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How flexible is the Code?

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The Franchising Code of Conduct’s stated purpose is “to regulate the conduct of participants in franchising towards other participants in franchising”.

In the period of more than a decade since it became a mandatory industry code, the Code and the compulsory regulations contained within it, have been the subject of much examination, analysis, criticism and debate within the franchise community.

The Code has frequently been condemned for its apparent lack of flexibility and its wide, “catch all” approach.  However, we must bear in mind that the Code’s broad brush drafting was, to some extent, deliberate and intended to capture all those arrangements which may have been called “licensing” or “distributorship” relationships in an attempt to avoid franchising legislation, but which were, in essence, franchises.

When analysing legislation, distinction is often drawn between the application, substance and form of the legislation.

At first glance the provisions of the Code do appear rigid, rigorous and onerous.  Therefore, if  the initial question intends to query whether there is any flexibility in the application of the Code, the response is clearly no.  The Code applies in full to all franchise systems operating within Australia, and to all franchise agreements entered into on or after 1 October 1998.

However, there are some express exemptions from the operation of the Code.  Clause 5(3) of the Code provides that the Code does not apply to a franchise agreement if:

  • another mandatory industry code prescribed under the Trade Practices Act applies to it; or
  • the agreement is for goods or services that are substantially the same as those which the franchisee has supplied for at least 2 years before entering into the franchise agreement and sales under the franchise are likely to provide no more than 20% of the franchisee’s gross turnover for goods or services of that kind in the first year of the franchise.

In addition, clause 4 of the Code stipulates that, unless the factual nature of the following relationships otherwise satisfy the definition of a franchise agreement as set out in that clause, they do not of themselves constitute a franchise agreement and are therefore exempt from the Code:

  • an employer and employee relationship
  • a partnership relationship
  • a landlord and tenant relationship
  • a mortgagor and mortgagee relationship
  • a lender and borrower relationship
  • the relationship between members of a cooperative that is registered, incorporated or formed under the Corporations Act 2001 or the relevant legislation governing co-operatives in each state and territory of Australia.

There is little flexibility also in the form prescribed by the Code.  Annexures 1 and 2 of the Code set out the exact form of Disclosure Document which franchisors must prepare, even going so far as to include specific numbering and wording which must be followed.  Clause 6(2) of the Code provides franchisors only with the choice of using either of the 2 forms of Disclosure Document where the franchised business has an expected annual turnover of less than $50,000.  Otherwise, the long form Disclosure Document contained in Annexure 1 must be used.

However, whether there is any flexibility in the substance of the Code is a question which may be answered more properly by considering what is omitted from the Code rather than by examining what is included.

Whilst the Code mandates and prohibits certain conduct, there is much detail which is “missing” and many issues in respect of which the Code is silent.  For instance, the Code does not specify or limit what provisions may be included in a franchise agreement in relation to such common matters as:

  • a franchisee’s rights to terminate (other than during the cooling off period) for the franchisor’s breach, or for other matters
  • a franchisee’s right to review the franchise agreement
  • methods of marketing and authorised types of expenditure of any marketing fund
  • the type, frequency, duration and method of any training required by the franchisor or any requirement for the franchisee to obtain any professional qualification, certification, accreditation or industry membership
  • the frequency, type and form of any reporting or accounting requirements

The Code’s silence on such matters may be its subtle way of providing discretion and power to the contracting parties to determine the terms and conditions of their own unique and individual relationships.

On closer inspection, it therefore seems that the Code prescribes certain boundaries for conduct between participants in franchising by providing obligatory parameters which are perceived as crucial and of universal application, whilst leaving the finer details to be negotiated and personalised by the respective parties in accordance with the general principals of contract law.

The more pertinent question then becomes not whether the Code itself is flexible, but rather whether or not the Code facilitates flexibility within franchise relationships? And the answer to this question is clearly yes.

Author:  Esther Gutnick