Court case clarifies franchise agreement definition, reports franchising lawyers Mason Sier Turnbull

Franchising lawyers Mason Sier Turnbull report on the implications of the recent Federal Court case of Rafferty v. Time 2000 West, which explored a particular aspect of the definition of a franchise under the Franchising Code of Conduct.

It is important first to clarify exactly what conditions are necessary for an agreement to be deemed a franchise agreement.

In basic terms, a franchise agreement needs to fulfil a number of elements, which are that:

• a written, oral or implied agreement is in place
• there is a right to supply goods or services under a system or marketing plan that is substantially determined, controlled or suggested by the alleged franchisor
• the operation of the business is associated with a trade mark; and
• a fee is payable to the alleged franchisor.

The decision in the Rafferty case, however, has provided some clarity to the second part of the above definition, relating to the requirement for a system or marketing plan.

In coming to a decision in this case, the Court identified a number of elements that, if present in an agreement, confirm the existence of a system or marketing plan.

These factors were:

• a centralised bookkeeping and records-keeping computer operation operated by the franchisor
• the franchisor having the right to screen and approve all promotional materials
• a prohibition on the repackaging of products by the franchisee
• the franchisor suggesting the retail prices to be charged for products
• a comprehensive advertising and promotional program controlled by the franchisor
• the division of a State/Territory into marketing areas
• the imposition of a sales quota by the franchisor
• the franchisor holding approval rights of any sales personnel whom the franchisee might seek to employ
• a mandatory sales training regime imposed by the franchisor
• the franchisor providing quotation sheets to the franchisee’s employees
• the provision by the franchisor of prescribed invoices and other sales forms
• a requirement that the franchisee elicits certain information from their customers and provides that information to the franchisor and
• a restriction on the franchisee selling any products without first consulting the franchisor

The Rafferty case, then, serves to provide further clarity and guidance as to what constitutes a franchise agreement under the Franchise Code of Conduct.

The implications are that many purported licence agreements and distribution agreements may in fact fall within the definition of a franchise agreement, and require compliance with the Franchise Code of Conduct.

Failure to comply with clauses within the Code could lead to agreements being set aside, so it is important for parties to such agreements to obtain legal advice from franchising lawyers before proceeding.

Franchising lawyers at Mason Sier Turnbull can be contacted to discuss any concerns an individual might have with regard to a system and documentation.