Worldwide: Top Tips For Franchisors Entering Australia

Last Updated: 25 May 2016
Article by Babette Märzheuser-Wood and Robyn Chatwood

The franchising industry is projected to post annualised growth of 2.8 per cent over the next five years according to a recent report by IBIS World1  – one of the leading industry researchers operating in that market.  The market "down under" is so rosy, according to The Sydney Morning Herald,2  that it is necessary to ask the question of whether Australia might be too franchised.  The newspaper notes the runaway success of franchising in Australia with over 80,000 franchised outlets turning over A$130 billion in sales (about US$100 million) and employing nearly half a million people.  Even the more conservative report on the franchising sector published by Griffith University's Asia-Pacific Centre for Franchising Excellence3 noted there was an increase of 8.2 per cent of franchising units in Australia in the two years between 2012 and 2014 and both franchisors and franchisees were reporting increases in revenues and profits.4 

These attractive growth prospects have led an increasing number of franchisors to now consider the Australian market for entry.

However, there are some traps that many brands can unwittingly fall into. Below we outline some of the key legal and commercial issues that impact franchising in Australia and provide our top tips for franchisors who are thinking of taking their franchised system there.  

1.  "Accidentally" franchising and the substantial legal consequences 

Many brands are keen to generate the maximum revenue from a trade mark by licensing its use.  Some brands choose to simply license their trade mark under a trade mark licence.  Others decide to license an entire business format and so franchise a system where the trade mark is just one of the key elements being licensed to a licensee.

Both trade mark licensors and franchisors should be aware that Australia has strict and tough laws which highly regulate businesses that enter into various arrangements for the distribution or licensing of goods or services under a trade mark.

The Competition and Consumer (Industry Codes—Franchising) Regulation 2014 (which is referred to by its more benign-sounding name, the "Franchising Code of Conduct") is of primary importance in Australia. The Franchising Code of Conduct (the "Code") is a mandatory law and it sets out a number of criteria which must be present in order for an agreement to be deemed to be a "franchise agreement" – regardless of what the agreement is actually called on its face.  So, many trade mark licences, distribution agreements, services agreements, collaboration agreements and other types of commercial arrangements may in fact be franchise agreements if they, as a matter of substance, fall within the definition of a franchise agreement under the Code.

In summary, there are five criteria for an agreement to be a franchise agreement.  These are: 

  1. Agreement: You must have an actual agreement but the trap is that it can be only oral or "implied" – so it need not be a written agreement.
  2. Rights to carry on a business: The agreement involves a licensor or franchisor granting a person or company (the licensee or franchisee) a right to carry on a business which offers, supplies or distributes goods or services in Australia.
  3. System or marketing plan: The agreement involves a system or marketing plan which is substantially determined, controlled or suggested by the licensor/franchisor or its associates.
  4. Trade mark or advertising: The agreement is substantially or materially associated with a trade mark or advertising which is owned, used, licensed or specified by the licensor/franchisor or its associates.
  5. Payments to be made: Under the agreement, the licensee/franchisee is obliged to pay fees to the licensor/franchisor or its associates.  Payments for wholesale goods and services, repayments of loans and rental payments are excluded.

Motor vehicle dealerships: Irrespective of whether any the above five criteria apply, any agreement for a motor vehicle dealership (that is, for a business of buying, selling, exchanging or leasing motor vehicles other than as a credit provider) will be a franchise agreement under the Code.

It is often a very technical assessment as to whether a distribution agreement or a simple trade mark licence is in fact – either accidentally or deliberately – a franchise agreement and many companies entering the Australian market get caught out by this and so breach the Code.  Dentons has advised a number of clients who had thought that their agreement was a simple trade mark licence for Australia when in fact it was a franchise agreement.  Sometimes the assessment comes down to close analysis of exactly what marketing plans are being imposed on the licensee.  There has been case law in Australia which has provided some guidance on the matter,5 but the assessment is almost always technical and one on which legal guidance should be sought.

Whether your agreement is a franchise agreement or not is crucial – as there are severe penalties under the Code for entering into a franchise agreement with another party without having complied with the Code (for example, without having provided the prospective franchisee or licensee with a disclosure document before the contract was entered into or without having included in the agreement certain mandatory provisions).  The penalties for breaches of the Code range from financial penalties and infringement notices of up to A$54,000 (about US$40,000) or A$9,000 (about US$6,000) per breach.  Additionally, the agreement itself can be unenforceable or set aside, compensation and damages may be payable or other remedies may be available for the licensee/franchisee.  So it is important to get it right.

