Franchising in Australia

Spotlight on Australia

With its fast growing and highly regarded franchise market worth $128 billion Australian dollars and amidst a sunny climate, great wine and cold beer, the other side of the globe is a serious contender for anyone considering expanding abroad. Tony Garrisson and Esther Gutnick of Mason Sier Turnbull reveal how you can get in and get on with franchising in Australia

Franchising in Australia represents a dynamic small business sector, which enjoys consistent growth and currently contributes over $128 billion to the economy, or approximately 14 per cent of Australia's national gross domestic product (GDP). The Australian franchising industry comprises approximately 960 different franchise systems, including both Australian based and foreign systems and employs 600,000 Australians.  

On a per capita basis, Australia is the second most franchised country in the world, surpassed only by New Zealand!

The Australian marketplace can thus be a very lucrative one for overseas franchisors wishing to expand into international territories.

Australian franchising law

The franchising industry in Australia enjoys a higher standard of regulation, and therefore protection, than in most other countries. Even the UK, where there is no specific franchise law, the British Franchise Association’s code of ethics is predominantly a voluntary code of best practice.

The Australian franchising sector is regulated by federal legislation known as the Trade Practices Act 1974 (Cth).  Pursuant to ancillary regulations prescribed under this legislation franchisees and franchisors must comply with a mandatory industry code, namely the Trade Practices (Industry Codes – Franchising) Regulations 1998 (Cth), more commonly known as the Franchising Code of Conduct (‘Code’).  

In addition, an independent Commonwealth statutory authority was formed in 1995 and acts as a consumer rights protection organisation. This organisation, known as The Australian Competition & Consumer Commission (‘the ACCC’), administers the Trade Practices Act and has extensive powers to take action against those who contravene it.

Code changes and their effect on foreign franchisors
Until now, there has been an exemption under the Code for foreign franchisors who have granted only a single franchise or master franchise directly into Australia.  Such franchisors were previously not subject to the Code's operation.

However, the Australian Government has recently conducted an extensive review of the Code and the franchising industry, resulting in a series of amendments to the Code, which will come into force on 1 March 2008.

One such amendment will oblige all foreign franchisors having any number of franchisees or master franchisees in Australia to comply with the Code on and from 1 March 2008.

Every foreign franchisor operating in the Australian marketplace will be required to operate within the confines of the Code, and will be required to provide all franchisees and prospective franchisees with a Disclosure Document and Franchise Agreement that are Code compliant.

From a practical perspective, this means that foreign franchisors will now be compelled to do the following:

1.    Franchisors must provide and update a Disclosure Document at least annually, within four months of the end of each financial year. The Disclosure Document must set out prescribed information designed to give a prospective franchisee or an existing franchisee seeking to renew a franchise agreement, information from the franchisor to help the franchisee to make a reasonably informed decision about the franchise. This information includes:

•    Franchisor details and business experience of the franchisor and its officers
•    Franchisor involvement in certain types of litigation
•    Details of past convictions for serious offences by the franchisor or any director thereof
•    Details of past insolvencies of the franchisor or any director thereof
•    The name of any person who is paid money to recruit franchisees
•    Details of existing franchisees in the network
•    Details of key events occurring in the network in the past three years, such as franchise transfers and terminations
•    Descriptions of relevant intellectual property and any agreements or judgments affecting same
•    Whether the site or territory is exclusive or non-exclusive and if so to what extent
•    The requirements for the supply of goods and services to a franchisee (including disclosure of the names of suppliers who pay rebates to the franchisor)
•    The franchisor's requirements for the supply of goods or services by franchisees
•    The franchisor's site or territory selection policy
•    Marketing or co-operative fund details (who contributes, how much, who administers, whether it is audited, how the fund may be expended, etc)
•    Payments likely to be made by the franchisee under the franchise agreement
•    Any financing arrangements offered by the franchisor
•    Any obligations upon the franchisee to sign associated agreements
•    Any earnings information the franchisor wishes to give (it can elect not to do so, but if it elects to do so, the basis of the information must be provided)
•    A statement of solvency signed by the franchisor or one of its directors
•    Either the last two years' financial statements of the franchisor or an auditor's statement supporting the statement of solvency

2.    Franchisors must give the following documents to prospective franchisees no less than 14 days before the franchisee enters into a franchise agreement or an agreement to enter into a franchise agreement or pays any non-refundable money to the franchisor or an associate of the franchisor:

•    The Disclosure Document
•    A copy of the Code

3.    Franchisors are prohibited from entering into a franchise agreement or renewing or extending a franchise agreement or receiving any non-refundable money unless they have received from the franchisee or prospective franchisee a written statement to the effect that they have received, read and had a reasonable opportunity to understand the Disclosure Document and the Code. Courts in Australia have held that franchise agreements entered into without the franchisor receiving the requisite written statement are illegal and unenforceable.

4.    Franchisors must advise franchisees to obtain independent advice from a lawyer, accountant and/or business advisor before signing a franchise agreement and obtain a statement from the franchisee as whether such advice was sought.

5.    A seven day cooling off period will exist for new franchisees.

6.    Documents relating to occupation of premises for the franchised business (such as a lease) must be given to the franchisee.

7.    Franchisors are prohibited from inducing franchisees or prospective franchisees not to associate with each other.

8.    Franchise agreements must not contain provisions that are prohibited by the Code, such as general releases of liability or waivers of any representations made ¬– if they do, those provisions will be unenforceable.

9.    The operation and administration of any marketing or other co-operative fund is regulated. For example statements of receipts and expenditures must be provided to franchisees within four months of the end of each financial year and generally those statements must also be independently audited within that time frame.

10.    There is an obligation to make ongoing disclosure to franchisees of key events such as a change in majority ownership or control of the franchisor, certain legal proceedings and judgments against the franchisor, any insolvency of the franchisor and any changes of ownership of key intellectual property.

11.    Franchisors are prohibited from unreasonably withholding consent to a proposed transfer of a franchised business by the franchisee.

12.    Except in very limited circumstances, termination of a franchise agreement due to a breach of that agreement by the franchisee is not permitted (despite any provision in the franchise agreement) unless the franchisor has given to the franchisee notice of the breach, reasonable time to rectify (which need not exceed 30 days) and the breach has not been rectified as requested.

13.    Franchise agreements must contain a complaint handling and dispute resolution procedure that complies with the Code and incorporates mediation.

Setting up in Australia

Franchisors will need to review any existing franchise agreements or proposed franchise agreements that will relate to Australia or involve the conduct of a business in Australia.

The task of amending a foreign franchise agreement so that it complies with Australian law is usually not a large or expensive task.   

The process of creating a Disclosure Document that complies with the Code does however involve a degree of compilation of information by the foreign franchisor and ultimately proper drafting by an Australian franchising lawyer.  

Foreign franchisors already subject to a disclosure regime in their country of residence should have the majority of relevant information at their fingertips.

This article was written by Tony Garrisson, a principal in the franchising and commercial division of Mason Sier Turnbull and Esther Gutnick, a solicitor in the franchising and commercial division of Mason Sier Turnbull. You can contact Tony on +61 3 8540 0271 or via email at tony.garrisson@mst.com.au.