The Franchising Code of Conduct (Code), which forms part of the Trade Practices ct 1974 (Cth), imposes obligations on franchisors, master franchisees, sub-franchisors and anyone who is involved in a franchise relationship.
The numerous obligations imposed on the franchisor include amongst them, the obligation that the franchisor must:
1. give a franchisee or prospective franchisee a copy of the disclosure document and a copy of the code at least 14 days before entering into, receiving non refundable money under, renewing or extending a franchise agreement or receiving a request for it (Regulation 10);
2. not enter into, or renew or extend, a franchise agreement or receive any non-refundable money in connection with a franchise agreement unless the franchisor has received from the franchisee or a potential franchisee a written statement that it has received, read and had a reasonable opportunity to understand the franchisor's disclosure document and the Code (Regulation 11(1)).
A recent NSW Court of Appeal case of Ketchell v Master of Education Services Ply Ltd held that a failure to comply with the Code and in particular with Regulation 11(1) rendered the franchise agreement illegal and unenforceable and dismissed the franchisor's claim against the franchisee to recover the debt.
Until this decision, it was often thought that the consequences for non-compliance with the Code, although constituting a breach of the Trade Practices Act 1974 (Cth), were minimal. However, it is now clear that an agreement can be struck down and rendered unenforceable if, it is held to fit the definition of a franchise agreement, and the obligations imposed by Regulation 11(1) of the Code are not complied with.
The definition of a franchise under the Code is complex and allows for scope for some companies to argue they are not a franchise. In simplified terms, the Code defines a franchise agreement as an agreement (written, oral or implied) granting another persona right to carry on a business under a system or marketing plan controlled by the franchisor, which is associated with a trade mark, advertising or commercial symbol and under which there is a payment to the franchisor.
Some groups in the marketplace attempt to avoid compliance with the Code by calling their agreements other names, such as a licence agreement, a distribution agreement or similar. There are also many companies with networks in Australia who believe their relationship with their distribution network is not a franchising relationship, when in reality it is. Such groups and companies, if held to be a franchise, will now find their business to be at risk.
The decision in Ketchell v Master of Education Services Pty Ltd has far reaching implications and provides that if an agreement is held to be a franchise agreement and the franchisor has not complied with the Code, the agreement will most likely be unenforceable.
This case serves as a warning to all businesses to ensure that they receive from franchisees a statement as required by Regulation 11(1) of the Code.
Therefore, it would be prudent for any business entering into a relationship which has a possibility of being seen as a franchise relationship to cover themselves and choose to be bound by and abide by the requirements under the Code. Further, all franchisors should make sure that they obtain a written statement from all their franchisees as required by Regulation 11(1) of the Code otherwise they face the possibility of a franchisee raising a claim of illegality of the franchise agreement and succeeding, if all other required elements are satisfied.
Remember, it is better to be safe than sorry.
This article was written byu Tony Garrison, a principal in the commercial division of
Mason Sier Turnbull.
This article appears courtesy of Franchising Magazine.
11-Jan-2008