In Australia an attempt in 1986 to legislate met with opposition from all sectors involved. In December 1990 the Minister for Small Business and Customs appointed a Franchising Task Force to examine and propose mechanisms for the reduction of barriers and impediments to the efficiency and growth of the franchising sector. The terms of reference of the Task Force were to examine and report on the potential of self-regulatory codes for countering marketing failure in franchising, focusing on business format franchising, and to recommend the measures by which industry and Government could enhance the efficiency and growth of the franchising sector.
The outcome of the work of the Task Force was the development of a voluntary and self-regulatory Franchising Code of Practice1 applicable to:
franchisors (including sub-franchisors);
service providers (including banking and financial institutions that provide franchise-related financial support to franchisors and franchisees and publishers or advertising media providers who accept work and publish advertising for the purpose of selling or promoting franchise systems);
advisers (persons, firms or associations such as lawyers, accountants, marketing or management consultants and business brokers who provide advise to franchisors and franchisees); and
State Small Business Corporations.
The Code provided for and regulated:
the certification by franchisees of receipt of the disclosure document, of a Guide for Franchisees and of a copy of the Code of Practice;
cooling off periods for franchisees within which they may terminate the franchise agreement;
alternate dispute resolution; and
contains the requirement that the franchisee be identified as being a franchisee.
To be noted is that the Code did not apply to master franchise arrangements between a foreign franchisor and a domestic franchisee.
The Minister for Customs and Small Business reviewed the functioning of the Code in 1994. The report was completed in October 1994 and released some time thereafter.2 The publication of this report caused renewed debate as to the necessity of introducing legislation for franchising. The reason for this was the finding that between 40% and 50% of franchisors had chosen not to register under the Code, most importantly the motor vehicle industry and significant areas in the real estate sector. Furthermore, a number of important banks had not registered as service providers. Other findings of the Reviewer were that there was a significant number of non-registered franchisors who failed to provide adequate disclosure, who failed to offer a cooling-off period for new franchise agreements and who failed to observe the standards of conduct contained in the Code. A number of recommendations were proposed by the Reviewer and extensively debated.
To administer the Code a Franchising Code Council had been set up in early 1993 with initial funding from the Department of Industry, Science and Technology. The Council comprised five franchisor representatives, five franchisee representatives, two members representing service providers and advisers and one lawyer representative. Following a decision on the part of the Department of Industry, Science and Technology to discontinue the funding as from 1997/1998, the Council ceased to operate on 31 December, 1996.
The situation of franchising was reviewed by the House of Representatives Standing Committee on Industry, Science and Technology in its examination of business conduct. In its report the Committee arrived at the conclusion that self-regulation had not worked and that it was necessary to underpin codes of conductwith legislation.3 This enquiry prompted the Australian Government to adopt a mandatory Franchising Code of Conduct4 and to underpin it by modifications to the Trade Practices Act 1974 (Cth). The provisions of the Code, the most significant of which are those that relate to disclosure, are based on the voluntary Code of Practice.5
In 2000 a Review of the Franchising Code of Conduct was initiated. The Review was conducted in two parts, the first of which set out to determine the usefulness of the Code and the extent to which operators were aware of the Code, so as to determine the extent to which the Code was complied with. The second part, the results of which were published in October 2006, concerned the disclosure provisions of the Code.6 In the end, the conclusion was that major changes to the Code were not necessary.
THE AUSTRALIAN MANDATORY FRANCHISING CODE OF CONDUCT
(contributed by Frank Zumbo, Senior Lecturer, School of Business Law and Taxation,University of New South Wales)
While the regulations containing Australia's new mandatory Franchising Code of Conduct commenced on 1 July 1998, it was not until 1 October 1998 that the Code became fully operational. In doing so, the new Code has imposed comprehensive disclosure requirements, a requirement for the mandatory mediation of franchising disputes and minimum standards for franchise agreements.7 Such minimum standards now require franchisors to:
allow a cooling off period;8
provide a copy of a lease to franchisees where they lease premises from the franchisor; 9
allow franchisees to associate with each other for lawful purposes;10
refrain from seeking from a franchisee a general release from liability;11
organise the preparation and audit of financial statements for a marketing fund;12
to disclose a number of materially relevant facts;13 and
to refrain from unreasonably withholding consent to a transfers of the franchised business.14
In addition, the Code requires a franchisor to take certain steps in relation to a termination of the franchise agreement. These steps - outlined in clauses 21 - 23 of the Code - impact upon a franchisor's right to terminate a franchise agreement. The three scenarios dealt with under these clauses relate to:
(i) termination where there is a breach by the franchisee;
(ii) termination where there is no breach by the franchisee; and,
(iii) termination under special circumstances.
