Franchising has become a prominent business model in Australia, offering entrepreneurs the opportunity to operate under established brand names while adhering to tested systems and processes. However, franchising is governed by a robust legal framework designed to ensure fair dealings and protect the interests of both franchisors and franchisees. For anyone considering entering a franchise agreement—whether as a franchisor or franchisee—understanding the key legal aspects is essential to avoid pitfalls and promote long-term success.
The Franchising Code of Conduct
At the heart of Australia’s franchising regulation is the Franchising Code of Conduct, a mandatory industry code under the Competition and Consumer Act 2010 (Cth). The Code applies to all franchise agreements entered into, renewed, or extended on or after 1 January 2015. It sets out obligations for disclosure, dispute resolution, and good faith dealings.
One of the primary legal obligations under the Code is the disclosure requirement. Franchisors must provide prospective franchisees with a comprehensive disclosure document at least 14 days before any agreement is signed or money is paid. This document must include vital information such as business experience, litigation history, fees, earnings potential, and termination conditions. The aim is to ensure franchisees make informed decisions.
Good Faith Obligations
Both parties to a franchise agreement must act in good faith. While the Code does not define good faith in absolute terms, it generally involves acting honestly, cooperatively, and not arbitrarily. This obligation applies throughout the entire franchising relationship—from negotiation to operation and termination. Breaching the good faith requirement can lead to penalties and damage claims.
Cooling-Off Period
Under the Code, franchisees have a seven-day cooling-off period after entering a franchise agreement. During this time, a franchisee can terminate the agreement without penalty, although they may be required to cover reasonable expenses incurred by the franchisor.
Dispute Resolution
The Franchising Code encourages parties to resolve disputes via alternative dispute resolution (ADR) mechanisms such as mediation. If a dispute arises, either party can issue a notice of dispute, triggering a structured process aimed at resolving the matter without litigation. If mediation fails, parties may still pursue legal remedies in court.
Intellectual Property and Licensing
A central element of franchising is the use of the franchisor’s intellectual property (IP), including trademarks, logos, business systems, and know-how. Franchise agreements must clearly define the scope of IP rights granted to the franchisee, including limitations on use and obligations to maintain brand standards. Infringement or misuse of IP can result in legal action and termination of the agreement.
Employment and Workplace Relations
Franchisees are typically considered independent contractors rather than employees. However, legal complexities can arise, especially under the Fair Work Act 2009, which has been amended to impose liability on franchisors in cases of systemic wage underpayments within their network. Franchisors must take proactive steps to ensure their franchisees comply with workplace laws, or they may face penalties.
Termination and Exit
Franchise agreements typically include detailed terms about termination and exit procedures. Grounds for termination may include breach of contract, insolvency, or failure to meet performance targets. Franchisees should be aware of their rights if they wish to sell their franchise or exit the system early, including whether transfer fees or approvals are required.
Conclusion
Franchising in Australia is tightly regulated, with laws designed to ensure transparency, fairness, and accountability. Both franchisors and franchisees must be aware of their legal rights and responsibilities under the Franchising Code of Conduct and other relevant laws. Before entering into a franchise arrangement, it is highly advisable to seek independent legal advice to review agreements, assess compliance, and mitigate risk. By understanding the legal landscape, parties can build a healthier and more sustainable franchising relationship.
