NEW TO FRANCHISING? Understand your rights

Dr Michael Schaper | Deputy Chair | Australian Competition and Consumer Commission

NEW TO FRANCHISING? Understand your rights

For many Australians, their first experience in small business will be as a franchisee. Franchise arrangements are often seen as a lower-risk business option, as it allows you to build on a proven business model.

However, it pays to be cautious and understand your rights and obligations under the Franchising Code, the mandatory code of conduct which governs franchising arrangements in Australia. The Code regulates the conduct of franchising participants towards one another and is overseen by the Australian Competition and Consumer Commission under the Competition and Consumer Act 2010.

Are you new to franchising?

If you’re new to franchising, it’s essential that you know and understand your obligations under the Code, whether you’re a franchisee ora franchisor. It includes:

  • disclosure requirements
  • good faith obligations
  • a dispute resolution mechanism
  • a cooling-off period for potential franchisees, and
  • procedures for ending a franchise agreement.

As a franchisee, you must act in good faith towards your franchisor and they must act in good faith in their dealings with you. Good faith requires parties to exercise their powers reasonably and not arbitrarily or for some irrelevant purpose. Acting in good faith extends to all aspects of the franchising relationship.

What you must be told

If you’re interested in acquiring a franchise, the franchisor must give you a two-page information statement highlighting some of the key risks and rewards of franchising.

If you decide to proceed with the franchise, the franchisor must provide you with a disclosure document, the executable copy of the franchise agreement and a copy of the Code at least 14 days before you enter into an agreement or make a non-refundable payment.

The disclosure document will contain important information, including:

  • operating costs and fees you’ll have to pay,
  • contact details of current and former franchisees,,
  • whether you have an exclusive territory, and
  • conditions for renewal.

The franchise agreement is your contract with the franchisor and sets out your rights and obligations as a franchisee. It’s important that you read the documents provided to you by the franchisor and seek independent legal, accounting and business advice from professionals with expertise in franchising. Remember: franchising is a business and there’s no guarantee of success. Make sure you’ve done your due diligence before making a decision about a franchise opportunity.

Cooling-off periods and dispute resolution

As a franchisee, you are entitled to terminate a new franchise agreement within seven days of entering into the agreement (or an agreement to enter into a franchise agreement) or making a payment under the agreement (whichever happens first). The cooling-off period does not cover a renewal, extension or transfer of an existing agreement.

If you decide to terminate a franchise agreement, you’re entitled to a refund of payments you have made within 14 days.

However, the franchisor can still deduct its reasonable expenses from this amount if the expenses, or the method of calculating such expenses, has been set out in the franchise agreement.

If a dispute arises, the Franchising Code requires that parties try to resolve it by outlining (in writing) to the other party:

  • the nature of the dispute,
  • what outcome they want,
  • what action will settle the dispute.

If the parties can’t resolve the dispute within three weeks, either party may refer the matter to mediation, an informal negotiation facilitated by an independent third party. Mediators assist parties negotiate an outcome that is acceptable to both parties. Parties can
agree to appoint a mediator or request that the Office of the Franchising Mediation Adviser appoint one. Alternatively, the Small Business Commissioner in your state (if available) or the Australian Small Business & Family Enterprise Ombudsman may be able to appoint a mediator.

The role of the ACCC

The Franchising Code is regulated by the ACCC, which can provide information to assist franchisees and franchisors understand their rights and responsibilities under the Code. To encourage compliance with the Code, the ACCC undertakes enforcement and compliance activities and is currently directing resources to ensure franchisees gain the protections of the Code.

The ACCC can now issue infringement notices to firms and has the power to seek financial penalties for certain breaches of the Code, including penalties against directors.

This year, a number of high-profile actions have been taken, including:

  • Domino’s: in May 2017, following the issue of two infringement notices by the ACCC, Domino’s Pizza Enterprises Ltd paid penalties totalling $18,000 for breaches of the Franchising Code by failing to provide franchisees with both an annual marketing fund financial statement and an auditor’s report within the time limits prescribed under the Code.
  • UltraTune: in May 2017, the ACCC alleged that in 2015, Ultra Tune Australia Pty Ltd failed to act in good faith in its dealing with a prospective franchisee, and failed to provide this prospective franchisee with documents the Code specifies must be provided before accepting a non-refundable payment. This action was ongoing at time of publication.
  • PastaCup: in September 2016 the ACCC alleged that Pastacup’s current franchisor, Morild Pty Ltd, and the company’s former director failed to disclose the relevant business experience of all its officers to franchisees. This action was ongoing at time of publication.

Further information

To understand your rights and responsibilities under the Franchising Code of Conduct, visit www.accc.gov.au/business/franchising, contact the ACCC small business helpline on 1300 302 502, or contact the Small Business Commissioner in your state.

Griffith University also runs a free Buying a Franchise online education program, funded by the ACCC, to help you understand what’s involved with franchising. You can access the program at www.accc.gov.au/ccaeducation.

For more information visit: www.accc.gov.au/uct