26/06/2009

A client asked us to review their Widget distribution agreement from their supplier, Widgets-R-Us (not their real name). Our review of the agreement revealed that the business proposition being offered by Widgets-R-Us was actually a franchise and therefore the agreement was subject to the Franchising Code of Conduct (the Code).

Franchisors have serious disclosure and compliance obligations under the Code. As a result, distributors of some products or services will go to great lengths to ensure their arrangements with sub distributors are not classified as a franchise agreement.

The Code defines a franchise agreement by describing certain criteria that apply to all franchises. If the criteria apply, then the arrangement is subject to the code, regardless of whether or not it’s called a franchise.

The criteria are:

1. an agreement that is written, oral or implied in whole or in part;
2. Franchisor grants the Franchisee the right to carry on a business of offering, supplying or distributing goods or services in Australia under a system or marketing plan substantially determined, controlled or (even) suggested by the Franchisor;
3. the business is associated with a trade mark or advertising symbol that is owned, licensed or specified by the Franchisor;
4. the Franchisee makes certain payments to the Franchisor. 

Some of the criteria are easy to identify, such as whether there is an agreement, or the arrangement is associated with a trade mark.  Other criteria may be more difficult to identify such as whether the Franchisor has suggested a “system or marketing plan”.

Exactly what constitutes a system or marketing plan is not defined in the Code. We therefore must look to the common law for guidance.

The courts have identified several features of a business arrangement which they consider may indicate the presence of a system or marketing plan required by the Franchisor. The features include centralised bookkeeping, reservation by the Franchisor of the right to approve promotional material, a scheme prescribed by the Franchisor under which a person could become a district or regional distributor or director, etc and the Franchisor suggesting retail pricing.

Other things that may indicate the existence of a system or marketing plan by a Franchisor include:

1. imposing geographical marketing areas;
2. sales quotas;
3. mandatory sales training;
4. provision of prescribed invoices and other sales forms;
5. a requirements that distributors collects information from customers and provide the information to the Franchisor.

This list is by no means exhaustive, and is only presented as a sampling of some of the features of a business relationship that the courts, or the ACCC who administers the Code, may look at when determining the existence, or otherwise, of a franchise agreement.

There can be serious consequences for a distributor that is knowingly or unknowingly granting franchises to Franchisees without complying with the Code.

For further information regarding Distribution Agreements or Franchise’s, please contact TOWNSENDS BUSINESS & CORPORATE LAWYERS on (02) 8296 6222.