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 Practice 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:
- prior disclosure;
- 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;
- unconscionable conduct;
- alternate dispute resolution; and
- contained 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. 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.
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 conduct with legislation. This enquiry prompted the Australian Government to adopt a mandatory Franchising Code of Conduct and to underpin it by modifications to the Trade Practices Act 1974 (Cth). The provisions of the Code, the most significant of which were those that relate to disclosure, were based on the voluntary Code of Practice.
The Australian Mandatory Franchising Code of Conduct 1998 (revised 2001)
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. The new Code imposed comprehensive disclosure requirements, a requirement for the mandatory mediation of franchising disputes and minimum standards for franchise agreements. Such minimum standards required franchisors to:
- • allow a cooling off period;
- • provide a copy of a lease to franchisees where they leased premises from the franchisor;
- • allow franchisees to associate with each other for lawful purposes;
- • refrain from seeking from a franchisee a general release from liability;
- • organise the preparation and audit of financial statements for a marketing fund;
- • to disclose a number of materially relevant facts; and
- • to refrain from unreasonably withholding consent to a transfer of the franchised business.
In addition, the Code required a franchisor to take certain steps in relation to a termination of the franchise agreement. These steps impacted upon a franchisor's right to terminate a franchise agreement. The three scenarios dealt with under these clauses related 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 needed 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 applied 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 agreements, some of the Code's provisions were not applicable to pre 1 October 1998 agreements. In such circumstances, a pre 1 October agreement was covered to the extent that the Code's provisions were applicable to that agreement.
A definition of a franchise agreement was provided in Clause 4(1) and was critical to the operation of the Code. That definition provided 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 satisfied this definition would be covered by the Code unless specifically excluded by another provision of the Code. A number of such exclusions were provided for in the Code. Significantly, Clause 4(2)(b) of the Code also provided for a specific inclusion dealing with motor vehicle dealer agreements. A motor vehicle dealership was 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 was also provided in Clause 3.
The following were specific exclusions to the Code:
- • under Clause 4(3) a number of specified legal relationships were not in themselves to be considered a franchise agreement. These relationships included:
- • 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 registered, incorporated or formed
under a relevant Australian law.
- • under Clause 5(3)(a), the Code did not apply to a non resident franchisor where the franchisor:
- • was not a resident, domiciled or incorporated in Australia; and
- • granted only one franchise or master franchise to be operated within Australia.
- • under Clause 5(3)(b), the Code did not apply to a franchise agreement that was covered by another code prescribed as mandatory pursuant to the Australian Trade Practices Act.
- • subject to one important proviso, the Code did not, in accordance with Clause 5(3)(c), apply to a franchise agreement that:
- • related to goods or services that were 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 would 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 was covered by the Code, a franchisor was required to prepare a disclosure document which was to be updated annually within three months after the end of the franchisor's financial year. Under Clause 10(a), the franchisor must give a copy of the Code and the disclosure document to the prospective franchisee at least 14 days before the prospective franchisee enterd into the franchise agreement or paid a non-refundable amount in connection with the proposed franchise agreement. Similarly, a franchisor was 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 stipulated that where a franchisor was proposing to grant a master franchise, the franchisor must give a disclosure document to the prospective subfranchisor. Where, in turn, a subfranchisor proposed to grant a subfranchise, the franchisor and subfranchisor were obliged under Clause 6(5)(a) to either individually provide a disclosure document or give a joint disclosure document that addressed 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 required a disclosure document to be in the form specified by Annexure 1 of the Code. That Annexure required the franchisor to include the following information:
- • Front Page Details
- • franchisor details;
- • business experience;
- • litigation details;
- • payments to agents;
- • existing franchises;
- • intellectual property details;
- • franchise territory;
- • 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;
- • prepayment details;
- • financing details;
- • 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 imposed disclosure obligations on a person who proposed to transfer a franchised business. Those requirements were specified in Annexure 2 of the Code. That Annexure required that a proposed transferee be given a disclosure document which set out specified details and other relevant disclosure material, and provided 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 complied with the procedure outlined in Part 4 of the Code. That procedure was, in appropriate circumstances, to be pursued by the parties to a franchising dispute. The procedure could be initiated by a party in dispute writing to the other party regarding both the nature of the dispute and what was needed to settle the dispute.
Once the complaint handling procedure was invoked, the parties should try to agree on how to resolve the dispute. Where such agreement was not reached within three weeks, either party might refer the dispute to a mediator who was acceptable to the parties. If the parties could not agree to a suitable mediator, then either party might ask the Federal Government-appointed Mediation Adviser to appoint a mediator. In such circumstances, the Mediation Adviser was required to appoint a mediator within 14 days. Once appointed, the mediator might decide the time and place of the mediation. In turn, the parties to the dispute were to attend the mediation and try to resolve the dispute.
While a post 1 October 1998 franchise agreement was required to contain a complaint handling procedure as outlined in Part 4 of the Code, there was no such requirement in relation to a pre 1 October 1998 franchise agreement. In the latter case, the Code provided that a party to a franchise dispute could use the Code complaint handling procedure which was basically the same as that required to be included in a post 1 October 1998 franchise agreement.
Importantly, Part 4 did not affect the right of a party to a franchise agreement to take legal proceedings under the agreement. The parties were to pay their own costs of attending a mediation, and in the absence of an agreement to the contrary, the parties were equally liable for the costs of mediation pursuant to Part 4.