In exercising its right of termination, a franchisor will need to identify the relevant scenario and comply with the Code's requirements in relation to that scenario.
FRANCHISE AGREEMENTS COVERED BY THE CODE
All aspects of the Code apply to a `franchise agreement' entered into, transferred, renewed or extended on or after 1 October 1998. While fully operational in relation to a post 1 October 1998 franchise agreement, some of the Code's provisions are not applicable to pre 1 October 1998 agreements.15 In such circumstances, a pre 1 October agreement is covered to the extent that the Code's provisions are applicable to that agreement.
A definition of franchise agreement is provided in clause 4(1) and is critical to the operation of the Code. That definition provides that:
"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 business 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;
(v) payment for goods or services at or below their wholesale price; or
(vi) repayment by the franchisee of a loan from the franchisor; or
(vii) payment for the wholesale price of goods taken on consignment; 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."
An agreement which satisfies this definition will be covered by the Code unless specifically excluded by another provision of the Code. A number of such exclusions are provided for in the Code. Significantly, clause 4(2)(b) of the Code also provides for a specific inclusion dealing with motor vehicle dealer agreements. A motor vehicle dealership is been defined in clause 3 of the Code:
"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."
A definition of motor vehicle is also provided in clause 3.
The following are specific exclusions to the Code:
under clause 4(3) a number of specified legal relationships are not in themselves to be considered a franchise agreement. These relationships include:
an employer and employee relationship;
a partnership relationship;
a landlord and tenant relationship;
a mortgagor and mortgagee relationship;
a lender and borrower relationship;
the relationship between the members of a cooperative that is registered, incorporated or formed under a relevant Australian law.
the Code does not, in accordance with clause 5(3)(a), apply to non resident franchisor where the franchisor:
is not a resident, domiciled or incorporated in Australia; and
grants only one franchise or master franchise to be operated within Australia.
under clause 5(3)(b), the Code will not apply to a franchise agreement covered by another code which is prescribed as mandatory pursuant to the Australian Trade Practices Act.
subject to one important proviso,16 the Code does not, in accordance with clause 5(3)(c), apply to a franchise agreement that:
relates to goods or services that are substantially the same as those supplied by the franchisee for at least 2 years immediately before entering into the agreement; and
the sales of goods or services under the proposed franchise will not provide more than 20% of the franchisee's gross turnover for goods or services of that kind during the first year of the franchise agreement.
DISCLOSURE REQUIREMENTS: PART TWO OF THE CODE
Where an agreement is covered by the Code, a franchisor is required to prepare a disclosure document which is to be updated annually within three months after the end of the franchisor's financial year. Under clause 10(a), the franchisor must to give a copy of the Code and the disclosure document to the prospective franchisee at least 14 days before the prospective franchisee enters into the franchise agreement or pays a non-refundable amount in connection with the proposed franchise agreement. Similarly, franchisor is required by clause 10(b) to give a copy of the Code and the disclosure document to a franchisee at least 14 days before the renewal or extension of the franchise agreement.
Clause 6(4) of the Code also stipulates that where a franchisor is proposing to grant a master franchise, the franchisor must give a disclosure document to the prospective subfranchisor. Where, in turn, a subfranchisor proposes to grant a subfranchise, the franchisor and subfranchisor are obliged under clause 6(5)(a) to either individually provide a disclosure document or give a joint disclosure document that addresses the respective obligations of the franchisor and the subfranchisor. Under clause 6(5)(b) of the Code, the subfranchisor must comply with the disclosure requirements imposed on a franchisor under the Code.
