 2.5 and the franchisor; and (b) each associate mentioned in item 2.6 and the franchisor; and of the relevance of the relationship to the franchise system and the franchise. 2.8 For each officer of the franchisor—name, position held and qualifications (if any). [page 91]

3

Business experience 3.1 A summary of the relevant business experience of each person mentioned in item 2.8 for the past 10 years, including length of experience in: (a) working in the franchise system; and (b) working for the franchisor. 3.2 A summary of relevant business experience of the franchisor for the past 10 years, including: (a) length of experience in: (i)

operating a business that is substantially the same as that of the franchise; and

(ii) offering other franchises that are substantially the same as the franchise; and

(b) whether the franchisor has offered franchises for other businesses and, if so: (i)

a description of each such business; and

(ii) for how long the franchisor offered franchises for each such business.

4

Litigation 4.1 Details of: (a) current proceedings by a public agency, criminal or civil proceedings or arbitration, relevant to the franchise, against the franchisor, a franchisor director, an associate of the franchisor or a director of an associate of the franchisor, in Australia alleging: (i)

breach of a franchise agreement; or

(ii) contravention of trade practices law; or (iii) contravention of the Corporations Act 2001; or (iv) unconscionable conduct; or (v) misconduct; or (vi) an offence of dishonesty; and (b) proceedings against the franchisor, a franchisor director, an associate of the franchisor or a director of an associate of the franchisor, other than for unfair dismissal of an employee, under: (i)

section 12 of the Independent Contractors Act 2006; or

(ii) a law of a State or Territory that regulates workplace relations or independent contractors. 4.2 Whether the franchisor, a franchisor director, an associate of the

franchisor or a director of an associate of the franchisor, has been: (a) in the last 10 years—convicted of a serious offence, or an equivalent offence outside Australia; or [page 92] (b) in the last 5 years—subject to final judgment in civil proceedings for a matter mentioned in paragraph 4.1(a); or (c) in the last 10 years—bankrupt, insolvent under administration or an externally-administered body corporate in Australia or elsewhere. 4.3 For items 4.1 and 4.2—the following details (where relevant): (a) the names of the parties to the proceedings; (b) the name of the court, tribunal or arbitrator; (c) the case number; (d) the general nature of the proceedings; (e) the current status of the proceedings; (f)

the date and content of any undertaking or order under section 87B of the Competition and Consumer Act 2010;

(g) the penalty or damages assessed or imposed; (h) the names of the persons who are bankrupt, insolvent under administration or externally administered; (i)

5

the period of the bankruptcy, insolvency administration or external administration.

Payments to agents

under

5.1 For any agreement under which the franchisor must pay an amount, or give other valuable consideration, to a person who is not an officer, director or employee of the franchisor in connection with the introduction or recruitment of a franchisee —the name of the person.

6

Existing franchises 6.1 Number, sorted by State, Territory or region, of: (a) existing franchised businesses; and (b) existing franchisees; and (c) businesses owned or operated by the franchisor or an associate of the franchisor in Australia that are substantially the same as the franchised business. 6.2 For each existing franchisee: (a) business address, if this is not the franchisee’s residential address; and (b) business phone number; and (c) year when the franchisee started operating the franchised business. 6.3 However, if there are more than 50 franchises, the franchisor may instead give details under item 6.2 for all franchisees in the State, [page 93] Territory, region or metropolitan area in which the franchise is to be operated.

For each of the last 3 financial years and for each of the following 6.4 events—the number of franchised businesses for which the event happened: (a) the franchise was transferred; (b) the franchised business ceased to operate; (c) the franchise agreement was terminated by the franchisor; (d) the franchise agreement was terminated by the franchisee; (e) the franchise agreement was not extended; (f)

the franchised business was bought back by the franchisor;

(g) the franchise agreement was terminated and the franchised business was acquired by the franchisor. Note: An event may be counted more than once if more than one paragraph applies. 6.5 Subject to subclause 32(1), the franchisor must supply, for each event mentioned in item 6.4, the name, location and contact details of each franchisee if the information is available.

7

Master franchises 7.1 If the franchisor is also a subfranchisor—the master franchisor’s: (a) name; and (b) address, or addresses, of registered office and principal place of business; and (c) ABN, ACN or ARBN (or foreign equivalent if applicable). 7.2 The name under which the master franchisor carries on business relevant to the franchise. 7.3 For each officer of the master franchisor—name, position held

and qualifications (if any). 7.4 For each of the last 3 financial years and each of the following events—the number of: (a) franchise agreements terminated by the master franchisor; (b) franchise agreements terminated by the franchisor; (c) franchise agreements that were not extended by the master franchisor. Note: An event may be counted more than once if more than one paragraph applies. 7.5 The following details about the master franchise: (a) the term of the franchise agreement, including the date that it began; (b) the territory of the franchise; [page 94] (c) whether the franchise agreement may be renewed; (d) whether the term of the franchise agreement may be extended and if so, any preconditions applying to an extension; (e) whether the scope of the franchise agreement may be extended; (f)

whether the franchise agreement may be transferred, and if so, whether the franchisee is required to become a party to a franchise agreement with the transferee;

(g) the grounds on which the franchise agreement may be terminated;

(h) if the franchise agreement is terminated, how a subfranchisor’s franchise agreement with a franchisee is affected.

COMMENTARY ON ITEM 7 7.1

Master franchise requirement

This requirement in relation to master franchises takes effect 1 January 2015, and supports the streamlined disclosure obligations in relation to master franchising. The terminology is somewhat confusing, but in essence means that if the franchisor party to a franchise agreement is itself a franchisee of another party, it (the franchisor party to the franchise agreement) must take responsibility to disclose how it has its rights, and what happens upstream from it.

8

Intellectual property 8.1 For any trade mark used to identify, and for any patent, design or copyright that is material to, the franchise system (intellectual property): (a) description of the intellectual property; and (b) details of the franchisee’s rights and obligations in connection with the use of the intellectual property; and (c) whether the intellectual property is registered in Australia, and if so, the registration date, registration number and place of registration; and (d) any judgment or pending proceedings that could significantly affect ownership or use of the intellectual

property, including: (i)

name of court or tribunal; and

(ii) matter number; and (iii) summary of the claim or judgment; and (e) if the intellectual property is not owned by the franchisor— who owns it; and [page 95] (f)

details of any agreement that significantly affects the franchisor’s rights to use, or to give others the right to use, the intellectual property, including: (i)

parties to the agreement; and

(ii) nature and extent of any limitation; and (iii) duration of the agreement; and (iv) conditions under which the agreement may be terminated. 8.2 The franchisor is taken to comply with item 8.1 for any information that is confidential if the franchisor gives: (a) a general description of the subject matter; and (b) a summary of conditions for use by the franchisee.

9

Franchise site or territory 9.1 Whether the franchise is: (a) for an exclusive or non-exclusive territory; or (b) limited to a particular site.

9.2 For the territory of the franchise: (a) whether other franchisees may own or operate a business that is substantially the same as the franchised business; and (b) whether the franchisor or an associate of the franchisor may own or operate a business that is substantially the same as the franchised business; and (c) whether the franchisor or an associate of the franchisor may establish other franchises that are substantially the same as the franchise; and (d) whether the franchisee may own or operate a business that is substantially the same as the franchised business outside the territory of the franchise; and (e) whether the franchisor may change the territory or site of the franchise and if so, the circumstances in which such a change may occur.

10 Supply of goods or services to a franchisee 10.1 For the franchisor’s requirements for supply of goods or services to a franchisee—details of: (a) any requirement for the franchisee to maintain a level of inventory or acquire an amount of goods or services; and (b) restrictions on acquisition of goods or services by the franchisee from other sources; and (c) ownership by the franchisor or an associate of the franchisor of an interest in any supplier from which the franchisee may be required to acquire goods or services; and [page 96]

(d) the obligation of the franchisee to accept goods or services from the franchisor, or from an associate of the franchisor; and (e) the franchisor’s obligation to supply goods or services to the franchisee; and (f)

whether the franchisee will be offered the right to be supplied with the whole range of the goods or services of the franchise; and

(g) conditions under which the franchisee can return goods, and to whom; and (h) conditions under which the franchisee can obtain a refund for services provided by the franchisor, and from whom; and (i)

whether the franchisor may change the range of goods or services, and if so, to what extent; and

(j)

whether the franchisor, or an associate of the franchisor, will receive a rebate or other financial benefit from the supply of goods or services to franchisees, including the name of the business providing the rebate or financial benefit; and

(k) whether any rebate or financial benefit referred to under paragraph (j) is shared, directly or indirectly, with franchisees. Note: Before a requirement is made under paragraph (b) or (c), the franchisor may notify, or seek authorisation from, the Australian Competition and Consumer Commission (see Part VII of the Act).

11 Supply of goods or services by a franchisee

11.1 For the franchisor’s requirements for supply of goods or services by a franchisee—details of: (a) restrictions on the goods or services that the franchisee may supply; and (b) restrictions on the persons to whom the franchisee may supply goods or services; and (c) whether the franchisee must supply the whole range of the goods or services of the franchise. Note: Before a requirement is made under paragraph (a) or (b), the franchisor may notify, or seek authorisation from, the Australian Competition and Consumer Commission (see Part VII of the Act).

