Franchising in Heavily Regulated Industries

By Marian Ngo, Lawyer, MST Lawyers

All franchisors and franchisees must comply with the standard laws applicable to operating a business such as business registration, taxation and employment laws. The Franchising Code of Conduct (“the Code”) is the primary law that regulates the franchising industry, applying to all franchise systems operating within Australia and to all franchise agreements entered into on or after 1 October 1998.

In addition to this regulatory environment which encompasses all franchising participants, in most cases further legal requirements apply which are unique to certain industries. These industry regulations are often complex and attract penalties for non-compliance in their own right.

Examples of industry specific regulatory requirements include:

• Businesses engaging in credit activities will generally need an Australian Credit Licence (“ACL”) granted by the Australian Securities and Investments Commission (“ASIC”) or authorisation from an existing credit licensee. Similarly, a financial services business must hold an Australian Financial Services Licence (“AFSL”) granted by ASIC or have authorisation from an existing AFSL holder.
• Regulations applicable to Real Estate Agent businesses outline the conduct expected of agents and agents’ representatives in their day-to-day dealings with clients and consumers. In Victoria, the primary law is the Estate Agents Act 1980 and its associated regulations; however, there are various other Acts which set out further obligations, such as the Sale of Land Act 1962 and Retail Leases Act 2003.

It is important for franchisors and franchisees to have an understanding of the implications that industry specific regulations may have on the franchise system and the franchise documentation, such as the potential for fines and penalties being issued by regulators and/or loss of a licence critical to the operation of the franchised business.

Provisions in the Franchising Code of Conduct

Breach of regulations by the Franchisee

The Code provides that a franchisor may immediately terminate a franchise agreement in the event that a franchisee no longer holds a licence required to carry on the franchised business. An example of this is where a franchisee operating a financial services business loses its Australian Financial Services Licence, or where a franchisee operating from a vehicle loses their driver’s licence. In other scenarios where a franchisee has breached an applicable law or regulation, a franchisor must follow the breach and/or dispute resolution procedures set out in the Code.

Breach of regulations by the Franchisor

The Code requires the franchisor to notify franchisees within 14 days of certain events. This includes where a public agency has commenced proceedings against the franchisor, a franchisor director, an associate of the franchisor or a director of an associate of the franchisor (“the parties”) in relation to certain trade practices law, corporations’ law, workplace relations law, unconscionable conduct, misconduct or an offence of dishonesty. Where a regulator has commenced proceedings against the franchisor or the parties, the franchisor should be mindful of the disclosure requirements that may apply, or risk also being in breach of the Code.

Provisions in the Franchise Agreement

Franchise Agreements typically contain provisions requiring the franchisee to comply with all laws and regulations applicable to the operation of the franchised business and to notify the franchisor if certain events occur, for example, if the franchisee receives communications from a regulator relating to the franchised business.

An indemnity clause is another standard provision in the Franchise Agreement. Its main purpose is for the franchisee to indemnify the franchisor from and against any losses arising from the franchisee’s violation of any laws and/or breach of the Franchise Agreement.

Other considerations

Whilst provisions in the Franchise Agreement are a starting point, franchisors must review the applicable industry regulations to determine whether further steps need to be taken. For example:

• Although the Franchise Agreement may state that the franchisee is required to comply with all laws, the regulator may impose a higher standard on the franchisor. Franchisors may then be required to play a more active role in monitoring the regulatory compliance of its franchised network, such as conducting compliance audits, offering compliance training or reporting breaches to a regulator. In the absence of express obligations, it may be prudent for the franchisor to voluntarily maintain initiatives in order to mitigate compliance risk and protect the reputation of the brand.
• Although the Franchise Agreement may indemnify the franchisor from the franchisee’s breach of law; the franchisor may be jointly accountable with a franchisee. For example, in Victoria the Estate Agents Act provides that estate agent franchisors and franchisees are jointly and severally liable for:
  • negligence by an estate agent, or by an employee or servant of the estate agent in the performance of the duties of an estate agent; or
  • any defalcation by the estate agent. Defalcation includes theft, embezzlement, failure to account, fraudulent misappropriation or other acts punishable by imprisonment in relation to any money or other property.

Given these provisions, an estate agent franchisor may consider implementing a centralised accounting system so that it can monitor financial discrepancies and provide training in relation to the performance of estate agent’s duties.

• A new relationship (beyond the franchisor/franchisee relationship) may be established between the parties. For example, a franchisor providing money transfer services is also deemed a Remittance Network Provider under the Anti-Money Laundering and Counter-Terrorism Financing Act 2006, and its franchisees are deemed remittance affiliates. Amongst other requirements, the franchisor is responsible for registering each of its franchisees with the Australian Transaction Reports and Analysis Centre (AUSTRAC) and notifying AUSTRAC of changes to registration details within 14 days. This imposes an additional administrative burden on franchising processes, for example, when the ownership of a franchised outlet changes.
• The franchisor should consider the extent to which the franchisor’s existing systems, administrative processes and operating model can comply with regulation. This is particularly relevant when new regulations are being introduced or when the franchisor is considering introducing new goods and/or services which are highly regulated. The extent to which a franchisor or franchisee can apply to a regulator for certain exemptions or concessions is also a relevant consideration.
• State and Territory enacted regulation further complicates the operating environment for franchisors whose networks span across different States and Territories. Considerations for franchisors include having systems in place to comply with any varying registration and/or reporting requirements and ensuring the practices outlined in their procedures and operations manuals are compliant in each jurisdiction.

MST Lawyers has over 25 years’ experience in franchising, representing clients throughout Australia and internationally in a variety of industries. MST Lawyers can assist you in reviewing your Franchise Agreement documentation in the context of the regulatory environment applicable to your business.

For more information, please contact our Franchise Law team by email franchise@mst.com.au or by telephone +61 38540 0200.