A PDF file should load here. If you do not see its contents the file may be temporarily unavailable at the journal website or you do not have a PDF plug-in installed and enabled in your browser. Toggle navigation. The franchise agreement documents a long-term contract-based business relationship between a franchisor as supplier and its franchisee, a business consumer.
Under contract law, assumptions are made about parties entering business relationships, and about the basis on which they agree the terms of their contracts.
These assumptions are flawed where one of the parties, in this case the franchisee, is in a weaker position and unable to negotiate amendments. The imbalance of power between a franchisor and its franchisees was redressed to an extent in by the enactment of amendments to the Trade Practices Act Cth. Administrators and liquidators appointed to the failed franchisor are regulated by the Corporations Act Cth. Thus it is important to consider whether franchisees could all self-protect against franchisor failure through the franchise agreement or whether this protection can only be achieved through legislation.
This article concludes that statutory intervention to protect the franchisee business consumer is the only workable response. Depending on many variables,1 the impact of the franchisor's failure2 on the franchisees ranges from slight to catastrophic.
Part III touches on the allocation of risk of failure in franchise agreements.
Part IV identifies assumptions that underpin the current response to franchisor failure. In part V the adequacy for the franchisee of the most common remedy for breach of contract, damages, is considered in the context of franchisor failure. Remedies for breach of the statutory warranties implied under the Trade Practices Act are also considered. In part VI, possible solutions are proposed.
That premise is not fulfilled in the typical franchise arrangement. Each franchise agreement and the resulting business which the administrator or liquidator will categorise as an asset or a liability, will be dealt with accordingly. A Standard Form Contract the liberal fiction that all the effects of a contract should be attributed to the will of those who made it still persists though contract law today even though the overwhelming majority of contracts are the product of the will of only one of the contracting parties.
Franchisors draft the franchise agreements to maximise their position. This makes good commercial sense as it helps the franchisor achieve administrative efficiency and maintain consistent standards. In some franchise networks, for instance Subway, one standard unit franchise agreement is used throughout the world with only minor variations from one jurisdiction to another. The franchisor supplier drafts the franchise agreement.
The franchisee business consumer takes it or leaves it, seldom having the opportunity to vary the standard form. Franchisees are encouraged to read the franchise agreement and ask questions, but any requests for changes are strenuously opposed by the franchisor. Standardisation of outcome is a more important result for a franchisor than letting a franchisee enter the relationship in the mistaken belief that they have any bargaining power. Franchise agreements are also an example of relational contracts.
The franchise agreement is unavoidably incomplete. There is an assumption underlying a relational contract that the major events which are foreseeable, and which could fundamentally change the relationship, have been addressed in the contract. It is also acknowledged that some events are not foreseeable and will be the subject of negotiation if and when they occur.
As Gillian Hadfield observes: incomplete contracts such as franchise agreements often exist deeply embedded in an ongoing relationship. It would be relatively inexpensive to insert provisions about franchisor failure into the franchise agreement and the traditional justification that issues left for the back end will be resolved by the courts is hard to justify where the trigger event is the insolvency of one party.
In actual fact, most of this is not even remotely true.
Federal Register of Legislation - Australian Government
This is an event whose possibility is real, and whose consequences will potentially be devastating for the franchisee consumer. It can be concluded that relational contracts are not well equipped to deal with insolvency as the event that triggers a need to renegotiate, franchisor failure, also signals the end of the relationship between the franchisor and its franchisees.
It is too late. C Exploitative Contract Rick Bigwood describes the power imbalance between the franchisee and franchisor that creates the environment for exploitation: What is crucial is that the vulnerability that gives rise to the asymmetric power relation between the parties is such that P [plaintiff franchisee] ought to be excused … from having to exercise that level of responsibility or self-reliance expected and required of the generality of contracting parties.
Consequently, the supplier franchisor is entering a franchise agreement that potentially exploits the consumer franchisee. If protection of franchisees from the consequences of franchisor failure is not achievable through the franchise agreement, how has the legislature responded? In part II the effectiveness of two key statutory initiatives is considered in the context of franchisee protection for franchisees of failed franchisors.
The marketing that leads to the formation of the franchise agreement, however, is closer in style to marketing for everyday consumer purchases. The franchisor may have breached s 51AC 3 i ii Trade Practices Act Cth in failing to disclose the risk that the franchisor might decide to adopt a course of strategic insolvency. Willmott, above n 6, Successful proceedings under the Trade Practices Act Cth assume that the franchisor will be solvent and thus able to meet legal costs and a judgment debt.