12 Supply of goods or services—online sales 12.1 Details of whether the franchisee may make available online: (a) goods of the same type or brand; or (b) services of the same type. [page 97] 12.2 If goods or services may be made available online by the franchisee, the following information: (a) whether the franchise agreement restricts, or places conditions on, the franchisee’s ability to make those goods and services available online; (b) whether goods or services may be made available via a third party website, and if so, specified restrictions or conditions by the franchisor on the franchisee’s use of a third party

website; (c) the extent to which those goods or services may be supplied outside the territory of the franchise. 12.3 Details of whether: (a) the franchisor or an associate of the franchisor; or (b) other franchisees; makes, or expects to make, goods or services available online. 12.4 If goods or services are made, or are expected to be made, available online by the franchisor, an associate of the franchisor or other franchisees, the following information: (a) the extent to which those goods or services may be supplied in the territory of the franchise; (b) in the case of goods or services made available via a third party website—the domain name or URL of the third party website. 12.5 Details of any profit sharing arrangements that apply in relation to goods or services made available online and would affect the franchisee, and whether these arrangements may be unilaterally changed by the franchisor.

COMMENTARY ON ITEM 12 12.1

Explanatory Statement

The Explanatory Statement notes on p 45 that on-line sales, and e-commerce in general, are now an important part of the operations of many franchise systems. However, until now there was no specific obligation on the part of a franchisor to

include information about on-line sales in the disclosure document … This item seems to promote transparency in this growing part of the franchising sector. The parties to the franchise agreement should approach disclosure under this item with the obligation on parties to act in good faith in mind. [page 98]

13 Sites or territories 13.1 The policy of the franchisor, or an associate of the franchisor, for selection of as many of the following as are relevant: (a) the site to be occupied by the franchised business; (b) the territory in which the franchised business is to operate. 13.2 Details of whether the territory or site to be franchised has, in the previous 10 years, been subject to a franchised business operated by a previous franchise granted by the franchisor and, if so, details of the franchised business, including the circumstances in which the previous franchisee ceased to operate. 13.3 The details mentioned in item 13.2 must be provided: (a) in a separate document; and (b) with the disclosure document.

14 Other payments Prepayments 14.1 If the franchisor requires a payment before the franchise

agreement is entered into—why the money is required, how the money is to be applied and who will hold the money. 14.2 The conditions under which a payment will be refunded. Establishment costs 14.3 Details of the range of costs to start operating the franchised business, based on current practice, for the following matters: (a) real property, including property type, location and building size; (b) equipment, fixtures, other fixed assets, construction, remodelling, leasehold improvements and decorating costs; (c) inventory required to begin operation; (d) security deposits, utility deposits, business licences, insurance and other prepaid expenses; (e) additional funds, including working capital, required by the franchisee before operations begin; (f)

other payments by a franchisee to begin operations.

14.4 For item 14.3, the details for each payment must include: (a) a description of the payment; and (b) the amount of the payment or the formula used to work out the payment; and (c) to whom the payment is made; and (d) when the payment is due; and (e) whether the payment is refundable and, if so, under what conditions. [page 99]

14.5 For item 14.4, if the amount of the payment cannot easily be worked out—the upper and lower limits of the amount. Other payments 14.6

For each recurring or isolated payment payable by the franchisee to the franchisor or an associate of the franchisor or to be collected by the franchisor or an associate of the franchisor for another person: (a) description of the payment; and (b) amount of the payment or formula used to work out the payment; and (c) to whom the payment is made; and (d) when the payment is due; and (e) whether the payment is refundable and, if so, under what conditions.

14.7

For each recurring or isolated payment, that is within the knowledge or control of the franchisor or is reasonably foreseeable by the franchisor, that is payable by the franchisee to a person other than the franchisor or an associate of the franchisor: (a) a description of the payment; and (b) the amount of the payment or formula used to work out the payment; and (c) to whom the payment is made; and (d) when the payment is due; and (e) whether the payment is refundable and, if so, under what conditions.

14.8

For item 14.6 or 14.7, if the amount of the payment cannot

easily be worked out—the upper and lower limits of the amount. 14.9

If 2 or more of items 14.1, 14.3 and 14.6 apply to a payment, the information required by those items in relation to that payment need be set out only once.

14.10 To avoid doubt, this item covers a payment of significant capital expenditure.

15 Marketing or other cooperative funds 15.1 For each marketing or other cooperative fund, controlled or administered by or for the franchisor, to which the franchisee may be required to contribute, the following details: (a) the kinds of persons who contribute to the fund (for example, franchisee, franchisor, outside supplier); (b) how much the franchisee must contribute to the fund and whether other franchisees must contribute at a different rate; (c) who controls or administers the fund; (d) whether the fund is audited and, if so, by whom and when; [page 100] (e) how the fund’s financial statements can be inspected by franchisees; (f)

the kinds of expense for which the fund may be used;

(g) the fund’s expenses for the last financial year, including the percentage spent on production, advertising, administration

and other stated expenses; (h) whether the franchisor or its associates supply goods or services for which the fund pays and, if so, details of the goods or services; (i)

whether the franchisor must spend part of the fund on marketing, advertising or promoting the franchisee’s business.

16 Financing 16.1 The material conditions of each financing arrangement that the franchisor, its agent or an associate of the franchisor offers to the franchisee for establishment or operation of the franchised business. 16.2 For item 16.1, the material conditions of a financing arrangement include the following: (a) any requirement that the franchisee must provide a minimum amount of unborrowed working capital for the franchised business; (b) any requirement that a franchisee must meet a stated debt to equity ratio in relation to the franchised business.

17 Unilateral variation of franchise agreement 17.1 The circumstances in which the franchisor has unilaterally varied a franchise agreement in the last 3 financial years (including, if applicable, financial years before this code came into force), other than variations of a minor nature. 17.2 The circumstances in which the franchise agreement may be varied, unilaterally, by the franchisor in the future.

COMMENTARY ON ITEM 17 17.1 Explanatory Statement The Explanatory Statement at p 47 provides that ‘this provision does not relate to operations manuals, unless they are considered part of the franchise agreement. Whether or not this is the case will depend on the terms of the agreement.’ Care needs to be taken in drafting the agreement, as often the agreement provides that the franchise agreement includes the operations manual. This requirement provides an additional reason why it is preferable to ensure compliance with the [page 101] operations manual separately, rather than by incorporating the manual into the definition of the franchise agreement.

18 Arrangements to apply at the end of the franchise agreement 18.1 Details of the process that will apply in determining arrangements to apply at the end of the franchise agreement, including: (a) whether the prospective franchisee will have an option to: (i)

renew the franchise agreement; or

(ii) enter into a new franchise agreement; and (b) whether the prospective franchisee will be able to extend the term of the franchise agreement, and if so, the processes the franchisor will use to determine whether to

extend the term of the franchise agreement; and (c) if the prospective franchisee will have an option to renew the franchise agreement—whether the prospective franchisee will be entitled to compensation at the end of the agreement if it is not renewed and, if so, how that compensation will be determined; and (d) details of the arrangements that will apply to unsold stock, marketing material, equipment and other assets purchased when the franchise agreement was entered into, including: (i)

whether the franchisor will purchase the stock, marketing material, equipment and other assets; and

(ii) if the franchisor is to purchase the stock, marketing material, equipment and other assets—how prices will be determined; and (e) whether the prospective franchisee will have the right to sell the business at the end of the franchise agreement; and (f)

if the prospective franchisee will have the right to sell the business at the end of the franchise agreement—whether the franchisor will have first right of refusal, and how market value will be determined; and

(g) whether the franchisor will consider any significant capital expenditure undertaken by the franchisee during the franchise agreement, in determining the arrangements to apply at the end of the franchise agreement. 18.2 Details of whether the franchisor has, in the last 3 financial years, considered any significant capital expenditure

undertaken by franchisees, in determining the arrangements to apply at the end of franchise agreements between the franchisor and those franchisees. [page 102] 18.3 If the franchisee does not have the option to renew the franchise agreement, the following statement must be included in size 12 font and bold: The franchisee does not have the option to renew the franchise agreement. At the end of the franchise agreement, the franchisor may, but does not have to, extend the term of the agreement. If the franchisor does not extend the term of the agreement, the franchise agreement ends and the franchisee no longer has a right to carry on the franchised business. 18.4 If the franchisee cannot extend the term of the franchise agreement, the following statement must be included in size 12 font and bold: The franchisee cannot extend the term of the franchise agreement. At the end of the franchise agreement, the franchisor may, but does not have to, extend the term of the agreement. If the franchisor does not do so, the franchise agreement ends and the franchisee no longer has a right to carry on the franchised business. 18.5 If the franchisee: (a) does not have the option to renew the franchise agreement; and (b) cannot extend the term of the franchise agreement;

the following statement must be included in size 12 font and bold: The franchisee does not have the option to renew the franchise agreement and cannot extend the term of the franchise agreement. At the end of the franchise agreement, the franchisor may, but does not have to, extend the term of the agreement. If the franchisor does not extend the term of the agreement, the franchise agreement ends and the franchisee no longer has a right to carry on the franchised business.