The 2001 Amendments to the Code
On 26 August 1999 the Australian Federal Government announced a review of the Code's operation. In 2001, the Governor General issued wide-ranging amendments to the Code. The amendments came into force on 1 October 2001 and were the following:
- the removal of the requirement that a franchisee selling its franchise provide a disclosure document to a prospective buyer;
- the institution of a Short Form Disclosure Document for the sale of a franchise with expected annual revenues of less than 50,000 AUD;
- the institution of a requirement that franchisors prepare a disclosure document before entering a franchise agreement and within three months after the end of each succeeding financial year;
- the permission of electronical delivery of disclosure documents, provided the information was readily accessible and the recipient accepted delivery electronically;
- the addition of a statement that the Code operated concurrently with the Petroleum Retail marketing Franchise Act of 1980;
- the insertion of a requirement that disclosure of materially relevant facts be in writing; and
- the insertion of an obligation of the franchisor to disclose a conviction of the franchisor or its director of a serious offence in the last ten years, a civil proceeding in the last five years and bankruptcy or insolvency in the last ten years.
Furthermore, mediation proceedings were obligated to be conduction in Australia.
However, this Franchising Code was repealed and replaced by a new Franchising Code of Conduct, which became effective on 1 January 2015.
The 2015 Code of Conduct
The Competition and Consumer (Industry Codes – Franchising) Regulation 2014 introduced a new Code which contains a certain number of changes, although most of its contents remains the same as the previous Code, albeit at times in different order. Certain terminology has also been changed (e.g. the term “master franchisee” is no longer used, being replaced by “subfranchisor”, as recommended already in 1989 by the IBA Committee on Franchsing (Committee X), the International Franchise Association and lawyers active in international franchising).
The novelties of the 2015 Code are
- the introduction of a general obligation for franchisors and franchisees (including prospective franchisees) to act in good faith in all their dealings with one another;
- throughout the Code, the introduction of civil (financial) penalties and infringement notices for breach of certain provisions;
- the introduction of a requirement for franchisors to provide prospective franchisees with brief information on the risks and rewards of franchising;
- the requirement for franchisors to set up a separate account for marketing funds and to provide greter transparency as regards the use of marketing funds;
- a requirement for additional disclosure regarding the ability of the franchisor and the franchisee to sell online;
- a prohibition for franchisors to impose significant capital expenditure, except in limited circumstances;
- the omission of the provision that “[i]In relation to franchise agreements concerning the retail marketing of motor fuel, this code is intended to operate concurrently with the Petroleum Retail Marketing Franchise Act 1980”.
The 2015 Code applies to all franchise agreements renewed, extended or transferred on or after 1 October 1998. A small number of provisions do not apply to agreements entered into before 1 January 2015.
 See Report by the Franchising Task Force To the Minister for Small Business and Customs The Hon. David Beddall M.P., December, 1991, Recommendation 6.
 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.
 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.
 See Franchising Code of Conduct, Commonwealth of Australia, 1998. Also reproduced in CCH, Business Franchise Guide, at ¶ 7001.
 See J. Darbyshire, Reform in the Australian Franchising Sector, in Journal of International Franchising and Distribution Law, 1997, p. 96 f.
 Section contributed by Frank Zumbo in 2000, at the time Senior Lecturer, School of Business Law and Taxation,University of New South Wales, updated by the Secretariat.
 See generally F. Zumbo, "Complying with the New Code: Critical Issues for the Franchising Sector," Law Society Journal, Vol. 36, (1998), pp. 46-50; and F. Zumbo, "A New Regulatory Regime for Australian Franchising," Franchise Law Journal, Vol. 18, (1999), pp. 154-158.
 Clause 13.
 Clause 14. Such a requirement is also imposed on an associate of the franchisor where it leases premises to the franchisee.
 Clause 15.
 Clause 16. This clause, however, does not prevent a franchisee from settling a claim against the franchisor after entering into a franchise agreement.
 Clause 17.
 Clause 18 specifies a number of matters which need to be disclosed within 60 days of the franchisor becoming aware of the particular matter.
 Clause 20 provides a list of circumstances in which it is reasonable for a franchisor to withhold consent.
 Clause 21.
 Clause 22.
 Clause 23.
 See Clauses 16 and 26.
 The exclusion in Clause 5(3)(c) would cease to apply if the franchisor was notified by the franchisee that sales of the goods or services under the franchise had provided more than 20% of the franchisee's gross turnover for goods or services of that kind for three consecutive years.
 See Clause 31(1).
 See Clause 31(3).
 See Clause 31(2).
 Competition and Consumer (Industry Codes— Franchising) Regulation 2014 No. 168, 2014 made under the Competition and Consumer Act 2010. The Code is contained in Schedule 1.
 Alex S. Konigsberg, International Franchising:Commonly used Terms, Volume 1, International Bar Association, 1989.
 Clause 6 of the Franchising Code: “(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.[…]
(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.[…]”
 See clauases13-18, 26-28, 32-33 and 41.
 Clause 11, which refers to the “Information statement for prospective franchisee” in Annexure 2 to the Franchising Code of Conduct.
 Clause 31.
 Clause 12 of Annexure 1 to the Franchising Code of Conduct: “Disclosure document for franchisee or prospective franchisee”
 Clause 30.