Franchising is a business ownership model that allows an individual or company (the franchisee) to sell a product or service under the name of another company (the franchisor). It can be a great opportunity for entrepreneurs to start a business with a successfully proven system and brand recognition, without assuming the risks and costs of opening and operating a completely new business.
What are my Rights as a Franchisee or Franchisor?
Franchising is regulated by the Franchising Code of Conduct, which is a mandatory industry code that sets out the rights and obligations of franchisors and franchisees in Australia. The Code applies to all franchisors and franchisees operating in Australia, regardless of where the franchise is based.
The Code is an important aspect of the franchising industry as it provides a strong framework to ensure transparency, fairness and good faith in franchising relationships. For example, the Code requires franchisors to provide disclosure documents to prospective franchisees, which contains information about the franchisor and system, so that potential franchisees can make informed decisions before investing and entering into a franchise agreement.
Key Terms in Franchise Agreements:
When entering into a franchise agreement, it is important for the parties to carefully read and understand the key terms of the agreement, including:
- how a franchisee can use the franchisor’s intellectual property (such as brand name, trade marks and trade secrets), products and operating system for a payment of fees or royalties by the franchisee;
- terms of compliance with the franchisor’s systems and standards;
- what support the franchisee will receive from the franchisor in areas such as training, marketing and operations and whether that will be ongoing;
- the term for the franchise agreement, which is usually fixed between 5-10 years with renewal periods;
- restrictions on franchisee’s ability to operate the business (restrictions on location, products and services offered);
- obligations to purchase goods and services only from the franchisor or its approved suppliers; and
- terms in relation to termination or non-renewal of the franchise agreement at the end of the term or for breach of the agreement.
At Stanley & Co, we provide unparalleled expertise in franchising law, guiding businesses in Adelaide through every challenge and opportunity. As regulations and agreements become increasingly intricate, trust our seasoned team to safeguard your interests, ensuring your franchising venture thrives. Book a free, no obligation 30 minute consultation with expert franchising lawyers today.
Helpful Questions & Answers
What are Franchise Disputes?
Franchising disputes can arise for a number of reasons, such as breaches of the franchise agreement, misleading and deceptive conduct, disputes over intellectual property, and parties failing to carefully read and understand the terms on which they are entering into, particularly when franchisees are locked into the franchise for a fixed period of time.
In some cases, the franchisor may not have fulfilled its obligations under the franchise agreement and is therefore liable for damages. For example, if it fails to provide adequate training or support to its franchisees during their time of operation, this could amount to a breach of contract on behalf of the franchisor.
Franchisees may also be liable if they fail to adequately maintain or operate their businesses according to agreed standards. This would amount to a breach by both parties and could lead to legal action being taken against either party involved in such an incident (or both).
In other instances, such as when one party claims that another has acted unlawfully or fraudulently throughout their relationship, the question becomes whether or not there are grounds under law for pursuing compensation through litigation. To answer this, we must look at the facts of each case carefully and in light of how courts have treated similar cases in the past.
How to Resolve a Franchise Dispute?
Franchise disputes can be resolved through a variety of methods, including negotiation, mediation (involving a neutral third party), arbitration (a more formal and expensive process with a third party, such as an expert or industry specialist, who makes a binding decision) or litigation (going to court).
The Franchising Code of Conduct requires franchisors and franchisees to participate in mediation before commencing legal proceedings, and failure to do so can result in penalties This helps to resolve disputes more efficiently and cost-effectively, reducing the burden on the court system.
It is important to seek legal advice early in the dispute resolution process to determine the best course of action based on the facts and circumstances of the dispute.
What if the Franchisor Refuses to Enter Mediation?
Under the Australian Small Business and Family Enterprise Ombudsman Act 2015, The Ombudsman may publicise, in any way that the Ombudsman thinks appropriate, a businesses refusal to mediate. For a list of recent businesses that refused to engage in mediation, please click here.
We recently acted for a number of franchisees who took issue with the franchisor’s conduct and wished to exit the franchise agreement.
Upon our review of our clients’ franchise agreements and Franchising Code of Conduct, there were several potential breaches by the franchisor pursuant to both – many of which were unknown to our clients.
Notwithstanding the franchisor’s breaches, there were very few circumstances in which the franchisees could terminate or leave the franchise relationship pursuant to the agreement. Our clients did not consider these scenarios when they had entered the agreement and were surprised to find out that there were limited events which would allow them to terminate.
After providing individualised advice to the franchisees, our clients were able to decide what the best strategy was for them to lawfully exit the franchise relationship, having regard to their circumstances.