19 Amendment of franchise agreement on transfer of franchise 19.1 Whether the franchisor will amend (or require the amendment of) the franchise agreement on or before the transfer of the franchise.

20 Earnings information 20.1 Earnings information may be given in a separate document attached to the disclosure document. 20.2 Earnings information includes the following information: (a) historical earnings data for: (i)

the franchised business; or

(ii) a franchise in the franchise system; [page 103]

if subparagraph (a)(ii) applies—any differences between (b) the franchise in the franchise system and the franchised business; (c) projected earnings for the franchised business and the assumptions on which those projections are based; (d) any other information from which historical or future earnings information of the franchised business can be assessed. 20.3 If earnings information is not given—the following statement: The franchisor does not give earnings information about a [insert type of franchise] franchise. Earnings may vary between franchises. The franchisor cannot estimate earnings for a particular franchise. 20.4 Earnings information that is a projection or forecast must include the following details: (a) the facts and assumptions on which the projection or forecast is based; (b) the extent of enquiries and research undertaken by the franchisor and any other compiler of the projection or forecast; (c) the period to which the projection or forecast relates; (d) an explanation of the choice of the period covered by the projection or forecast; (e) whether the projection or forecast includes depreciation, salary for the franchisee and the cost of servicing loans; (f)

assumptions about interest and tax.

21 Financial details 21.1 A statement of the franchisor’s solvency that: (a) reflects the franchisor’s position: (i)

at the end of the last financial year; or

(ii) if the franchisor did not exist at the end of the last financial year—at the date of the statement; and (b) is signed by at least one director of the franchisor; and (c) gives the directors’ opinion as to whether there are reasonable grounds to believe that the franchisor will be able to pay its debts as and when they fall due. 21.2 Financial reports for each of the last 2 completed financial years in accordance with sections 295 to 297 of the Corporations Act 2001, or a foreign equivalent of that Act applicable to the franchisor, prepared by the franchisor. Note: See also items 21.4 to 21.6. [page 104] 21.3 If: (a) the franchisor is part of a consolidated entity that is required to provide audited financial reports under the Corporations Act 2001, or a foreign equivalent of that Act applicable to the consolidated entity; and (b) a franchisee requests those financial reports; financial reports for each of the last 2 completed financial years, prepared by the consolidated entity.

Note: See also items 21.4 to 21.6. 21.4 Items 21.2 and 21.3 do not apply if: (a) the statement under item 21.1 is supported by an independent audit provided by: (i)

a registered company auditor; or

(ii) if the franchisor is a foreign franchisor—a foreign equivalent for that franchisor; within 4 months after the end of the financial year to which the statement relates; and (b) a copy of the independent audit is provided with the statement under item 21.1. 21.5 If the franchisor or consolidated entity (the entity) has not existed for 2 or more financial years, then instead of providing the financial reports mentioned in item 21.2 or 21.3, the following: (a) a statutory declaration of the entity’s solvency; (b) an independent audit report on the entity’s solvency as at the date of the entity’s declaration. 21.6 If the franchisor or consolidated entity (the entity) was insolvent in either or both of the last 2 completed financial years, the following: (a) a statement of the period during which the entity was insolvent; (b) a statutory declaration of the entity’s solvency; (c) an independent audit report on the entity’s solvency as at the date of the entity’s declaration.

COMMENTARY ON ITEM 21 21.1 Financial details The Australian Government Auditing and Assurance Standards Board (AUASB) issued Guidance Statement GS 018, Franchising Code of Conduct — Auditor’s Report, on 15 June 2015 to provide guidance on compliance with following audit [page 105] requirements. A copy is available from the Board’s website at Audits are performed under ASA 805 Special Considerations — Audits of Single Financial Statements and Specific Elements, Accounts or Items of a Financial Statement, which further notes that an auditor must apply the requirements in ASA700 Forming an Opinion and Reporting on a Financial Report in relation to the engagement. Practitioners should not assume that obtaining an audit report will necessarily be a simple exercise. In paragraph 13 of GS 018, the AUASB notes that under ASA 500 Audit Evidence, an auditor needs to obtain ‘sufficient appropriate evidence … about the assets, liabilities, revenue, expenses, cash flows, budgets and projections of the entity in order to assess the basis for the directors’ statement’ in relation to solvency. Large or established franchisors may have little difficulty, but small and/or fast-growing franchisors may face challenges. Part of the appeal of franchising as an expansion strategy is that capital to fund network growth is provided by franchisees. It is also quite typical for franchisors to reinvest in growth of the business, such that although they remain solvent they do not have the capital or tangible asset base of a more traditional corporation. Few franchise systems will actually be audited in their early years, so it may even be necessary to establish a new relationship with a

registered company auditor. Thus the audit requirements imposed by the Code will be challenging in some circumstances.

21.2 Item 21.5 This is an important new requirement of the Code that has received very little publicity or comment. In all previous versions of the Code, if the franchisor had not existed for two years, all that was required was those financial statements that were available. Now an independent audit report of solvency is required if the franchisor or consolidated entity has not existed for two or more financial years. The cost of obtaining an independent audit of solvency in such a situation is likely to be significant. Further, in some circumstances where the entity is newly established with few tangible assets, an auditor may be reluctant to provide such a report.

22 Updates 22.1 Any information given under clause 17 that has changed between the date of the disclosure document and the date the disclosure document is given under the code.

23 Receipt 23.1 On the last page of the disclosure document: (a) a statement to the effect that the prospective franchisee may keep the disclosure document; and (b) a form on which the prospective franchisee can acknowledge receipt of the disclosure document. [page 106]

Annexure 2—Information statement for prospective franchisee Note: See subclause 11(1).

THINKING OF BECOMING A FRANCHISEE? IT IS IMPORTANT TO CONSIDER THE RISKS AND THE REWARDS This document is not a complete guide to franchising, it is a starting point. It should be combined with your own independent legal, accounting or business advice and the disclosure document provided by the franchisor.

Entering a franchise is a big decision. Before you do so, you should: Conduct due diligence – this means researching the franchise system and talking to current and former franchisees. Get advice – get legal, accounting and/or business advice from professionals with expertise in franchising. Read all the documents – carefully study the disclosure document, franchise agreement and any other documents provided by the franchisor. Know your rights – make your own enquiries to ensure that it is the right decision for you. The Franchising Code of Conduct sets out the rights and obligations of the people involved in a franchising relationship. It can be found at http://www.comlaw.gov.au. You should also consider taking a specialist franchising or business course before making a decision to enter a franchise agreement. There are free,

online education courses available for prospective franchisees. Some courses can be found here http://www.franchise.edu.au/education.html. What is franchising? Franchising is a model for doing business. When you enter a franchise agreement, the franchisor controls the name, brand and business system you are going to use. The franchisor grants you the right to operate a business in line with its system, usually for a set period of time. There is no guarantee you will be able to keep your franchise business after the initial period of the agreement ends. Franchisors and franchisees must comply with the Franchising Code of Conduct, which exists under the Competition and Consumer Act 2010, as well as consumer and company laws. The Franchising Code sets out minimum requirements for a franchisor to provide specific information to you. A franchise agreement, once entered into, is a legally binding contract that sets out the terms of the franchise. [page 107] Why consider franchising? A franchise can offer particular benefits over other types of businesses. For example, franchises may have an established product or service and an existing reputation and image. It may also give you access to the franchisor’s experience and knowledge in the industry, planning, marketing skills and operating procedures. Some franchise systems provide support, some do not. You should carefully think about whether the franchise system you are considering suits your business experience, skills and needs. Understanding the franchising relationship

Two important features of franchising are that the franchisor has established the business system you are using and that most franchise systems rely on each franchise maintaining consistency. For those reasons, franchisees are usually required to strictly comply with the operating procedures set down by the franchisor. As a result, you may be limited in the changes you can make to the franchise system without the agreement of the franchisor. You will usually also be bound by confidentiality obligations. This includes limits on your rights to use the franchisor’s intellectual property or business system outside the franchise. Most businesses adjust to meet changes in the market. The franchisor might make changes to the franchise system at any time but does not have to discuss them with all franchisees. Unexpected expenses In franchising, as in any business, unexpected expenses may arise. Events such as a natural disaster or a change in the law or Australian standards can impact your business. You need to have a business plan that takes this into account when working out the funds you will need for the future. You should also make sure you have the type of insurance which is right for your situation. During the life of your franchise agreement, a franchisor might also decide to update computer systems or introduce new uniforms or change the appearance of the franchise system. These changes might not have been thought about when you entered the agreement. Those costs would normally be paid by the franchisee under the agreement. The risks of franchising Statistics suggest franchises have a lower failure rate than other businesses, but franchising is not risk free. Franchising is a business and, like any

business, there is the potential for a franchisor or franchisee to become insolvent. If this occurs this may have significant impacts on your business, for instance, you may no longer be able to use the franchise system’s branding. [page 108] Some of the things you should think about are: How much working capital or extra funds you need for the first year or two while the business is getting established. Consumer demand for products or services is not the same in every geographical area and a franchise system might not be successful in every area. As a franchisee, you may not have an exclusive territory. Your franchisor may have the ability to compete with you online. As a franchisee, you won’t necessarily have the choice of where you buy the products you need to run the business, even if you believe you can get those products for a lesser price somewhere else. An agreement may allow the franchisor to terminate the agreement even if there hasn’t been a breach by a franchisee. Some locations are better for some businesses than others (i.e. consider a shopping centre versus a main street). The economy has its ups and downs. Whether the business is a fad or should it pass the test of time. You may not have an automatic right to renew your agreement once the initial term is over. You should think about what happens at the end of the agreement: Will you be able to recover your outlay and make a profit during the

term of the agreement? What are your rights and responsibilities around renewing your franchise agreement? What are the rules about you selling your business? Are there any restrictions on you starting a similar business if you want to? The Australian Competition and Consumer Commission (ACCC) administer and enforce the Franchising Code. For example, the ACCC can provide information on how supply arrangements work in a franchising relationship. Further information Further information on franchising can be found at http://www.accc.gov.au or by calling the ACCC Small Business Helpline on 1300 302 021.