FRANCHISOR DISCLOSURE DOCUMENT
Clause 7 requires a disclosure document is to be in the form specified by Annexure 1 of the Code. That Annexure requires the franchisor to include the following information:
Front Page Details
payments to agents;
intellectual property details;
details regarding the supply of goods or services to franchisees
details regarding the supply of goods or services by franchisees;
site selection policy;
details regarding marketing and other cooperative funds;
the franchisor's obligations;
the franchisee's obligations;
summary of other conditions of agreement;
details regarding any obligation to sign related agreements;
details regarding any earning information provided;
financial details; and
other relevant disclosure information.
OBLIGATIONS IMPOSED ON TRANSFEROR OF FRANCHISED BUSINESS
Clause 6(2) of the Code also imposes disclosure obligations on a person who proposes to transfer a franchised business. Those requirements are specified in Annexure 2 of the Code. That Annexure requires that a proposed transferee be given a disclosure document which sets out specified details and other relevant disclosure material, and provides for both the required disclaimer statement and an acknowledgment of receipt by the proposed transferee.
MANDATORY MEDIATION: INTRODUCING A NEW ERA OF FRANCHISING DISPUTE RESOLUTION
Under the Code, a franchise agreement entered into, transferred, renewed or extended on or after 1 October 1998 must contain an internal complaint handling procedure which complies with the procedure outlined in Part 4 of the Code. That procedure is, in appropriate circumstances, to be pursued by the parties to a franchising dispute. The procedure can be initiated by a party in dispute writing to the other party regarding both the nature of the dispute and what is needed to settle the dispute.
Once the complaint handling procedure is invoked, the parties should try to agree on how to resolve the dispute. Where such agreement is not reached within three weeks, either party may refer the dispute to a mediator who is acceptable to the parties. If the parties cannot agree to a suitable mediator, then either party may ask the Federal Government-appointed Mediation Adviser to appoint a mediator. In such circumstances, the Mediation Adviser is required to appoint a mediator within 14 days. Once appointed, the mediator may decide the time and place of the mediation. In turn, the parties to the dispute are to attend the mediation and try to resolve the dispute.
While a post 1 October 1998 franchise agreement is required to contain a complaint handling procedure as outlined in Part 4 of the Code, there is no such requirement in relation to a pre 1 October 1998 franchise agreement. In the latter case, the Code provides that a party to a franchise dispute can use the code complaint handling procedure. That procedure is basically the same as that required to be included in a post 1 October 1998 franchise agreement.
Importantly, Part 4 does not affect the right of a party to a franchise agreement to take legal proceedings under the agreement.17 The parties are to pay their own costs of attending a mediation,18 and in the absence of an agreement to the contrary, the parties are equally liable for the costs of mediation pursuant to Part 4.19
REVIEW OF MANDATORY FRANCHISING CODE
On 26 August 1999 the Australian Federal Government has announced a review of the Code's operation.
2 R. Gardini, Review of the Franchising Code of Practice, Report to Senator the Hon. Chris Schacht, Minister for Small Business, Customs and Construction, Australian Government Publishing Service, Canberra, October, 1994.
3 Finding a balance - Towards fair trading in Australia, Report by the House of Representatives Standing Committee on Industry, Science and Technology, Australian Government Publishing Service, Canberra, May, 1997, p. 114 and Recommendation on p. 120.
6 See the Review of the Disclosure Provisions of the Franchising Code of Conduct, Report to the Hon Fran Bailey MP Minister for Small Business and Tourism, Secretariat, Office of Small Business, Canberra, October 2006.
7 See generally Zumbo, F., (1998), "Complying with the New Code: Critical Issues for the Franchising Sector," Law Society Journal, Vol. 36, pp. 46-50; and Zumbo, F., (1999), "A New Regulatory Regime for Australian Franchising," Franchise Law Journal, Vol. 18, pp. 154-158. [Back to text]
11 Clause 16. This clause, however, does not prevent a franchisee from settling a claim against the franchisor after entering into a franchise agreement.
16 The exclusion in clause 5(3)(c) will cease to apply if the franchisor is notified by the franchisee that sales of the goods or services under the franchise have provided more than 20% of the franchisee's gross turnover for goods or services of that kind for three consecutive years.