The Corporations Act Cth imposes pre-conditions on continuing or commencing litigation once an administrator or liquidator has been appointed.
This is discussed in part V of this article. Franchising Code of Conduct the Code Protection for parties to the franchise agreement is achieved though the Code implying terms into the franchise relationship, and requiring the franchisor to provide disclosure. It is assumed that the Code provides franchisees with the information they need so they can structure their affairs to self-protect, or that it protects them in key risk areas.
The primary focus of disclosure is contract formation. The disclosure extends only to the matters listed in the Code.
Thus, franchisees may not be directed to consider other issues, including possible consequences of franchisor failure. But, in general only public companies are required to be audited.
Those mitigating circumstances may or may not eventuate. Thus, the audit which was essentially a snapshot that confirmed the entity met the test of solvency, may present a misleading picture of the solvency of the franchisor.
The The Code implies terms into franchise agreements. Relevantly, regulation 23 b allows the franchisor to terminate a franchise agreement if the franchisee becomes bankrupt or insolvent. There is no reciprocal right for franchisees. The Code may apply to administrators. The Code does not apply to liquidators. Consumer contract is defined in s 2 3 of the Bill as: s 2 3 A consumer contract is a contract for: a a supply of goods or services; or b a sale or grant of an interest in land; to an individual whose acquisition of the goods, services or interest is wholly or predominantly for personal, domestic or household use or consumption.
Traveland franchise that failed in contained a clause permitting the franchisee to terminate the contract if the franchisor became insolvent.
We went to see a QC to see if we could get out of the agreements and there was no way. In the absence of Australian franchise agreements, 70 franchise agreements from a United States website39 were analysed. None mentioned franchisor bankruptcy.
Education about a problem as serious as franchisor failure is no substitute to providing for it in a franchise agreement. The failure of advisers to insist on franchisor failure being addressed may be a result of advisers knowing that the contract is standard form, exploitative and not negotiable. Thus, the franchisor can protect personal assets much more easily than the franchisee can. Another example of risk shifting occurs where a franchisor structures a franchise relationship like a commission agency.
The franchisor pays commission to its franchisees. Two risks that the franchisees assume in this scenario are; that the franchisor will be prepared to chase the customer for payment, and that the franchisor will remit the commission to the franchisees; both in a timely manner.
The word used for both corporate insolvency and personal bankruptcy in the USA. This can take months. Franchisors often operate through several legal entities. The more entities there are, the more expensive and difficult it is to conduct due diligence.
Some franchisors and related entities are trusts. As far as a bystander was concerned, Chaste was entirely controlled by Mr Webb. No bystander could have known that there were agreements in place … which gave control of Chaste to Mr Foster.
This limits the value of professional advice as it is not able to be contextualised. However this requires a level of expertise that not all franchisee advisers possess.
In the Government commissioned a review of the FCP. Thus the assumption that franchisors will act in their own interests is correct.
Conflicts of interest may, and do, create counter-incentives for complying with contractual obligations. The vision the franchisees buy into is that a franchisor and its hard working, loyal franchisees make the team that builds a strong brand. Why would some not choose insolvency?
The franchisor may decide that on 58 Ibid. It is cheaper to become insolvent. Did the Franchisor Breach the Contract? For the plaintiff to have access to remedies for breach of contract the defendant must have breached the contract.
A franchise agreement typically imposes a duty on the franchisee to: 2 c carry on business activities in compliance with all laws, regulations, and codes of conduct and any instructions, directions, requirements and requests made by any statutory, governmental, industry or regulatory body, and in accordance with the highest standards of ethics and business practice.
The franchisee shall also obtain and maintain all necessary permits and licences to enable the franchisee to properly operate the franchised business in accordance with this agreement and the law.
Reciprocal contractual obligations on franchisors to obey the law do not appear in standard franchise agreements. Nor is the franchisor contractually bound to remain solvent.
471b of the corporations act 2001 pdf
A statutory obligation not to trade while insolvent is imposed on directors of all corporations by the Corporations Act Cth.
Nor is it, of itself, necessarily a breach of the Trade Practices Act Cth. If the franchisor has not breached a provision of the franchise agreement, a claim for breach of contract cannot easily be mounted under contract law. The franchisee may consider suing the franchisor for anticipatory breach, breach of a collateral contract, or pursuing a quasi-contract action such as unjust enrichment.
The possibility of actions based on contract will not be pursued further as they do not present a clear way of overcoming the statutory stay on proceedings during winding up. Any stay of proceedings make it difficult for franchisees to commence or continue litigation.