1. S Giles, M Redfern and A Terry, Franchising Law and Practice, LexisNexis, Sydney, 2009, looseleaf. 2. See . 3. See . 4. See Burger King Corporation v Hungry Jacks Pty Ltd [2001] NSWCA 187; JF Keir Pty Ltd v Priority Management Systems Pty Ltd (administrators appointed) [2007] NSWSC 789; Alstom Ltd v Yokogawa Australia Pty Ltd (No 7) [2012] SASC 49. 5. See Burger King Corporation v Hungry Jacks Pty Ltd [2001] NSWCA 187. In this case, Burger King had a number of agreements with Hungry Jacks under which Hungry Jacks operated as Burger King’s Australian franchisee. Burger King was held to not have acted in good faith when it refused to grant licenses to Hungry Jacks for the opening of new stores in Australia. While power to do this existed under one of the agreements, doing so was held to not be in good faith because the purpose was to force Hungry Jacks into breach of the agreement, which also required Hungry Jacks to open a number of new stores each year. 6. See s 223 of the Australian Consumer Law (ACL). 7. The court discussed the nature of a franchise relationship, noting that the franchisor and franchisee had two separate businesses. In assessing the intended consequences of termination, Mildren J

noted that it was necessary to identify and follow the physical assets. The court permitted the withdrawal of the right to use the name and the requirements for transfer of the telephone numbers, business records, customer lists, fax numbers and email addresses to the plaintiff. However, the court refused to enforce the general restraint, noting that the franchisor did not ‘own the customers’ and in fact that nobody can own customers — customers are free to go where they like. All the franchisor was contractually entitled to receive back was any customer lists. 8. S Giles, M Redfern and A Terry, Franchising Law and Practice, LexisNexis, Sydney, 2009, looseleaf. 9. See also Attorney-General (Cth) v Adelaide Steamship Co Ltd (1913) 18 CLR 30; [1913] AC 781; [1911-13] All ER Rep 1120; Esso Petroleum Co Ltd v Harper’s Garage (Stourport) Ltd [1968] AC 269; [1967] 1 All ER 699; 2 WLR 871; Queensland Co-op Milling Association v Pamag Pty Ltd (1973) 133 CLR 260; 1 ALR 47; BC7300014; Amoco Australia Pty Ltd v Rocca Bros Motor Engineering Co Pty Ltd (1973) 133 CLR 288; 1 ALR 385; BC7300033; and Quadramain Pty Ltd v Sevastapol Investments Pty Ltd (1976) 133 CLR 390; 8 ALR 555; BC7600029. 10. See also Esso Petroleum Co Ltd v Harper’s Garage (Stourport) Ltd [1968] AC 269 at 324; [1967] 1 All ER 699 at 724; 2 WLR 871. 11. See also LBA Financial Services Pty Ltd v Parkinson (VSC, Beach J, 8760/1994, 2 December 1994, unreported, BC9406111), in which a restraint was granted on a former representative of a financial dealer (who was in possession of the client files) to prevent the former representative contacting clients. However, in Triangle Corp Pty Ltd v Carnsew (1994) 29 IPR 69; AIPC ¶91–099; BC9406540, an application to restrain a former employee using information acquired in the course of his employment was dismissed. In Security Storage Pty Ltd v Neilson (NSWSC, McLelland CJ, 5195/1993, 25 November 1993, unreported, BC9302338), a restraint was refused except in relation to specific information that was in the nature of a trade secret. The court stated that, in the absence of any contractual restraint, and in the absence of special circumstances creating some special obligation in relation to particular elements of confidential information, a former employee is at liberty to participate in a business which is in competition with his former employer and to solicit orders from, or otherwise deal with, customers of his former employer. 12. Contracts in restraint of trade provide an exception to the general rule that contracts contrary to public policy are void. If the offending restraint of trade clause can be severed, the courts will enforce the remaining inoffensive clause. However, in New South Wales, the Restraints of Trade Act 1976 (NSW) provides a different solution. Section 4(1) provides that a ‘restraint of trade is valid to the extent to which it is not against public policy, whether it is in severable terms or not’. Orton v Melman [1981] 1 NSWLR 583 at 587; (1981) ATPR ¶40–250 at 43–257 and 43–258. 13. S Giles, M Redfern and A Terry, Franchising Law and Practice, LexisNexis, Sydney, 2009, looseleaf. 14. See Moorgate Tobacco Co Ltd v Philip Morris Ltd (No 2) (1984) 156 CLR 414; 56 ALR 193; BC8400490; and Coco v A N Clark (Engineers) Ltd (1968) 1IPR 587; [1968] FSR 415; [1969] RPC 41. 15. See Australian Blue Metal Ltd v Hughes [1963] AC 74; [1963] ALR 113 and Crawford Fitting Co v Sydney Valve and Fittings Pty Ltd (1988) 14 NSWLR 438. See also S Giles, M Redfern and A Terry, Franchising Law and Practice, LexisNexis, Sydney, looseleaf, Ch 16. 16. The court adopted the comments of Lord Wilberforce in Federal Commerce and Navigation Co Ltd

v Molena Alpha Inc [1979] AC 757; [1979] 1 All ER 307; [1979] 1 Lloyd’s Rep 201. 17. See also Waltons Stores (Interstate) Ltd v Maher (1988) 164 CLR 387; 76 ALR 513; BC8802656. 18. See Shevill v Builders Licensing Board (1982) 149 CLR 620; 42 ALR 305; BC8200097 (Shevill); Ankar Pty Ltd v National Westminster Finance (Aust) Ltd (1987) 162 CLR 549; 70 ALR 641; BC8701770; N C Sneddon and M P Elinghaus, Cheshire and Fifoot’s Law of Contract, 7th ed, Butterworths, Sydney, 1997 at [217]. 19. DTR Nominees Pty Ltd v Mona Homes Pty Ltd (1978) 138 CLR 423; 19 ALR 223; BC7800034. 20. Review of the Franchising Code of Conduct: Report to: the Hon Gary Gray AO MP, Minister for Small Business, and the Hon Bernie Ripoll MP, Parliamentary Secretary for Small Business, Commonwealth of Australia, Canberra, 30 April 2013.

[page 109]

Part 3 Case Summaries

[page 111]

Case Summaries Far Horizons Pty Ltd v McDonald’s Australia Ltd [2000] VSC 310 Background This case illustrates the application of the implied duty of good faith in a common franchising scenario. The case supports the proposition that a duty of good faith is likely to be implied into all franchise agreements. However, this is now a moot point given the express inclusion of the duty into the Franchising Code of Conduct. Nevertheless, the reasoning of the court as to how the duty is likely to be applied now has added relevance. Mr Hackett owned Far Horizons Pty Ltd (Far Horizons), the independent owner of two McDonald’s stores. Far Horizons operated under licence agreements with McDonald’s Australia Pty Ltd (McDonald’s), at the Fountain Gate and Endeavour Hills stores in Victoria. Under the licence agreements, McDonald’s could open new stores and did not have to offer Far Horizons the licences for the new stores. It was common for store owners to have more than one store. The issue of whether an existing licensee would be granted an additional licence was included in the ‘National Store Owner Expansion Criteria’ policy. Under this policy, an existing licensee could be considered for another licence if they satisfied certain criteria, including operational level of quality, service and cleanliness, financial capability, re-investment and operator involvement. In 1994, the relationship between McDonald’s and Far Horizons had declined

due to Far Horizons receiving poor ratings from McDonald’s on performance parameters, which Far Horizons then failed to rectify. McDonald’s notified Far Horizons in early 1996 about the decision to open two new stores. One store was proposed to be located at the Fountain Gate food court, less than one kilometre from Far Horizons’ Fountain Gate store, and one at Berwick, less than five kilometres from their Endeavour Hills store. Far Horizons commenced proceedings after being notified that they were not being offered the licences. They sought damages alleging the decision was in made in bad faith and motivated by McDonald’s intention to prejudice the profitability of the stores and persuade them to withdraw from the McDonald’s system. [page 112]

Decision of the Supreme Court Whether the franchisor’s decision was motivated by bad faith Far Horizons alleged that McDonald’s breached their duty to: not open a store that would prejudice significantly the profitability of either the Fountain Gate or Endeavour Hills store; offer to Far Horizons the licence to operate the new store; not exercise its rights under the licence agreements unfairly or in bad faith; not use the confidential information provided by the Hacketts when determining who to grant the licence to unless it was McDonald’s intention to grant the licence to Far Horizons; advise or consult with Far Horizons before taking any action which may prejudice significantly the profitability of either store; and ensure Far Horizons receive the same opportunity for expansion,

information, assistance and expertise from McDonald’s as any other licensee. Far Horizons argued that the decisions were made in bad faith as part of McDonald’s strategy to improperly pressure Far Horizons to leave the system. The decision to open the two new stores was described as a ‘pincer movement’ directed toward that strategy. The court held that McDonald’s ‘must have regard to the express agreement between the parties, negotiated at arms’ length and not on unequal terms … it cannot operate to deny a party the right to exercise a power conferred by the contract for the promotion or protection of its legitimate interests, in circumstances where that party seeks to exercise that right to protect or promote those interests.’ Far Horizons alleged that the legal foundations of the duties owed by McDonald’s were contractual and also arose from the fiduciary relationship between the parties. Under the licence agreements, McDonald’s was entitled to open new stores, it did not provide Far Horizons the right to be offered the licence of any new store and did not have exclusive trading rights in any area beyond the location of their stores. McDonald’s denied that the decisions had been made in conjunction with their strategy to remove Far Horizons from the system.