Although Australia does not have any legal barriers to commencing discussions with a potential franchisee (such as those that apply in some jurisdictions in the United States, which require a disclosure document to be provided to a prospective franchisee before a first meeting is held), franchisors and licensors seeking to enter the Australian market should take care as the Code applies to oral (unwritten) agreements and "implied" agreements.  So negotiations with prospective licensees or franchisees need to be well managed to minimise the risk of a later challenge by a franchisee or licensee that an unwritten agreement had been entered into with them in breach of the Code. 

2.  Australian franchising laws protect big business and a variety of commercial structures too

Another issue to keep in mind for those seeking to enter the Australian market is that the Code applies to all sizes of business and a large array of commercial structures.  The Code will protect a franchisee irrespective of the size of the franchisee – and many powerful franchisees seek to shelter under its protection.

Also, the franchise laws apply to most commercial franchise structures such as area developer agreements, master franchise agreements and unit franchise agreements.  

It is not uncommon in international franchising for a franchisee with a large portfolio of brands under licence to be of greater financial substance than the individual franchisor.  Even if the situation is more like a "Goliath Franchisee" versus a "David Franchisor", the Code will apply to and will favour the franchisee.  In this sense, unlike the United States, Australia does not have a "sophisticated investor" exemption from the Code.  

The reason for the Code being one sided and protecting franchisees irrespective of the power balance between the parties is because of the history of the laws.  The Australian franchise legislation has existed since 1998 and it was put in place at a time when there was significant public debate about "big business" from "overseas" bullying small "mum and dad" investors who were at risk of losing their life savings.  Although the origin of these laws in Australia reflect a desire on the part of legislators to protect small business, they have the effect of favouring large powerful franchisees – who are often legally well advised.  As a result, franchisee and regulatory proceedings under the Code against franchisors is now a prominent litigious area in Australia.6  

The regulator, the Australian Competition and Consumer Commission (ACCC), plays an active role in promoting compliance with the Code through its enforcement actions.  In 2013, the ACCC reported that it had received over 2,000 complaints related to franchising and the Code alone.7 

3.  Other regulations protecting small business franchisees

Another potential issue for franchisors entering the Australian market to keep in mind is the presence of other regulations which protect "small business" and so advantage franchisees.    

The Australian Consumer Law8  prohibits what is known as "unconscionable conduct" – which is a difficult concept to nail down and which has been a contentious area.  In short, certain conduct is unconscionable if harsh or oppressive to another party (either another business or a consumer).  Conduct may also be unconscionable where one party knowingly exploits a special disadvantage of another.  Such laws will protect small business owners who are franchisees and advice should be sought to make sure that any prospective franchisor does not include in its agreement provisions which would not be enforceable under these consumer protection and small business protection laws. 

There are also other laws protecting small business franchisees of which to be mindful.  In 2015, the Australian federal government enacted the Treasury Legislation Amendments (Small Business and Unfair Contract Terms) Act 2015 (Cth), which comes into force in late 2016 and which will apply to certain "standard form contracts".  Once in force, any standard form contract is entered into, renewed or varied will be caught if the counterparty is a small business who employs fewer than 20 people and who pays an up-front fee of less than A$1 million (about US$750,000) for a contract of over 12 months.

If the franchisee to a franchise agreement has had little or no opportunity to negotiate its terms (that is, it is presented on a "take it or leave it" basis) then it is likely that the new laws will apply to it and the franchise agreement will be considered to be a "standard form contract" and so the new law will apply to it.  
The effect of the new law is that it prohibits certain "unfair contract terms".  If they are present in the franchise agreement, then the contract can be declared void by a court and the franchisee may have remedies of injunctions, compensation or damages against the franchisor. 

4.  Providing an initial disclosure document is not the end of it

Most franchisors entering Australia will be alert to the potential need to provide a form of disclosure document to a franchisee before the contract is entered into.  However, there are some tricks with the Australian disclosure requirements and legal advice should be sought as the penalties for getting disclosure wrong are severe and the franchisor could risk the franchise agreement being set aside on that basis or worse (having to pay compensation and damages to the franchisee).  

Another issue to bear in mind is that the Code requires franchisors to provide a disclosure document to both new and renewing franchisees. And, under the Code, precise details, format and information must be disclosed in accordance with a mandatory pro forma.  

Prospective Australian franchisors should also be aware that the disclosure document will need to be updated annually within four months after the end of the Australian financial year (i.e. by the end of October each year as the financial year end is 30 June).

The franchise disclosure documents must be given to potential new franchisees and to existing franchisees proposing to renew their agreements at least 14 days before the franchisee signs its franchise agreement and the disclosure must be accompanied by the franchise agreement in the form in which it is to be signed as well as a copy of the Code.

