Franchising is a type of business agreement between a franchisor and franchisee. The nature of the agreement is set out in a contract – the franchise agreement. Before both parties sign the agreement, the franchisor has an obligation to provide the franchisee with specific documents. We outline the documentation franchisors need to provide and their purpose.
What’s a franchise agreement?
The franchise agreement is probably the most significant document in any franchising set-up, for both franchisors and franchisees. It’s a legally binding document establishing the nature of the franchisor and the franchisee’s relationship. It outlines the franchisor and franchisee’s duties and obligations for the agreement and beyond. Most franchising agreements run for five to 10 years with options for renewal if franchisees meet certain conditions.
In Australia, franchise agreements are regulated by the Franchising Code of Conduct. This code of conduct outlines specific documents franchisors need to provide to franchisees among other things.
Before a franchisor and franchisee enter a franchise agreement, the franchisor must give the franchisee three specific documents at least 14 days before the franchisee signs an agreement or make a non-refundable payment. These documents are the Franchising Code, a disclosure document, and the franchise agreement in its final form.
Additionally, as soon as a franchisee shows a genuine interest in a franchise, the franchisor needs to provide him/her with a standard information sheet on the risks and rewards of franchising
1. Information sheet on risks and rewards of franchising
This information sheet, also known as information statement for prospective franchisees, sets out general risks and rewards of franchising. It offers recommendations like doing due diligence and getting expert advice, to franchisees.
2. The Franchising Code
The Franchising Code of Conduct is an industry code all franchisors and franchisees need to follow. It covers disclosure requirements, imposes a good faith obligation, and outlines a dispute resolution mechanism. It also prescribes the seven-day cooling-off period for franchisees, and outlines procedures for ending franchise agreements. The ACCC is the regulator of the code and can investigate breaches, but franchisees and franchisors have the right to take legal action over a breach of the Code or the Franchise Agreement.
3. Disclosure document
The disclosure document contains further information about the franchise, including details that could help the franchisee make an informed decision about whether or not to buy the franchise. It should be in the form outlined in the Franchising Code of Conduct (Annexure 1), and it should include relevant information even if sharing the details might encourage prospective franchisees not to buy the franchise.
The disclosure document can include things like the franchisor’s business background and related entities, any litigation the franchisor is involved in, and any bankruptcy or insolvency details. It can also include details of intellectual property held by the franchisor, exclusive/non-exclusive territories granted by the agreement, franchisee fees and payments, and the franchisor’s financials.
4. The franchise agreement in final form
The franchisor must also provide the franchisee with a copy of the franchise agreement in its final form at least 14 days before it can be signed. This allows the prospective franchisee sufficient time to read all three documents and seek legal advice on the terms and conditions.
Who is the franchise agreement relevant to?
The franchisee agreement is a contract between the franchisor and franchisee, where the franchisor grants the franchisee the right to operate a business in accordance with an established system, for a given period of time.
Why is a franchise agreement necessary?
Like other common business contracts, franchise agreements establish legally binding duties and responsibilities, making the franchisor-franchisee relationship clear and expectations unambiguous, thereby reducing the risk of misunderstandings and disputes. Usually, this would be a written contract, but franchise agreements theoretically can be oral, implied, or written.
Who can create the franchise agreement?
Generally, the franchisor creates the franchise agreement to ensure uniformity across the franchise network, and it’s usually drafted by the franchisor’s lawyers. However, depending on the particular franchise network, franchisees might be able to negotiate certain terms and conditions.
How does the franchise agreement cover a franchisor and franchisee?
The franchisee agreement sets out the franchisor and franchisee’s duties, obligations, and rights, along with the terms and conditions for the franchisee operating the franchise. Generally it will include details of sites, territories, operations (how franchisees will run their sites), and duration. It can also cover terms about fees, royalties, use of trademarks and logos, advertising commitments by the franchisor, renewal rights, termination, and exit.
How to manage disputes
The Franchising Code of Conduct outlines mechanisms for dispute resolution. The Code also requires franchisors to develop an internal procedure for handling complaints from franchisees. If a dispute arises, the franchisor or the franchisee can follow the procedure under either the Code or the franchise agreement.
The Code’s dispute resolution procedure requires you should try to first resolve your dispute with the other party by writing to them and outlining the dispute, desired outcome, and what action will settle the dispute. If you can’t agree to an outcome, you can proceed to mediation. Either party has the right to take legal action at any time.
Fulfilling franchising documentation obligations
If you’re a franchisor, you should understand your franchise documentation obligations towards prospective franchisees so you can be fully compliant when dealing with franchise queries. Along with the franchise agreement, you’ll need to provide an information sheet on risks and rewards, the Franchising Code of Conduct, and a disclosure statement. Additionally, your agreement should outline an internal dispute resolution procedure.
Need help managing a dispute or understanding franchise documents? Contact Baybridge expert legal team who specialise in business franchising for a consultation.
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