Duty to act honestly, fairly and in good faith The court had to determine whether McDonald’s, under the licence agreements, had an obligation to act honestly, fairly and in good faith while exercising its powers and, if so, the scope of those obligations. It was held that McDonald’s did not breach the duties owed to Far Horizons by making the decisions to open new stores and to not offer the licences to Far

[page 113] Horizons. Rather, McDonald’s had acted honestly and reasonably and in good faith because: each party was ‘well aware that the opening of new stores was an ordinary part of the McDonald’s way of doing business and that this will in many cases involve an impact upon the business of an existing license’; Far Horizons had the onus to establish that McDonald’s had acted in bad faith, specifically, that it exercised its powers for an extraneous purpose and to force Far Horizons out of the McDonald’s system, which they failed to prove; Mr Hackett was obligated to provide financial information and McDonald’s was not prohibited from using the information in its growth strategies. McDonald’s was in fact entitled to use the information for its own statistical and management purposes; and McDonald’s provided adequate advice and consulted with Far Horizons on its plans, before taking any step which may have prejudiced the profitability of their stores or their business interest. In this case, there was evidence to show the considerable length McDonald’s went to before the decisions were made.

Conclusion The court stated that ‘there is to be implied in a franchise agreement a term of good faith and fair dealing which obliges each party to exercise the powers conferred by the agreement in good faith and reasonably, not capriciously or for some extraneous purpose. Such a term is a legal incident of such a contract.’ However, the implied duty cannot prevent a party exercising their rights with the purpose of protecting their legitimate commercial interests.

If a franchisee provides evidence that the motive of the franchisor is contrary to the reasonable expectations of the franchisee and that the franchisor will deliberately prejudice the franchisee’s business, it may be sufficient to prove a lack of good faith on the part of the franchisor.

PouletFrais Pty Ltd v The Silver Fox Company Pty Ltd [2005] FCAFC 131 Background It is quite common for franchisees to make allegations of misleading or deceptive conduct against a franchisor. In most cases the franchisee has succeeded, with the courts making it clear that they would not tolerate misrepresentations or conduct that caused a franchisee to take action they would not have taken had they been fully informed. This case provides a very useful insight into the boundaries for a misleading conduct claim, making it clear that conduct which, viewed in isolation, might constitute misleading or deceptive conduct will not necessarily enable a franchisee plaintiff to succeed in its claim. [page 114] In September 1998, The Silver Fox Company Pty Ltd (Silver Fox) and its guarantors, Mr and Mrs Baker (the Bakers), acquired and began operations of a Lenard’s Poultry Shop franchise (Lenard’s) at the Hilton Plaza Shopping Centre in South Australia. PouletFrais Pty Ltd (PouletFrais) was the master franchisee of Lenard’s in South Australia. Prior to signing the franchise agreement, possible locations were discussed with the Bakers, including a shop at the Hilton Plaza Shopping Centre. Various documents were provided to the Bakers as part of an information

pack, which included a document titled ‘Financial Requirements’. Weekly sales did not meet the Bakers’ expectations and in July 2000, PouletFrais served the Bakers with a notice of termination of the franchise agreement. As a result, the Bakers suffered significant financial loss, lost the Hilton shop and the opportunity to earn profit from the business. They also lost their source of income and the capital that they had introduced into the Hilton shop. The Bakers alleged that PouletFrais contravened s 52 of the Trade Practices Act 1974 (Cth) (TPA). They argued that PouletFrais engaged in misleading and deceptive conduct prior to signing the franchise agreement by making representations regarding sales, profitability and the site quality. The Bakers further alleged that PouletFrais engaged in unconscionable conduct by entering into and then terminating the franchise agreement.

Decision of the Federal Court The primary judge rejected the allegations that PouletFrais and Lenard’s engaged in misleading and deceptive conduct by making oral representations that were untrue to the Bakers in their capacity as potential purchasers. The judge held that PouletFrais and Lenard’s did not engage in misleading and deceptive conduct in contravention of s 52 of the TPA. It was also acknowledged by the court that Lenard’s had a policy to choose the site locations ‘carefully’, but held that the shop site was not ‘carefully’ selected. PouletFrais filed a notice of appeal and stated that the primary judge erred in finding that the sales and profitability representation and the site quality representation were made. It was further stated that even if representations were made, they were not misleading or deceptive.

Decision of the Full Federal Court on appeal Sales and profitability representation The issue of whether PouletFrais’ conduct was misleading or deceptive was

required to be determined by considering what a ‘reasonable person’ in the position of the Bakers would have understood the statements to mean. PouletFrais was held not responsible for the financial losses and were entitled to rely on statements made that no representation had been made to the Bakers regarding the success of the business because: [page 115] the evidence presented suggested that the Bakers were ‘competent and mature individuals’ and that nothing compelled them to do business with PouletFrais; PouletFrais did not guarantee the business would achieve the same results indicated in any targets or that it would in fact succeed. The court held that ‘no reasonable person who read and considered the whole of the documentary material could have been under the illusion that PouletFrais was representing to them that, provided the franchisee complied with the Lenard’s system, any particular weekly level of gross sales would be achieved or any particular level of operating profit would be achieved’; a significant aspect of the franchise agreement was that the Bakers acknowledged that no representations had been made to them in regard to whether the business would be successful and produce a certain turnover or profits; the Bakers acknowledged the receipt of some but not all documents in the information pack but gave evidence that they read the documents, particularly those which stated that PouletFrais did not guarantee that their business would succeed; and the Bakers obtained advice, as required by PouletFrais, from a solicitor and accountant in regard to the legal and financial characteristics, obligations and risks associated with the franchise agreement.

Site quality representation The court found that the policy adopted by Lenard’s to ‘choose shop locations carefully’ is to be considered from the perspective of a reasonable person in the position of the Bakers as it ‘carried with it a message that Lenard’s choose shop locations with an eye to identifying sites where Lenard’s considered that Lenard’s shops might be expected to operate profitably’. References to ‘quality shopping centres and sites close to supermarkets are important in that they inform a reasonable reader about the sorts of judgments that it is Lenard’s practice when selecting a site’. The court found that the Hilton shop site was ‘carefully’ selected in accordance with the site quality representation because: PouletFrais or Lenard’s did not hold themselves out to be an expert in regards to retail shop site selection but did acknowledge that they had considerable experience; evidence showed that the site was selected carefully, even though PouletFrais or Lenard’s did not take every option that was available to them and selected the site without considering certain factors that an expert might have considered; and lack of care was not established ‘merely by the fact that a heavily geared franchisee experienced difficulties in profitability operating a Lenard’s shop on the site in the first 24 months it was open’. [page 116]

Conclusion The franchisor does not assume all risks associated with the business from the franchisee. The franchisee has the onus to understand the legal and financial obligations under the franchise agreement as well as the risks associated with

the franchise. However, if the franchisor’s conduct is misleading or deceptive, they are unable to rely on a disclaimer to avoid liability.

SPAR Licensing Pty Ltd v MIS Qld Pty Ltd [2014] FCAFC 50 Background There are not many cases that have considered in detail the application of the disclosure obligations contained in the Franchising Code of Conduct, and the consequences of breach of those obligations. In early 2010, SPAR Licensing Pty Ltd (SPAR), a supplier of dry groceries to independent retail outlets, entered into negotiations with MIS Qld Pty Ltd (MIS) that operated a supermarket on Macleay Island in Queensland. The negotiations resulted in MIS receiving a disclosure document from SPAR in July 2010, which contained a directors’ statement and independent auditor’s report for the 2009 financial year. On 1 February 2011, MIS entered into a franchise agreement with SPAR for a term of five years. Unbeknown to MIS, SPAR’s financial position had deteriorated since the issue of the disclosure document. During the term of the franchise agreement, MIS was required to operate the supermarket as a SPAR-bannered store and to purchase dry groceries exclusively from SPAR. Before the franchise agreement was entered into, representations were made by a senior executive of SPAR that MIS could be released from the franchise agreement earlier than five years; however, this was not incorporated into franchise agreement. Six months following execution of the franchise agreement, MIS wrote to SPAR, indicating that MIS was withdrawing from the franchise agreement in reliance on the representations made by SPAR that it could terminate upon payment of a break fee. This was so that MIS could rebrand the store and

enter into an alternative supply agreement with IGA Distribution Pty Limited (IGA), a rival of SPAR.

