Australia: Franchisee Or Distributor - A Rose By Any Other Name?

Last Updated: 13 May 2009
Article by Tony Conaghan, Ben Coogan and Fred Potgieter

The Franchise Code (the Code) is a mandatory code prescribed under the Trade Practices Act 1974 (Cth) (the Act). The purpose of the Code is to regulate the conduct of participants in franchising, which it does by primarily requiring franchisors to disclose specific facts to franchisees and to follow set procedures in their subsequent dealings with franchisees.

Recent case law serves as a timely reminder that describing a business arrangement as a 'distribution agreement' or similar will not prevent a Court from finding on the facts that the parties' relationship is actually caught by the statutory definition of a 'franchise agreement'.

Statutory regime

Part IVB of the Act provides for the establishment and enforcement of industry codes of practice. Section 51AE provides for industry codes to be prescribed by regulation. The Trade Practices (Industry Codes - Franchising) Regulations 1998 (Cth) was made pursuant to this power. The Franchise Code is contained in the Schedule to the Regulations and is declared to be a mandatory industry code pursuant to Section 51ACA(1) and Regulation 3. Importantly for participants in the franchising industry, Section 51AD of the Act provides that 'a corporation must not, in trade or commerce, contravene any applicable industry code'.

Failure to comply with the Franchise Code has serious consequences for the franchisor. It may result in contraventions of Part VI of the Act.

In addition, directors of a non-compliant corporate entity may also incur ancillary personal liability under sections 75 and 81 of the Act.

What is a franchise agreement?

To be a 'franchise agreement' as defined in Section 4 of the Franchise Code requires:

  1. An agreement (this can be written, oral or implied).
  2. A grant of a right to carry on the business of offering, supplying or distributing goods or services in Australia under a system or marketing plan substantially determined, controlled or suggested by the franchisor or an associate of the franchisor.
  3. Operation of the business substantially or materially associated with a trade mark, advertising or commercial symbol that is owned, used, licensed or specified by the franchisor or an associate of the franchisor.
  4. Payment of an amount by the franchisee to the franchisor or an associate of the franchisor.

By its very nature, a distribution arrangement will satisfy Requirements 1 and 4 of this definition. In most instances, it will also satisfy Requirement 3, as the distribution business is likely to be substantially associated with a trade mark, advertising or commercial symbol identifying the goods or services the subject of the distribution arrangement.

To avoid the unintentional application of the Franchise Code, it is necessary to ensure that a distribution arrangement does not satisfy Requirement 2.

To date there has been little by way of judicial consideration of what is actually required to satisfy Requirement 2. In Capital Networks Pty Limited v au Domain Administration Limited [2004] FCA 808 (Capital Networks), Justice Bennett concluded that for Requirement 2 to be satisfied, there must firstly be a 'system or marketing plan', and secondly, the 'system or marketing plan must be substantially determined, controlled or suggested by the franchisor or an associate of the franchisor'.

In the recent decision of ACCC v Kyloe Pty Limited [2007] FCA 1522 (Kyloe Pty Limited), Justice Tracy was required to determine whether a series of arrangements (said to be a distribution arrangement) satisfied Requirement 2, and therefore fell within the definition of a 'franchise agreement'.

Requirement 2 - system or marketing plan?

System or marketing plan is not a defined term in the Franchise Code. In the absence of Australian authority, Justice Tracy referred to American case law dealing with a similar (but not identical) provision. With reference to Master Abrasives Corporation v Williams (1984) 469 NE 2b 1196 in particular, Justice Tracy identified the following helpful indicators of the existence of a system or marketing plan:

  • The provision by the franchisor of a detailed compensation and bonus structure for distributors selling its products.
  • A centralised bookkeeping and recordkeeping computer operation provided by the franchisor for distributors.
  • A scheme prescribed by the franchisor under which a person would become a distributor or sub-distributor.
  • The reservation by the franchisor of the right to screen and approve all promotional materials used by distributors.
  • Prohibition on repacking of products by distributors.
  • The provision of assistance by the franchisor to its distributors in conducting 'opportunity meetings'.
  • Suggestion by the franchisor of the retail prices to be charged for products.
  • A comprehensive advertising and promotional program by the franchisor.
  • The division of a state into marketing areas.
  • The establishment of sales quotas.
  • The franchisor having approval rights of any sales personnel whom the distributor might seek to employ.
  • A mandatory sales training regime.
  • Provision of quotation sheets to the distributor's employees.
  • Provision by the franchisor of prescribed invoices and other sales forms.
  • A requirement that distributors illicit certain information from the customers and provide that information to the franchisor.
  • A restriction on the distributor selling any of the franchisor's products without first consulting with the franchisor.

