How flexible is the Franchising Code of Conduct?

The Franchising Code's stated purpose is "to regulate the conduct of participants in franchising towards other participants in franchising". In the period of more than a decade since it became a mandatory industry code, the Code and the compulsory regulations contained within it, have been the subject of much examination, analysis, criticism and debate within the franchise community.

The provisions of the Code, at first glance, do appear rigid, rigorous and onerous. In answer to the initial question of whether there is any flexibility in the application of the Code, the response is clearly no. The Code applies in full to all franchise systems operating within Australia, and to all franchise agreements entered into on or after October 1, 1998.

However, there are some express exemptions from the operation of the Code. Clause 5(3) of the Code provides that the Code does not apply to a franchise agreement if: another mandatory industry code prescribed under the Trade Practices Act applies to it; or the agreement is for goods or services that are substantially the same as those which the franchisee has supplied for at least two years before entering into the franchise agreement and sales under the franchise are likely to provide no more than 20 per cent of the franchisee's gross turnover for goods or services of that kind in the first year of the franchise.

Exempt from the Code unless they meet the definition of a franchise agreement set out in clause 4 of the Code are: an employer and employee relationship; a partnership relationship; a landlord and tenant relationship; a mortgagor and mortgagee relationship; a lender and borrower relationship; and the relationship between members of a co-operative that is registered, incorporated or formed under the Corporations Act 2001 or the relevant legislation governing co-operatives in each state and territory of Australia.

There is little flexibility also in the form prescribed by the Code which sets out the exact form of Disclosure Document which franchisors must prepare, even going so far as to include specific numbering and wording.

However, whether there is any flexibility in the substance of the Code is a question which may be answered more properly by considering what is omitted from the Code rather than by examining what is included.

While the Code mandates and prohibits certain conduct, there is much detail which is missing and many issues in respect of which the Code is silent.

For instance, the Code does not specify or limit what provisions may be included in a franchise agreement in relation to such matters as: a franchisee's rights to terminate (other than during the cooling off period) for the franchisor's breach, or for other matters; a franchisee's right to review the franchise agreement; methods of marketing and authorised types of expenditure of any marketing fund; the type, frequency, duration and method of any training required by the franchisor or any requirement for the franchisee to obtain any professional qualification, certification, accreditation or industry membership; the frequency, type and form of any reporting or accounting requirements.

The Code's silence on such matters may be a subtle way of providing discretion and power to both parties to determine the terms and conditions of their own unique and individual relationships.

So it seems that the Code prescribes certain boundaries for conduct between participants in franchising by providing obligatory parameters which are perceived as crucial and of universal application, while leaving the finer details to be negotiated and personalised by the respective parties in accordance with the general principals of contract law.

The more pertinent question then becomes not whether the Code itself is flexible, but rather whether or not the Code facilitates flexibility within franchise relationships? And the answer to this question is clearly yes.

This article appears courtesy of Tony Garrisson, principal and Esther Gutnick, lawyer in the franchising division of Mason Sier Turnbull.

Mason Sier Turnbull provide franchise legal advice to franchisees and franchisors.