Decision of the Federal Court SPAR did not allow MIS to exit the franchise agreement and consequently sought specific performance of the franchise agreement and orders requiring MIS to continue to buy supplies from it. In September 2011, SPAR obtained an interlocutory injunction restraining MIS from purchasing goods from a supplier other than SPAR in order to maintain the status quo. [page 117] In addition to its claims in contract, SPAR claimed that MIS was in breach of s 45 of the Competition and Consumer Act 2010 (Cth) (CCA). These claims were dismissed at trial and were not considered in the appeal. MIS crossclaimed that SPAR had contravened s 51AD of the Trade Practices Act 1974 (Cth) (TPA) (which deals with franchising codes of conduct) in regards to the requirement to provide a current disclosure document and solvency statement. MIS further claimed that SPAR was in breach of s 52 (prohibition on misleading and deceptive conduct) of the TPA. The court found in favour of MIS in respect of both limbs of the cross-claim and made orders to vary the franchise agreement to permit MIS to withdraw from it upon payment of the break fees set out in the franchise agreement. Further, MIS was awarded damages on the basis that they had lost an opportunity for an increase in sales they would have obtained if they had commenced trading under the IGA banner. SPAR subsequently appealed the trial decision.

Decision of the Full Federal Court on appeal

Franchising Code of Conduct requirement to provide current disclosure document MIS claimed that SPAR had failed to comply with cl 6B(1) of the Franchising Code of Conduct (Code) which required a franchisor to give a prospective franchisee a ‘current disclosure document’. MIS had been provided with a disclosure document seven months before the date of signing of the franchise agreement. The document was current at the time of issue but was not current at the date the franchise agreement was signed. The court had to determine whether cl 6B(1) requires a disclosure document which is current at the date the franchise agreement is entered into, or current as at the date that the disclosure document is provided to the prospective franchisee. It was held by the majority that to satisfy this requirement, the prospective franchisee must be provided with a disclosure document that is current at the date the franchise agreement is entered into. Notwithstanding any previous versions of the disclosure document provided, a franchisor must provide the franchisee with an updated disclosure document at least 14 days prior to the prospective franchisee entering into the franchise agreement. Consequently, SPAR’s failure to provide an updated disclosure document was a contravention of the Code.

Franchising Code of Conduct requirement to provide solvency statement It was also claimed by MIS that SPAR failed to comply with cl 6(2)(a)(i) of the Code which provides that the franchisor’s disclosure document must be in accordance with Annexure 1 of the Code if the expected annual turnover of the business will be $50,000 or more during the term of the franchise agreement. Annexure 1, at item 21.1, requires that a disclosure document include ‘a statement as at the end of

[page 118] the last financial year, signed by at least 1 director of the franchisor, whether in its directors’ opinion there are reasonable grounds to believe that the franchisor will be able to pay its debts as and when they fall due’. The disclosure document provided by SPAR contained the relevant statement for the 2008/2009 financial year. However, the disclosure document was provided in July 2010, which falls in the 2010/2011 financial year. Farrell J, the only judge to consider this issue, held that a franchisor must create a new disclosure document at the beginning of each financial year, which includes an updated solvency statement. Buchanan and Foster JJ did not consider the solvency statement issue and therefore there is no majority view on this point, and it is not clear whether Farrell J’s interpretation of item 21.1 will be applied in future cases.

Representations made by franchisor during negotiations with prospective franchisee On appeal, the finding that SPAR engaged in misleading or deceptive conduct was unanimously overturned. The court held that the representations in question were representations as to future matters (whether or not the franchisor would enforce a particular clause of the franchise agreement). A representation as to a future matter is not misleading or deceptive if there was a reasonable basis for making it at the time it was made. At the time the representation was made by the SPAR executive, SPAR had a practice of allowing franchisees to exit a franchise agreement prior to the end of the fiveyear term. This policy provided a reasonable basis for making such a statement and therefore there was no misleading or deceptive conduct.

Remedies The court accepted the argument of MIS that it would not have entered into

the franchise agreement if SPAR had complied with the Code as MIS would have been aware of SPAR’s declining financial position. MIS would have known this if SPAR had provided an updated disclosure document 14 days prior to the signing of the franchise agreement. For this reason MIS submitted that the franchise agreement should be set aside from the date of signing. The court, however, decided to set aside the franchise agreement from the date of the court’s judgment (three years after entry into the franchise agreement), as in its view MIS had not suffered in any way which would require any financial adjustment in its favour.

Conclusion The decision in this case provides clarification of a franchisor’s disclosure obligations under the Code. In particular, franchisors must ensure that they provide prospective franchisees with an updated disclosure document, including a current financial report and solvency statement, 14 days prior to when it proposes to enter into the franchise agreement. [page 119]

Rafferty v Madgwicks [2012] FCAFC 37; Time 2000 Systems (Aust) Pty Ltd v Rafferty [2010] FCA 1179 Background There are several cases that have considered the application of the Franchising Code of Conduct to transactions that would not normally be considered to be a franchise arrangement. However, this case demonstrates the willingness of the courts to look to the Franchising Code of Conduct to provide a remedy in the context of a broader commercial dispute.

Between May 2007 and May 2008, Mr Rafferty and his two associated companies, Santora Holdings Pty Ltd and Karaville Holdings Pty Ltd (together the Rafferty Parties) entered into a business venture with Mr Donovan and his three associated companies, Time 2000 Systems (Australia) Pty Ltd, Time 2000 Operations (Australia) Pty Ltd and Embleton Limited (together the Donovan Parties). The Rafferty Parties and the Donovan Parties incorporated a company, Time 2000 West Pty Ltd (T2W) for the purposes of the joint venture. The business venture involved the sale of Modular Accommodation Units (MAUs) and was established by three agreements: a Heads of Agreement (HoA), a Joint Venture and Shareholders’ Agreement (JVSA) and a Rights Agreement (RA). Under the RA, T2W was granted a licence to use patents and trade marks belonging to the Donovan Parties in exchange for a payment of $1 million. The RA also required T2W to comply with specific obligations regarding the promotion, marketing and selling of the MAUs. Madgwicks was the law firm that prepared the agreements and they advised the Donovan Parties that the arrangements could potentially constitute a franchise and consequently they should adhere to the Franchising Code of Conduct (the Code). The Donovan Parties chose to ignore this legal advice while the Rafferty Parties did not obtain any legal advice. The Donovan Parties had made a number of representations to the Rafferty Parties, including that a Chinese manufacturer had been engaged to produce the prototype and that there was significant interest in the MAUs from potential customers. After entry into the agreements, the relationship between the parties broke down and the Rafferty Parties sued the Donovan Parties on the basis of a breach of the Code and misleading and deceptive conduct under s 52 of the Trade Practices Act 1974 (Cth) (TPA).

Decision of the Federal Court The trial judge found that the HoA and RA constituted an agreement to enter

into a franchise and a franchise agreement and accordingly gave rise to disclosure obligations under the Code. It was also held that that the Donovan Parties had engaged in misleading and deceptive conduct as prohibited by s 52 of the TPA regarding representations made by Mr Donovan in relation [page 120] to the status of the MAU prototypes. The claims made against Madgwicks by the Rafferty Parties that Madgwicks had engaged in misleading or deceptive conduct were dismissed.

Decision of the Full Federal Court on appeal HoA as agreement to enter into a franchise agreement The Donovan Parties contended that the HoA did not constitute an agreement to enter into a franchise agreement as all the terms of the agreement had not yet been settled. However, the Full Court held (at 149) that it was enough that there was a ‘discernable agreement to enter into a franchise agreement, without any necessity that the precise terms of that franchise agreement be settled’.

Licence arrangement may constitute a franchise agreement Further, the Full Court had to determine whether the RA and HoA constituted a franchise agreement within the meaning of cl 4 of the Code. The key question was whether the Donovan Parties (the putative franchisor) gave the Rafferty Parties (the putative 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’, as per cl 4(1)(b) of the Code.

The court looked at the ‘control’ necessary for a licensing arrangement to qualify as a franchise agreement and listed a number of factors which are relevant (at 172). In regards to the case before them, they thought that the following features were enough to deem the RA a franchise agreement (at 175–84): Specific requirements for accounting and recording keeping — the franchisee was required to prepare and maintain financial records on a management system approved by the franchisor. Reservation of franchisor’s right to audit financial records of the franchisee — the franchisor had the right to access (and thereby audit) financial records. Inability of the franchisee to supply goods or services to customers without the franchisor’s approval — the franchisor was to have absolute discretion to scrutinise proposed sales orders of MAUs and approve or refuse any project. Reservation by the franchisor of the right to approve promotional and advertising material — under the RA, the franchisee was obliged to comply with all reasonable directors of the franchisor as to the marketing of MAUs. Badging — trademarks, trade and brand names — under the RA, T2W could be obliged to give prominence ‘to trademarks and trade and brand names associated with the Core IP and Time 2000 Image in all displays and catalogues and other promotional material’. [page 121] Requirements for merchandising and employment of sales staff — under the RA, the franchisee was required to establish display units and employ sales persons as reasonably required by the franchisor.

