What is a franchise agreement?

If a contractual arrangement is a franchise agreement then the Franchising Code of Conduct (pdf) (including the obligation to provide disclosure documents) applies.

In ACCC v Kyloe Pty Ltd [2007] FCA 1522 the Federal Court rejected the ACCC's claim that the sub-distributorship agreements for the Polar Krush Ice drink business were really a franchise.

The Code defines a franchise agreement as:

... an agreement:

(a) that takes the form, in whole or part, of any of the following:

(i) a written agreement;

(ii) an oral agreement;

(iii) an implied agreement; and

(b) in which a person (the franchisor) grants to another person (the franchisee) the right to carry on the business of offering, supplying or distributing goods or services in Australia under a system or marketing plan substantially determined, controlled or suggested by the franchisor or an associate of the franchisor; and

(c) under which the operation of the business will be substantially or materially associated with a trade mark, advertising or a commercial symbol;

(i) owned, used or licensed by the franchisor or an associate of the franchisor; or

(ii) specified by the franchisor or an associate of the franchisor; and

(d) under which, before starting business or continuing the business, the franchisee must pay or agree to pay to the franchisor or an associate of the franchisor an amount including, for example:

(i) an initial capital investment fee;

(ii) a payment for goods or services;

(iii) a fee based on a percentage of gross or net income whether or not called a royalty or franchise service fee; or

(iv) a training fee or training school fee;

but excluding:

(v) payment for goods or services at or below their wholesale price; or

(vi) repayment by the franchisee of a loan from the franchisor; or

(vii) payment for the whole sale price of goods taken on consignment; or

(viii) payment of market value for purchase or lease of real property, fixtures, equipment or supplies needed to start business or to continue business under the franchise agreement."

After looking at the contractual arrangements in this case, Judge Tracey decided that Clause 4(1)(b), which requires that any right conferred by a franchisor to carry on business must be granted under a system or marketing plan, had not been satisfied.

He noted that "The phrase a "system or marketing plan" is not defined in the Code. In seeking to give meaning to this concept Australian courts have had resort to American case law which deals with equivalent but not identical legislation."