If the Franchisee breaches the franchising agreement, can the Franchisor terminate the agreement?

Sarah Stowe

The Franchising Code (the Code) sets out certain requirements which must be complied with in order for a Franchisor to terminate a franchising agreement on the grounds of a breach by the franchisee.

The Code applies to all franchising agreements, regardless of whether or not the agreement specifically refers to the provisions of the Code. This is the effect of section 51AD of the Competition and Consumer Act 2010 (Cth), which provides that a corporation must not, in trade or commerce, contravene an applicable industry code.

On the issue of notice, Clause 21 of the Code mandates that in order for a franchisor to terminate a franchising agreement due to a breach by the franchisee, the franchisor must:

– Give the franchisee reasonable notice of the Franchisor’s intention to terminate;

– Tell the franchisee what action must be taken to remedy the breach; and

– Allow the franchisee a reasonable time, being not more than 30 days, in which to remedy the breach.

If the Franchisee successfully remedies the breach within the time specified, the franchisor cannot terminate the agreement.

In a recent decision of the Supreme Court of Queensland, National Security Training Academy (GC) Pty Ltd v National Security Training Academy Pty Ltd [2013] QSC 245, the court held that the notice given to the franchisee must identify the breach, specify action to remedy the breach and notify the intention of the franchisor to terminate if the franchisee failed to remedy the breach in a reasonable time, irrespective of whether this detail is required under the terms of the franchising agreement (at 27). In that case, the court held that the notice issued to the franchisee was ineffective due to failure to comply with clause 21, and ordered declaratory relief to the effect that the contract between the franchisee and franchisor has not been duly terminated.