Franchises are unique form of business model. Indeed, there is a significant power imbalance in the relationship between franchisors and franchisees. Therefore, it is critical to protecting your business that you are aware of your rights as a franchisee, and the obligations owed to you by the franchisor, including prior to purchasing a franchise.
The parties to a franchise agreement (the franchisee and franchisor) are bound by the Franchising Code of Conduct. The Code of Conduct applies to all franchise agreements, including renewals, variations and transfers. The Code of Conduct outlines certain rights and responsibilities for both franchisors and franchisees.
Is My Business a Franchise?
Generally speaking, a franchise is a business that satisfies the following conditions:
- There is an agreement (written, oral or implied) between two parties, where one party grants the other party the right to carry on the business under an arrangement or marketing plan that is substantially determined or controlled by the other party.
- The business is substantially or materially associated with a specific trademark, advertising or commercial symbol.
- You as the franchisee are required to pay a fee to the granting party (franchisor) before commencing the business.
Common examples of franchises in Australia include fast-food restaurants, convenience stores and cleaning or other domestic services.
Under the Code of Conduct, you as a franchisee have a number of distinct rights.
- Disclosure Obligations
If you have expressed interest in purchasing a franchise, the franchisor must provide you with an information statement outlining some key benefits and risks of franchise arrangements, along with a copy of your franchise agreement and the Code of Conduct.
The Franchisor is also required to provide you with a disclosure document outlining information such as:
- Operating costs and fees: These costs and fees may include initial and ongoing fees that you will be required to pay the franchisor, marketing costs, fit-out costs and ancillary costs relating to your lease.
- Whether you have an exclusive territory: An ‘exclusive territory’ is an area where you have the right to provide goods and service under the franchise, to the exclusion of all other franchisees in the franchise network.
- End of term arrangements: Franchisors are required to outline what rights franchisees will have at the end of the initial term in this initial disclosure document.
- Contact details for the current and former franchisees
- ‘Good Faith’ Obligations
Franchisees and franchisors are legally required to act in good faith.
This good faith obligation requires parties to act honestly and not arbitrarily in their dealings with each other and to cooperate to achieve the purposes of the franchise agreement. This obligation extends to all aspects of the franchising relationship.
However, the ‘good faith’ obligation does not require the franchisor to necessarily act in the interests of the franchisee, nor does it prevent the franchisor from acting in its own commercial interests.
- Dispute Resolution Procedures
Before formally raising a dispute, the Code of Conduct requires that the party first write to the other party outlining the nature of the dispute and what resolution they are hoping to achieve. If the dispute remains unresolved after three weeks, either party may refer the matter to mediation.
- Cooling-off Period
The Code provides for a cooling off period for franchise agreements. Under the Code, a new franchise agreement can be terminated within seven days of entering into the agreement or making any payment under the agreement.
If you decide to terminate the agreement, you are entitled to a refund of all the payments you have made, minus any reasonable expense incurred by the franchisor. The franchisor must provide your refund within 14 days. This cooling-off period does not apply to the renewal, variation or transfer of existing franchise agreements.
My Rights Have Been Breached: What Can I Do?
If you believe that your rights as a franchisee have been breached, there are a number of ways you can respond. These are outlined below.
- Formally Raise a Dispute
The usual first option is to formally raise the dispute with the other party in writing. This must be done in accordance with the Code and the dispute resolution provisions outlined in your franchise agreement. Both parties should work cooperatively to resolve the dispute. If you are fortunate, the dispute may be able to be resolved at this early stage.
If you are unable to resolve the dispute within three weeks, either party may refer the matter to mediation. Attendance at mediation is compulsory for both parties.
- Lodge a Complaint with the ACCC
The Australian Competition and Consumer Commission (ACCC) is the regulatory body responsible for enforcing the Code and investigating alleged breaches.
If you lodge a complaint with the ACCC, they may elect to investigate the matter, and if it considers that there has been a breach of the Code, it may elect to take further action. However, there is no guarantee that the ACCC will be prepared to do so.
- Take Independent Legal Action
Finally, you may choose to take independent legal action either under the code, or to seek to enforce other legal rights that you may have. However, given the power imbalance between franchisor and franchisees, this process can be daunting and complex and legal representation is often advisable.
Gordon Legal has extensive experience in dealing with these matters and would be happy to provide you with assistance. If you think you may want to investigate your claim further, or have any questions about your franchise agreement dispute, please contact us at our Melbourne office on 1800 21 22 23.