Franchise Agreement Pitfalls: What Australian Franchisees Should Know

Franchising is a significant sector of the Australian economy, with thousands of franchise systems operating across the country. For prospective franchisees, a franchise agreement represents a major financial and legal commitment - often involving personal guarantees, fit-out costs, ongoing royalties and restrictions on how the business can be operated. The Franchising Code of Conduct ("the Code"), a mandatory industry code under the Competition and Consumer Act 2010 (Cth), regulates the relationship between franchisors and franchisees. At Astris Law, we advise both incoming and existing franchisees on their rights under the Code and the enforceability of franchise agreement terms.

The Franchising Code of Conduct

The Code is prescribed under s 51AE of the Competition and Consumer Act 2010 (Cth) and applies to all franchise agreements entered into or renewed after 1 January 2015. Key protections under the Code include:

• Disclosure document: The franchisor must provide a comprehensive disclosure document at least 14 days before the franchisee enters into the agreement or makes any non-refundable payment. The disclosure document must contain detailed information about the franchise system, the franchisor's financial position, litigation history and the obligations of each party
• Key facts sheet: A summary document highlighting the most important information a prospective franchisee needs to consider
• Cooling-off period: Franchisees have a 14-day cooling-off period after entering into a franchise agreement (or making any payment under it), during which they can terminate the agreement and receive a refund of payments (less the franchisor's reasonable expenses)
• Good faith obligation: Both parties must act in good faith in their dealings with each other. This obligation applies throughout the life of the franchise relationship
• Dispute resolution: The Code prescribes a dispute resolution process that includes internal complaint handling and mediation through the Office of the Franchising Mediation Adviser (OFMA)

Common Pitfalls in Franchise Agreements

Earnings Claims and Financial Projections

One of the most common sources of franchise disputes is the gap between expected and actual earnings. While the Code does not require franchisors to provide earnings information, if they do, it must be included in the disclosure document and must have a reasonable basis. Verbal representations about potential earnings that are not reflected in the disclosure document can constitute misleading or deceptive conduct under the Australian Consumer Law.

Territory and Exclusivity

Franchisees should carefully examine what territory rights (if any) the agreement provides. Some franchise agreements grant exclusive territories; others provide no territorial protection at all, meaning the franchisor can open additional outlets or grant additional franchises in the same area. The scope of any territorial right - including whether it covers online sales - should be clearly understood before signing.

Renewal and Exit Terms

Many franchise agreements grant the franchisor significant discretion over renewal. The Code requires the franchisor to give at least 6 months' notice if it proposes not to renew an expiring franchise agreement. However, franchisees should understand the renewal conditions - including whether they may be required to sign a new agreement on different terms, upgrade fitout at their own expense or pay a renewal fee.

Exit is often the most difficult aspect of franchising. Franchise agreements typically restrict the franchisee's ability to sell the business (requiring franchisor consent), impose restraint of trade obligations post-termination and may require the franchisee to pay a transfer fee.

Franchisor's Unilateral Powers

Many franchise agreements reserve broad powers to the franchisor to vary operational requirements, marketing fund contributions, product specifications and pricing. Franchisees should understand the extent of these powers and whether there are any limits on how they can be exercised.

The Good Faith Obligation

The Code imposes an obligation on each party to a franchise agreement to act in good faith in dealings with the other party. This obligation has been interpreted by the courts to include honesty, cooperation and not acting in a way that undermines the other party's legitimate interests. However, good faith does not prevent a party from exercising their contractual rights - it requires that those rights be exercised honestly and not capriciously.

Unfair Contract Terms and Franchising

Since the 2023 amendments to the Australian Consumer Law, the unfair contract terms regime now applies to franchise agreements that are "standard form contracts" with small businesses. This means that terms in franchise agreements that create a significant imbalance in rights and obligations may be declared unfair and attract civil penalties. The ACCC has identified franchising as a priority sector for UCT enforcement.

Conclusion

A franchise agreement is one of the most consequential commercial contracts a small business operator will ever sign. Before entering into a franchise, prospective franchisees should obtain independent legal and financial advice, scrutinise the disclosure document, understand all fees and charges, assess territorial rights and exit terms and ensure they are comfortable with the franchisor's unilateral powers. Astris Law's regulatory and compliance team advises franchisees on pre-entry due diligence, franchise agreement review, dispute resolution and exit strategies under the Franchising Code of Conduct.

This article is for general information purposes only and does not constitute legal advice. You should seek professional advice tailored to your specific circumstances before acting on any information in this article. Liability limited by a scheme approved under Professional Standards Legislation.