It is an increasingly common practice for people to start a business by purchasing a franchise. A franchise can be an enticing option to allow a person to become a business owner without having to establish much of the marketing or a system for business processes for the running of the business.
In Australia, franchising is heavily regulated by the Franchising Code of Conduct. It is important to know whether the Franchising Code of Conduct is applicable to your particular agreement as there are very strict obligations in relation to disclosure which, should you fail to provide the required disclosure, can have adverse consequences for you.
It may also be the case that people have entered into various business agreements that do not appear to be a Franchise Agreement in form, however in substance may be subject to the Franchising Code of Conduct.
The Franchising Code of Conduct defines a Franchise Agreement as follows (summarised):
- An agreement either in writing or oral whether wholly or in part;
- A person grants to another person the right to carry on a business in Australia under a system or marketing plan that is substantially determined by the Franchisor (i.e. the party that provides the franchised business);
- The operation of the business will be substantially associated with a trademark or symbol owned by the Franchisor;
- There must be an obligation of the Franchisee (i.e. the person who operates the franchised business) to pay to the Franchisor money.
An important element of the above definition is whether or not there is a system or marketing plan that is substantially determined by the Franchisor.
The leading case in this regard is ACCC v Kyloe  FCA1522. This case involved a determination as to whether an agreement was subject to the Franchising Code of Conduct and, relevantly, whether or not a system or marketing plan had been substantially determined by the Franchisor.
The Court ultimately found that it is a question of fact and degree as to whether a system or marketing plan exists. The Court provided sixteen (16) helpful indicators to assist in determining whether a business had a system or marketing plan such that the Franchising Code of Conduct would apply.
These helpful indicators are:
- detailed compensation bonus structures for selling products;
- centralised book keeping and record keeping computer operations;
- assistance conducting opportunity meetings;
- comprehensive advertising and promotional programs;
- schemes for appointment of distributors, direct distributors, district directors, regional directors or zone directors;
- rights to screen and approve promotional materials;
- prohibitions on repackaging of products;
- suggestions for retail prices charged for products;
- division of states into marketing areas;
- establishment of sales quotas;
- rights to approve sale personnel employed by the sub-distributor;
- mandatory sales training regimes;
- provision of quotation sheets to the sub-distributors employees or prescribed invoices and other sales forms;
- requirement that sub-distributor gather information from customers for the head distributor;
- restrictions on sub-distributor selling products without consulting the head distributor.
Many of these helpful indicators can be apparent in other types of agreements such as distributor agreements or trademark agreements and, as such, it is important to obtain appropriate legal advice to determine whether or not your specific agreement is subject to the Franchising Code of Conduct.
McNamara & Associates has over 70 years of legal experience in the greater Ipswich area and should you wish to discuss your franchise situation please contact us on 13 58 28.