FRANCHISE AGREEMENTS – WHO HAS THE MOST RIGHTS?

running your franchised business. It is a legal document that says what you are allowed to do, what you must do, and what you must not do.

Franchisors draft these agreements to give themselves a lot of control over your business investment. This means the franchisor often has the most rights in the business relationship, despite the money you’ve invested and the significant risk in running a franchise business.

Here are some examples from reports to the ACCC.

The franchise agreement says the franchisee has to buy their ingredients and supplies from suppliers chosen by the franchisor, even though there are cheaper alternative options available. Franchisees have to pay marketing fees each month, but don’t have a right to decide how the money is spent; the franchisor makes these marketing decisions.

Buying a franchise? A typical franchise agreement is likely to include some things that might surprise you.

The franchisor can set up new businesses that may compete with existing franchises or the entire network, but franchisees can’t do the same.

These conditions are pretty common in franchising and are usually legal and part of the franchise contract.

You might think the Franchising Code of Conduct would help. Under the Code the franchisor has to tell you certain things during the disclosure process, before you sign an agreement.

While there is an obligation on parties (including franchisors) to act in good faith, this doesn’t mean the franchisor cannot act in their own legitimate commercial interests, including by having terms in an agreement that suit them but not you.

If you don’t like the idea of the power imbalance that often exists between franchisors and franchisees, you need to think about whether franchising is for you.

You can read more on good faith and the Code on our website www.accc.gov. au/franchising

SOME FRANCHISE AGREEMENTS MAY

HAVE UNFAIR CONTRACT TERMS

Sometimes the terms or clauses in franchise agreements may be unfair.

You can try to negotiate to have the terms removed, but this is often not straightforward and should be done with help from your lawyer so that you’re not worse off.

The ACCC recently accepted a court-enforceable undertaking (a legally enforceable promise) by Back In Motion Physiotherapy Pty Ltd to remove certain terms from its franchise agreements, which it admitted may have been unfair.

One of these terms was about what work people could do after they stopped being a franchisee of Back In Motion (a restraint of trade clause). This clause was in most of the Back In Motion franchise agreements. It meant any franchisee who wanted to leave the group was not allowed to be involved in any competing physiotherapy practice located within a radius of up to 10 kilometres of any Back In Motion franchise anywhere in Australia for up to 12 months.

Franchise agreements often contain a restraint of trade clause, which can try to limit the type of work or geographic areas franchisees can work in after leaving the franchise system.

The key takeaway here is to check your franchise agreement before you sign, and get legal advice about any terms that may be unfair, such as unreasonable restraint of trade clauses.

THE MOST IMPORTANT PHONE CALLS

YOU CAN MAKE

Here is another thing that might surprise you. The most important phone calls you can make when thinking of buying a franchise are not to the ACCC – it’s to people who own or have owned a franchise. These are the people who know the most about the franchise system you’re thinking of buying into, and how it works (or doesn’t work) in practice.

You should receive their contact details when you get something called a disclosure document from the franchisor. If it is too hard to get in touch with former franchisees, or they don’t want to talk to you, consider it a big warning sign to avoid the franchise system.

Calling your legal advisor is also important. Your legal advisor will help you understand the franchise agreement, and avoid agreeing to something that you don’t want.

Getting legal advice about a franchise agreement, and speaking with current and former franchisees in advance, should give you greater confidence in your decision - whether or not you sign up.

MORE INFORMATION AND RESOURCES

The ACCC provides a range of resources and guidance to help potential franchisees like you. This includes short videos explaining common concepts in franchising and things to watch out for - check out our website www.accc.gov.au/ buyingafranchise.

The ACCC enforces the Competition and Consumer Act 2010, which includes the Franchising Code of Conduct and the Australian Consumer Law in accordance with our Compliance & Enforcement policy. If you think a franchisor might have breached the Competition and Consumer Act you can make a report to the ACCC at www.accc.gov.au/ contact-us. The ACCC can take action in serious cases, for example, where there is widespread harm, but the ACCC does not have a role in resolving disputes between franchisees and franchisors.

The information in this article is for general guidance only. It does not constitute legal or other professional advice, and should not be relied on as a statement of the law in any jurisdiction. As it is intended only as a general guide, it may contain generalisations. You should obtain professional advice if you have any specific concern.

Mick Keogh is deputy chair of the Australian Competition and Consumer Commission.