Comprehensive Analysis: Legal Challenges of Franchising in Australia

This report provides a detailed analysis of the legal challenges associated with franchising in Australia. It begins with an introduction to franchising and the roles of franchisors and franchisees, followed by an overview of the relevant legislation, including the Trade Practices Act 1974, the Trade Practices Regulations 1998, and the Franchising Code of Conduct. The report examines the role of the Franchising Council of Australia and discusses factors that contribute to the failure of franchising, such as non-compliance with the Code and inadequate disclosure requirements. It also explores the concept of unconscionable conduct. The report then shifts its focus to factors that contribute to the success of franchising, including good faith, goodwill, and mediation arrangements. The discussion includes the implications of these factors for both franchisors and franchisees. The report concludes with a summary of the key findings and highlights the importance of understanding the legal framework to ensure the success of franchising ventures in Australia.

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Legal Challenges of Franchising in Australia
Introduction
Franchising refers to a method that is used to build a business. The franchisee, who
owns the franchise, is granted the right to make an offer or distribute or sell goods or services
as per the system of the business which is determined by the franchisor, the founder of the
business. The franchisor gives support by providing training, guidance, leadership and
assistance, where there is a receipt of ongoing service fees by them. The franchisor is termed
as a senior partner.
Franchising Law
The regulation of the sector of franchising is made a reality through the TPA- Trade
Practices Act 1974 and also the TPR-Trade Practices Regulations 1998 (Industry Codes-
Franchising) containing provision for the Australian Franchising Code of Conduct among
other provisions. Initially, the Code was voluntary, it is mandatory in its current format
(section 54AE TPA). This was after the publishing of the report called Finding a Balance:
towards Fair Trading in Australia in May the year 1997. This had the effect of the
Government introducing a compulsory code of conduct for franchising.

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The industry codes of the Trade Practices Regulations of 1998 were introduced by the
Trade Practices Act 1974 (Fair Trading) into the TPA. This made the Code of Conduct to be
applied as a separate regulation. It is a requirement under the Code that the information
categories to prospective and existing franchisees to be mandatorily disclosed. The Code has
also provided for provisions for dispute mediation as well as a period of cooling off.
Franchising Council of Australia
This is a nationally incorporated association which is not meant for profit. It is the
sector’s peak body of franchising in Australia. It represents the sector’s franchisors, advisors,
franchisees and service providers.
The council aims to develop, promote and support the franchising sector in Australia
in order to push for the sector’s entrepreneurial and economic success. To ensure the
effectiveness of its activities, the Australian franchising council makes use of themes such as;
promotion of highest standards of the industry and best practice in the sector; boosting
productive and strong relationships with governments, stakeholders and core regulators to
ensure the welfare of franchising; voluntary membership to the council and openness to any
person or organisation with involvement in the sector of franchising.
Franchising Code of Conduct
This is an industry code which provides mandatory regulation across Australia for the
conduct of participants of franchising towards one another. Any participant in the franchising
sector must understand his or her rights and responsibilities as provided by the Code
whenever they make a commitment to any franchising opportunity.
There must be good faith between parties entering or preparing to enter into an
agreement of franchising. This includes current and prospective franchisors and franchisees

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in their dealings of business with one another. There are mechanisms provided by the Code
for the trial and resolution of disputes between parties in a franchise agreement in a manner
that is cost effective and timely.
The Code provides a specific period for the operation of franchise agreements. This
period may however be cut short due to a variety of reasons. Franchising investigations are
conducted by the in case of allegations for the breaching of the Franchising Code. The
Australian Competition and Consumer Commission (ACCC) may also take appropriate
actions to ensure the enforcement of its policies is actualised. The penalties provided under
the Code include penalties and notices of infringement in case the franchisors and franchisees
breach its certain provisions.
Factors for the Failure of Franchising in Australia
Non-compliance with the Code
The High Court clarified the consequences facing a franchisor in case he or she fails
to comply with the rules and provisions of the Franchising Code. Moreover, to determine that
an agreement of the whole franchise is void due to an illegal element and can therefore not be
enforceable is unavailable any longer. Considering the law’s current state, if the franchisor
does not comply with the Code, then the franchisee has the onus of seeking any of the reliefs
provided by Part VI, TPA. These reliefs include damages, (Section 82 TPA), injunctions
(Section 80 TPA), orders that are non-punitive in nature (Section 86C TPA) and other orders
such as orders provided under Section 87(2) TPA.
Despite the various provisions by the Code regarding non-compliance, it does not
stipulate any explicit penalties. Therefore, there would be an improvement to the compliance
with the Code if heavy penalties such as penal convictions for offences of criminal nature

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were provided for in the Code as well as their strong implementation actualized by the
regulator.
Disclosure requirements under the Franchising Code of Conduct
Disclosure is very important for franchisees because it can prove to be very difficult
and expensive to ensure due diligence before purchasing a franchising business. Most
franchisees do not register the names of their business. This makes the work of tracking down
via public record and also reaching out to the franchisees very difficult. The franchisor
businesses can also characteristically have very complex structure. This poses a complication
on the franchisee to identify who they will deal and associate with contractually (Buchan
2008 p.3).
Disclosure was among the main purposes for the introduction of the Code so as to
ensure access to information more readily by the franchisees concerning the business of
franchising they wished to purchase, or had purchased, via the provisions of disclosure.
However, the disclosure provisions’ effectiveness has been subjected to continuing debate
between the franchisors and franchisees.
Franchising Code Part 2 provides a comprehensive list of details that a franchisor
must avail for the benefit of its franchisees as well as prospective franchisees. Such
disclosures must be in a document in the form of writing, having been prepared or written by
the franchisor in a manner and form which is consistent with the Franchising Code(Section 7
TPR 1998) This document must given to the franchisee by the franchisor at least within 14
days before the entry into, renewal or extension of the franchise agreement or payment of a
deposit which is non-refundable by the franchisee.(Section 10 TPR) The disclosure document
must also be updated and provided to the existing franchisees by the franchisor every
financial year(Section 6 TPR).