It is important to remember that this list of helpful indicators is not a mandatory checklist, but only indicates the type of matters which a Court may take into consideration when assessing whether a system or marketing plan exists on the facts of each case. For example, in Kyloe Pty Limited, Justice Tracy decided that it was appropriate to consider the cumulative effect of all the agreements and not the terms of each separate distribution agreement. Secondly, in finding that there was not a system or marketing plan in existence, Justice Tracy noted that:

  • While Kyloe was obligated by the terms of the sub-distribution agreement to provide training to sub-distributors, and sub-distributors were precluded from negotiating with potential customers until such training was received, the training did not cover business and operational features of the sub-distributors businesses.
  • During training, sub-distributors were provided with a profit profile containing recommended sales prices which, if adopted, would yield projected profit margins marked 'example only'. This was not accepted by the Court as evidence of any enforced pricing structure.
  • No formal machine sales quotas were prescribed by Kyloe (although sub-distributors were required to purchase minimum quantities of materials each year).
  • There was no evidence of a comprehensive advertising and promotional program (in spite of materials such as sales pitch 'scripts' provided to sub-distributors at training).
  • There was no evidence in either the terms of the agreements or in practice that Kyloe or its associates reserved the right to oversee the choice of employees by sub-distributors.
  • Sub-distribution agreements made it clear that there was no territorial divisions established within Australia.
  • The training programs, written reports and minimum purchasing requirements were insufficient evidence to find that Kyloe exercised any control over the operation/management of the distribution businesses.

Requirement 2 - 'Substantially determined, controlled or suggested by the franchisor'?

In considering the second limb of Requirement 2, being whether a system or marketing plan can be said to be substantially determined, controlled or suggested by the franchisor or an associate of the franchisor, Justice Tracy again referred to factors identified in the Capital Networks case. These include:

  • The extent to which the distributor's business involves the sale of the franchisor's products;
  • Whether or not the franchisor has ostensibly assumed responsibility for uniform standards of quality, price, advertising, and promotions; and
  • The extent to which the franchisor controls the distributor's day to day business.

Helpfully, the Court accepted that there are important differences between distributorship and franchise arrangements. It was noted that in the case of a distributorship, the main points of difference with a franchise are that the arrangement is generally much less formal, may not have the same degree of certainty of term, may or may not be exclusive, may tend to cover a larger geographical area and would leave the marketing, merchandising and sale decisions largely to the distributor. Importantly in determining the true nature of a distributorship, no royalties are generally payable to the supplier by a distributor.


The Federal Court decision of ACCC v Kyloe Pty Limited has gone a long way to create more legal certainty, especially by giving judicial recognition to the important differences between franchise and other business arrangements such as a distributorship.

The Court has also gone to great lengths to identify helpful indicators which can be applied to the facts of each case in determining whether a particular business arrangement amounts to a franchise.

It is also clear that any attempt to structure a business arrangement through a series of complex interrelated agreements will not be of any assistance in an attempt to evade the application of the Franchise Code.

Phillips Fox has changed its name to DLA Phillips Fox because the firm entered into an exclusive alliance with DLA Piper, one of the largest legal services organisations in the world. We will retain our offices in every major commercial centre in Australia and New Zealand, with no operational change to your relationship with the firm. DLA Phillips Fox can now take your business one step further − by connecting you to a global network of legal experience, talent and knowledge.

This publication is intended as a first point of reference and should not be relied on as a substitute for professional advice. Specialist legal advice should always be sought in relation to any particular circumstances and no liability will be accepted for any losses incurred by those relying solely on this publication.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.

    By clicking Register you state you have read and agree to our Terms and Conditions