One of the unique aspects of the Australian franchising laws is that they additionally place a "continuous disclosure" obligation on the franchisor.  This means that franchisors must notify their franchisees within 14 days of certain "materially relevant facts", including details of the following:

  • Proceedings against the franchisor or a franchisor director by 10 per cent or at least 10 franchisees or investigations, judgments or arbitration awards against the franchisor or franchisor director which are relevant to the franchise system.
  • Changes in ownership or control of the franchisor or intellectual property of the franchise business.
  • The franchisor becoming externally administered or being required to make court-enforceable undertakings.  

Franchisors will need good management systems and procedures to make sure they get disclosure right.

5.  You need to think about your expansion strategies 

Another trap for many new franchisors entering the Australian market is that they are not aware of some of the compliance and risk issues associated with expansion of their franchise after they have entered into their agreement with their franchisees.  The reason it is necessary to think this through is because the franchisor has an additional disclosure obligation in relation to issues such as on-line sales and when they are extending a agreement – either its term, territory, trade marks or its scope in any other way.  

This can be a technical area. Bottom line is that franchisors need to be aware that they simply cannot alter the scope of the franchise agreement with the franchisee without thinking through the need to comply with any disclosure obligations or other laws in place that protect franchisees from franchisors exercising rights to unilaterally vary the franchise agreement.

How many franchisors have set up systems which will alert their management to the need to potentially comply with the legal requirements such as disclosure obligations when altering the franchisee's agreement, or the intellectual property or trade marks being licensed, or the agreement's  scope or term?  Advice should be sought and good franchise management systems, processes and structures need to be put in place with the compliance programme.

In this way, franchisors in Australia can avoid any expensive "rookie" mistakes. 

Conclusion

In conclusion, the outlook for franchisors entering into the Australian market is sunny but obtaining good advice as part of due diligence on the Australian market is necessary.  Most Australian legal requirements are straightforward and would not negatively effect a franchisor with good practices.  Good franchisors prepare for market entry by setting up their legal compliance programmes from the beginning.  

Footnotes

1 See  http://www.ibisworld.com.au/industry/default.aspx?indid=1902

2 See  http://www.smh.com.au/small-business/the-venture/is-australia-too-franchised-20100809-11tya.html

3 See "Franchising Australia 2014" by Griffith University.

4 See above at page 18.

5 See ACCC v Kyloe Pty Ltd [2007] FCA 1522 (18 October 2007).

6 "Franchising Australia 2014" by Griffith University at page 19 reports that substantial disputes were reported by 21 per cent of franchisors, who were in dispute with an average of two franchisees and the proportion of franchisees in dispute with their franchisor was estimated at 1.5 per cent. 

7 See here

8 This is Schedule 2 to the Competition and Consumer Act 2010 (Cth) which is uniform legislation for consumer protection across Australia and is incorporated into the law of each of Australia's states and territories.

Dentons is the world's first polycentric global law firm. A top 20 firm on the Acritas 2015 Global Elite Brand Index, the Firm is committed to challenging the status quo in delivering consistent and uncompromising quality and value in new and inventive ways. Driven to provide clients a competitive edge, and connected to the communities where its clients want to do business, Dentons knows that understanding local cultures is crucial to successfully completing a deal, resolving a dispute or solving a business challenge. Now the world's largest law firm, Dentons' global team builds agile, tailored solutions to meet the local, national and global needs of private and public clients of any size in more than 125 locations serving 50-plus countries. www.dentons.com.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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

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

Authors
Events from this Firm
21 Sep 2017, Seminar, London, UK

Is there such a thing as "energy law"? What do "energy lawyers" do? And why should it be of interest to anyone else?

28 Sep 2017, Seminar, London, UK

On 26 July the FCA published its long-expected consultation paper on the extension of the SMCR to all FCA-authorised firms. The so-called "core regime" introduces the key concepts of regulator-approved senior managers, firm-approved certification staff and conduct rules applicable to virtually all staff.

3 Oct 2017, Conference, Zurich, Switzerland

As the founding Partner of the Europe-Iran Forum, Dentons Europe will once again support this year’s event. This compelling event which explores all Iran-related topics will take place in Zürich on 3rd and 4th October.

 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
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
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (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 www.mondaq.com

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 Mondaq.com’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.

Disclaimer

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.

Registration

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 by clicking here .

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 unsubscribe@mondaq.com 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.

Cookies

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.

Links

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.

Mail-A-Friend

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.

Security

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 webmaster@mondaq.com.

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 EditorialAdvisor@mondaq.com.

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 enquiries@mondaq.com.

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