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Public companies which represent almost 14% of the franchisors make publication of
company reports which lack substantive information regarding the division of the franchise.
Accessing information concerning trusts has also proven to be more restricted.
Arguments against further amendments
Such arguments assert that the document of disclosure is not meant to be the
exhaustive source of the entire requisite information. Therefore the franchisees should bear
the responsibility for their investment decisions instead of putting the blame on the franchisor
for failure of full disclosure. The Franchising Council also added that any disclosure
document which is prepared according to the comprehensive standards of the Code provides
all the necessary information needed for the assistance of a prospective franchisee in making
any informed decision relating to the franchise.
Unconscionable conduct
Unconscionable conduct was explained in the Amadio case (1983) where the High
Court Chief Justice explained that it occurred where a party is placed at an advantage over the
other party after which the opportunity is used to take unfair advantage over the injured party.
Such a transaction has to be set aside on its discovery. According to Section 51 AC, TPA, no
corporation should engage in any unconscionable conduct with relation to supply to or
acquisition from an individual, of products and services. The section continues to provide a
list of the issues that the court may consider, though not limited to, to aid them to decide
whether the conduct was unconscionable. Recommendations have been made for the
amendment of section 51 AC, TPA so that the definition of the word ‘unconscionable’ can be
included or a prescribed list to be inserted to give examples the kinds of conduct which would
under ordinary circumstances be considered as ‘unconscionable’.

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Factors for the Success of Franchising in Australia
Good faith
This refers to the duty to comply with the standards of honest conduct that are of
reason and have the parties’ interest (Hanna 2007 p.78). However, it is doubtful whether the
law of Australia has really accepted the good faith duty in performing and enforcing
contracts. The High Court has itself not reached a decision to the issue which may be
considered as binding. In J F Keir Ltd v Priority Management Systems Pty Ltd (2007), the
acing Justice of the Court of Appeal accepted a franchisee’s submissions that the franchisor,
in exercising its powers as per the franchise agreement, the franchisor was required by the
implied good faith duty to act: objectively; reasonably and honestly; apply degree of
diligence and caution expected of the ordinary prudence and honesty of a person; without any
ill motive; recognising both parties’ interests in enjoying the contract; and to avoid any action
that may render the interests of the plaintiff as laid out in the agreement as worthless,
nugatory or seriously undermined.
Goodwill
It was described by Lord Macnaghten as the advantage and benefit of the good name
and reputation and connection of the business. It is the force of attraction which introduces
custom. Goodwill distinguishes a business characterised by old establishment from a new
starting business. It is comprises various elements differently in different businesses but
sharing the same trade (Inland Revenue Commissioners v Mull and Co’s Margarine Ltd) The
franchisee is responsible for the business’ goodwill and also possibly demonstrates goodwill
when he or she ventures into a franchising system or sector. The franchisee also adds a
personal goodwill. There is also goodwill in the calculation of the franchise fee, which may
be referred to as business goodwill. The franchisee exchanges the business goodwill with the

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right to conduct business with the help of the franchisor’s system and intellectual property
over a given period of time as provided for in the franchise term.
It is the traditional view that goodwill is the franchisor’s belonging. However, the
franchisor simply gets the right of conducting his or her business during specific term
stipulated by the franchising agreement. Without any contrary provisions, the franchisee is
not under any obligation of assigning or renewing the agreement and is not entitled to receive
compensation from the franchisor in case of non-renewal or termination whether the
franchisee purchased or contributed to goodwill (Buchan 2008 at p.112).
Mediation arrangements
Mediation refers to an informal negotiation where parties to a dispute are assisted by a
neutral and independent mediator in identifying and exploring settlement options. The
mediator assists the parties in reaching their own agreement. The mediation process enjoys
advantages such as confidentiality, informality, low cost and accessibility.
On the request by either for mediation, the Code provides that it is mandatory for both
the parties to be involved in the mediation process with the aim of resolving the dispute (Sub
clause 29(6) of the Code). However, non-attendance is common because one party may not
see the progress prospects of the mediation process and opt for other options and others may
fail to attend so as to obstruct or frustrate the mediation process.
For more effectiveness in the process of using mediation to solve disputes, the option
of establishing an independent entity for the monitoring and control of the mediation process
may be considered. The mediation process should also emphasise the importance of good
faith in the mediation process.
Conclusion

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Franchising helps in establishing a business where the franchisor gives the franchisee
the right to provide his goods and services to his or her customers. The Australian legislation
which regulates franchising includes the 1974 Trade Practices Act, Trade Practices
Regulations of 1998 and the Franchising Code of Conduct. The Franchising Council of
Australia is the body which represents the interests of all the stakeholders of franchising.
Arguments that have been made for the amendment of the Code include clear clarity to the
definition of unconscionable conduct and insertions that will improve compliance to the
provisions of the Code. Other legal issues in the franchising sector in Australia include good
faith, goodwill and mediation agreements.

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Reference List
1) Commercial Bank of Australia Ltd v Amadio (1983) 151 CLR 447.
2) Buchan, J (2008), “Submission to the Economic and Finance Committee”.
3) Hanna, T (2007), “Court of Appeal rejects tortuous duty of good faith” Law Societal
Journal, vol.45.
4) Inland Revenue Commissioners v Mull and Co’s Margarine Ltd (1901) AC at 223-
224.
5) J F Keir Ltd v Priority Management Systems Pty Ltd (2007) NSWSC 789.
6) Trade Practices Act 1974.
7) Trade Practices Regulations 1998.