Stipulation of retail pricing structures, sales structures and sales quotas — the franchisee was obliged to meet specific sales targets and the franchisor was entitled to terminate the RA in the event that the targets were not achieved in the specified circumstances. Creation of marketing and sales territories — the HoA and RA granted the franchisee the exclusive right to ‘promote, market, sell and install’ MAUs within certain markets in a stipulated territory. Restriction on the franchisee selling competing products — the RA contained clauses which restricted competition. Requirement to comply with the franchisor’s policies and procedures — provisions of the HoA and RA which required compliance with any ‘policies and procedures’ were significant as these could enable the creation of a system or marketing plan if the franchisor so desired. In general, the court thought it was important that: the business of the franchisee was solely concerned with the franchisor’s product; the franchisor had a critical degree of control over key aspects of the franchisee’s business; the franchisor assumed responsibility for quality control; and the degree of control could have been augmented under the policy and procedure provisions. It was held that the HoA was an agreement to enter into a franchise agreement and the RA a franchise agreement. Consequently, as the Donovan Parties did not provide a copy of the Code, the disclosure document or written statements to the Rafferty Parties before they entered into the HoA or RA, they were in contravention of ss 10 and 11 of the Code and s 51AD of the TPA.

Misleading and deceptive conduct

In respect of the allegations of misleading and deceptive conduct, the court affirmed the decision of the trial judge.

Conclusion The decision in Rafferty indicates that heads of agreement or other preliminary agreements may be agreements to enter into franchise agreements and hence trigger disclosure obligations under the Code. Further, it illustrates the courts adopting a ‘substance over form’ approach as to what may constitute a franchise agreement. [page 122]

Master Education Services Pty Ltd v Ketchell [2008] HCA 38 Background The franchise sector reacted swiftly when the New South Wales Court of Appeal delivered a judgment that threatened to undermine the apparent purpose of the Franchising Code of Conduct. The peak industry body, the Franchise Council of Australia, helped organise and fund an appeal to the High Court that ultimately restored the integrity of the regulatory framework and provided clarity concerning the consequences of breach of the Franchising Code of Conduct. Master Education Services Pty Ltd (MES) initiated proceedings against one of its franchisees, Ms Jean Ketchell (Ketchell), to recover money owed to MES under a franchise agreement entered into by the parties in February 2000. Acting in accordance with its obligations under the Franchising Code of Conduct (the Code), MES provided Ketchell with a disclosure document and copy of the Code prior to executing the franchise agreement. MES did not,

however, obtain a written statement from Ketchell acknowledging that Ketchell had received, read, and had a reasonable opportunity to understand both the disclosure document provided by MES, and the Code. Clause 11(1) of the Code prohibits franchisors from entering into, renewing, extending a franchise agreement, or receiving any non-refundable money in connection with a franchise agreement unless the franchisor has received such an acknowledgement from the franchisee. In defending against the claim, Ketchell argued that MES, by virtue of its failure to receive the written acknowledgement required under cl 11(1) of the Code, lacked any entitlement to enter into the franchise agreement or to receive any money under the terms of the agreement. In effect, Ketchell argued that non-compliance with cl 11(1) of the Code, made the franchise agreement illegal and of no effect, thereby releasing Ketchell from her obligations under the agreement. This argument relied upon reading cl 11(1) of the Code in conjunction with Pt IVB s 51AD of the Trade Practices Act 1974 (Cth) (TPA), which states that a corporation must not contravene an applicable industry code (which included the Franchising Code of Conduct). At first instance, the Local Court dismissed Ketchell’s argument. The Local Court held that while MES’ contravention of cl 11(1) of the Code would not render the franchise agreement illegal, it may allow Ketchell the availability to seek damages for any loss or damage incurred as a result of the contravention.

Decision of the New South Wales Court of Appeal An appeal was brought before the New South Wales Court of Appeal where a decision was made in favour of Ketchell. [page 123] The reasoning of the Court of Appeal was that when read in conjunction with s 51AD of the TPA, cl 11 of the Code directly prohibited the franchise

agreement due to MES not receiving the required written statement from Ketchell. As part of its reasoning, the court referred to the common law general rule that contracts will not give rise to any enforceable right or undertaking where the contract is prohibited by legislation. The court found no other section within either the TPA or the Code that expressly or impliedly mitigated the wording of cl 11 of the Code. The court was satisfied therefore that s 51AD of the TPA, in conjunction with cl 11 of the Code, expressly prohibited the agreement between the parties as well as any money sought to be recovered by MES.

Decision of the High Court On appeal, the High Court held unanimously that MES’ failure to comply with cl 11(1) of the Code did not render the franchise agreement illegal and unenforceable. As a result, MES was able to enforce its claim to the money owed to it by Ketchell. In reaching this decision, the High Court referred to not only the language of both the TPA and the Code, but also the purposes of these instruments. The High Court’s reasoning began by considering the general common law principle referenced by the New South Wales Court of Appeal that no enforceable right or obligation arises from an agreement prohibited by legislation. Considering this, the High Court held that the correct approach to applying this general principle was explained in the case of Australian Competition and Consumer Commission v Baxter Healthcare Pty Ltd [2007] HCA 38.1 There, the court held (at 46) that ‘[W]hether or not the statute has this effect [of invalidating a contract] depends upon the mischief which the statute is designed to prevent, its language, scope and purpose, the consequences for the innocent party, and any other relevant considerations.’ The High Court held in support of the proposition from Australian Competition and Consumer Commission v Baxter Healthcare, that whether or

not a legislative instrument can be held to completely invalidate a contract will be a matter of statutory construction aided by a consideration of the scope and object of the whole statute. It was held that the prohibition under s 51AD of the TPA was designed for the general purpose of securing compliance by franchisors with the Code. Specifically, the legislative purpose was to regulate the franchising industry so as to improve business practices by participants, decrease litigation and provide a degree of protection to franchisees. It supported this proposition by reference to the Second Reading Speech of the Trade Practices Amendment (Fair Trading) Bill 1997,2 the [page 124] Explanatory Statement to the regulations of the TPA prescribing the Code, and the Code’s express purpose as found in cl 2 of the Code. The court further concluded that the TPA readily prescribes a range of elaborate remedies for any breaches of Pt IVB of the TPA, including injunctive relief and damages, and that the applicability of these remedies in the first instance is supported by reference to the Explanatory Memorandum. As the TPA is far from silent as to the consequences a party may face for breach of Pt IVB of the TPA, the court held that it is not to be inferred that contravention of s 51AD of the TPA or cl 11(1) of the Code would automatically lead to the drastic consequences, argued by Ketchell, of rendering the contract void. Further, the court also addressed the language of cl 11(1) of the Code, stating that while the language is imperative, this again cannot be taken to imply or infer that any contravention will automatically render a contract void and unenforceable. Such an understanding, the court held, could lead to unusual results of allowing franchisors to rely on their own non-compliance with the Code to avoid their obligations, thereafter placing franchisees in potential

breach of their obligations to third parties, a result which would be counter to the purposes of the TPA and Code, namely improving business practices and offering protection to franchisees.

Conclusion The High Court’s decision confirmed that parties need not fear that nonsubstantial contraventions of the Code will automatically render a franchise agreement void. While this case does not clarify the extent that noncompliance would need to reach before an agreement would be rendered void, parties should, in the first instance, look to those remedies available under the TPA to settle the majority of cases of non-compliance.

1. See also Yango Pastoral Co Pty Ltd v First Chicago Australia Ltd (1978) 139 CLR 410 at 423. 2. Australia, House of Representatives, Parliamentary Debates (Hansard), 30 September 1997 at 87998800, as at Master Education Services Pty Limited v Ketchell [2008] HCA 38 at [20].

Index References are to page numbers A ACCC Franchisor Compliance Manual …. 41, 42–43, 45, 53 Advertising fees. See Marketing and advertising fees Advisors, professional …. 3 “An amount” …. 30 Annotated Code …. 4 Appointment of mediation adviser …. 17 Associate, definition …. 22, 25–26 Association of franchisees or prospective franchisees …. 83 Australia, regulation of franchising in. See Regulation of franchising in Australia Australian Competition and Consumer Commission (ACCC) …. 4 Australian Consumer Law (ACL) …. 8, 35 Australian Securities and Investments Commission (ASIC) …. 7 B Breach of cartel provisions …. 73 of CCA …. 74 by franchise, termination …. 79–80 of implied term, termination for …. 77

of specific legislative provisions …. 73 code provisions …. 88 Business conduct …. 4 Business Format Franchising …. 7 Business unconscionability …. 8 C Capital expenditure …. 81 Capital Networks case …. 32 Case law …. 31 Code certificates …. 55 Code of Practice …. 8 Codes of Conduct …. 9 Common law on restraints of trade …. 61–62 Commonwealth of Australia Constitution Act 1900 …. 21 Compensation, genuine …. 59 Competition and Consumer Act (CCA) …. 3, 6, 65–66 Competition and Consumer (Industry Codes-Franchising) Regulation 2014 about …. 9 industry code …. 16 pecuniary penalties …. 15 transitional arrangements …. 17 transitional-continued appointment of mediation adviser …. 17 Competition and Consumer (Industry Codes-Oilcode) Regulation 2006 …. 20

Confidentiality of information …. 59 Consumer unconscionability …. 8 Contracts in restraint of trade …. 65 Contractual restraint, absence of …. 64 Cooling off period, termination …. 69 Corporations Act 2001 …. 25 Costs of settling disputes …. 57 Court enforceable undertaking …. 88 Credit Reference Association of Australia (CRAA) …. 64 D Deceptive conduct …. 4, 6, 35 Definitions associate …. 22, 25–26 extend …. 22, 26 financial year …. 26 franchise …. 26 franchise agreement …. 28 franchisee …. 28 franchisor …. 28 interest in franchise …. 26 master franchise …. 27 prospective franchisee …. 27 related body corporate …. 27 renew …. 27

small proprietary company …. 27 Deregistration …. 8 Disclosure document applicable information …. 41 changes to agreement after disclosure, before signing …. 42 content and form …. 40 double disclosure, unnecessary …. 42 ‘financial year,’ definition of …. 41 to franchise systems …. 40–41 legal and financial risks associated with franchise …. 44 maintaining of …. 40 one request per annum, by franchisee …. 51 renewal or extension …. 42 strict wording of Old Code …. 42–43 update …. 41, 50 written statement from franchise …. 44 Disclosure obligations copy of lease, strict time requirement …. 48 copy of other agreements …. 48 disclosure document …. 50 financial statements, copy of …. 49–50 lease incentives or benefits …. 48 for materially relevant facts …. 53 Disclosure of former franchisee details …. 83

Disclosure of materially relevant facts about …. 51–52 extended beyond changes, purely to franchisor entity …. 53 updated financial information …. 53 Dispute settlement costs …. 57 jurisdiction for …. 56–57 E Electronic signature …. 22 End of term arrangements …. 53–54 Engage in conduct …. 22 Estoppel …. 77–78 Expansion policy of franchisor …. 37 Expenditure, capital …. 81 Explanatory Statement …. 50, 101 Extend, definition …. 22, 26 Extension, extended definition of …. 42 F Fees, marketing and advertising. See Marketing and advertising fees Financial benefit, lease …. 48 Financial statements copy …. 49 franchisee votes, flexibility for voting …. 50 ‘meaningful information’ …. 50

Financial year, definition …. 23, 26, 41 Franchise, definition …. 23, 26 Franchise agreement case law …. 31–33 definition …. 28 master franchisee …. 46 meaning of …. 29–30 multi-tiered franchise network …. 46 obligation to act in good faith …. 34 requirements for …. 48–49 sub-franchisee …. 46 termination of (See Termination of franchise agreement) terms of …. 56 transfer of …. 67 Franchisee, definition …. 28 Franchisee’s request …. 42 Franchise regulation challenge of …. 4–5 nature of …. 5–6 Franchise relationship, nature of …. 60 Franchise system …. 23 Franchising, background of …. 4–5 Franchising Code Council (FCC) …. 8 Franchising Code of Conduct

about …. 6 application of …. 20 arrangements in rural communities …. 20 Commonwealth of Australia Constitution Act 1900 …. 20 Competition and Consumer (Industry Codes-Oilcode) Regulation 2006 …. 20 extension to franchise …. 21 legislative instrument …. 18 rejection of industry calls for additional exemptions …. 20 Franchising Code of Conduct (the Code) …. 3 Franchising Law and Practice …. 36 Franchising Task Force …. 7 Franchisor consent to transfer by …. 67–68 definition …. 28 and disclosure document maintenance …. 39 documents to franchisee or prospective franchisee …. 41–42 giving information statement to prospective franchisee …. 45 prospective franchisee giving advice …. 43–44 Franchisor Compliance Manual …. 45 Frustration, concept of …. 76 Fuel resellers, conduct of …. 20 G Gardini Report (March 1995) …. 8

Genuine wholesaling arrangement …. 30 Good faith, meaning …. 36 Goodwill …. 59, 60, 62 H House of Representatives Standing Committee on Industry, Science and Technology …. 8 I Ignorance of law …. 35 Industrial Relations Act 1996 (NSW) …. 72, 74 Industry code …. 16 Information Statement …. 4 Information statement to prospective franchisees about …. 45 risks and rewards, psychological commitment to agreement …. 45 Intellectual property …. 59 Interdependence between businesses …. 5 Interest in franchise, definition …. 23, 26 Interlocutory injunction to prevent termination …. 72 Interlocutory relief to franchisor …. 65 Investigative and auditing powers of ACCC …. 55 Investment schemes …. 6 Invoices for services …. 31 J Jurisdiction for settling disputes …. 56–57

L Lease, copy of lease incentives or benefits …. 48 time requirement …. 48 Legislative Instruments Act 2003 …. 18 Legislative intervention …. 6 Legitimate commercial interests …. 36, 38 M Mandatory industry code …. 8–9, 20, 29 Marketing and advertising fees about …. 81 for franchisor itself …. 82 franchisors free to deal with funds …. 82 separate fund …. 82 Master franchise definition …. 23–24, 27 requirement …. 94 Master franchisor about …. 39 and disclosure requirements …. 39 Mediation adviser, appointment of …. 17 Misleading conduct …. 4, 6, 35 Misrepresentation …. 76 Mistake …. 76

Motor Dealers and Repairers Act 2013 (NSW) …. 30 Motor vehicle …. 24 defined …. 30 examples …. 30–31 Motor vehicle dealership …. 24, 30 N National Companies and Securities Commission (NCSC) …. 6 New South Wales Industrial Relations Commission …. 74 No breach by franchise, termination …. 70 Non-competition deed …. 63 Non-refundable deposit …. 42 Notices …. 78–79 Notification obligations …. 54 O Obligation to act in good faith declining to grant an option or extension …. 36 Explanatory Statement …. 35 impact of …. 35 legitimate commercial interests …. 36 pecuniary penalty …. 35 prohibitions on misleading or deceptive conduct …. 35 purposes of agreement …. 35 Occupation of premises under lease …. 47

without lease …. 47–48 Old Code …. 3 P Pecuniary penalties …. 20, 35 Penalties …. 88 enforcement …. 88 Petroleum Retail Marketing Franchise Act …. 6 Prescribed interests …. 6, 7 Product distribution agreement …. 30 Prohibition on release from liability …. 56 Prospective franchisee association …. 83 definition …. 24, 27 franchisor giving information statement to …. 45 giving advice to franchisor …. 43–44 information statement to …. 45 restrict or impair …. 83 Q Quasi-regulation …. 6, 7 R Record keeping obligations about …. 54–55 information and documents, keeping …. 55 Registration …. 8

Regulation of franchising in Australia challenge of …. 4–5 under Companies Act …. 6–7 mandatory industry code …. 8–9 nature …. 5–6 voluntary regulation …. 7–8 Regulation under Companies Act …. 6–7 Related body corporate, definition …. 27 Relevant interlocutory proceedings …. 33 Renew, definition …. 24, 27 Repudiation …. 75–76 Request for franchisor’s consent to transfer …. 67 Reseller agreement …. 31 Restraint of trade at law …. 60–61 Restraint of trade clause, if agreement not extended for former franchisee …. 58–59 genuine compensation …. 59–60 goodwill of franchisee …. 59 notice requirement …. 59 terms for incoming franchisees …. 59 Restraints of Trade Act 1976 (NSW) …. 65 Restriction of termination …. 71 Restrictive covenants in franchise agreements …. 62–63 S

Sale of franchise …. 5 Serious offence …. 24 Small business failures …. 4 Small proprietary company, definition …. 27 Special circumstances, termination …. 70 Standards of conduct …. 8 Sub-franchisee …. 39 Subfranchisor …. 24 Substantiation notice …. 55 T Telephone number use, restraint on …. 66 Termination of franchise agreement for breach …. 79–80 for breach of implied term …. 75–76 cooling off period …. 69 estoppel …. 77–78 frustration/mistake/misrepresentation …. 76 no breach by franchisee …. 70 notices …. 78–79 by operation of law …. 70 on reasonable notice …. 69–70 repudiation …. 75–76 restricting termination …. 73–74 special circumstances …. 70

Terms of franchise agreement …. 56 Trade mark …. 25 Trade Practices Act1974 (Cth) (TPA) …. 8 Trade Practices (Industry Codes-Oilcode) Regulations 2006 (Oilcode) …. 6 Transfer …. 25 Transferee …. 68 Transfer of franchise agreement consent to transfer, franchisor’s …. 67–68 request for franchisor’s consent to transfer …. 67 Transitional arrangements …. 17 Trust deed …. 7 Two Exposure Drafts of Old Code …. 9 U Unconscionable conduct …. 6 V Voluntary regulation …. 7–8 W Wein, Alan …. 3 Wein Report …. 30 Wein’s recommendations …. 3 Wholesalers, conduct of …. 20