If You’ve Given Licences To Others To Use Your Trademark, System or Marketing Plan and Haven’t Complied With The Franchising Code… You May Have A Problem…
A recent decision of the NSW Court of Appeal highlights the risk of not understanding when your agreement is really a franchise agreement… the so-called “distribution agreement” in question cost the licensor (“franchisor”) $208,178.39.
You can call your agreements whatever you like: license agreement; distribution agreement; or, supply agreement… but if in reality it meets the criteria of a franchise agreement, then it’s a franchise agreement… and to be enforceable you must have complied with the Franchising Code of Conduct.
This recent decision – Workplace Safety Australia v Simple OHS Solutions Pty Ltd – was handed down just this month, on the 8th of April.
The facts, put simply, were that Workplace Safety Australia Ltd (WSA), provided online subscription packages designed to assist businesses to meet their obligations under occupational health and safety legislation. The agreement between it and Simple OHS Solutions Pty Ltd (Simple) was titled as a “Distribution Agreement”.
Pursuant to the agreement, Simple agreed to act as the exclusive distributor of WSA’s subscription packages. In doing so, Simple was required to:
set out a business plan indicating how it intended to operate its business;
administer all sales in accordance with a process prescribed by WSA;
use standard forms prescribed by WSA;
comply with a manual provided by WSA; and
comply with all reasonable directions of WSA.
Further, under the agreement Simple was, amongst other things, obliged to pay WSA a Customer List Fee in quarterly instalments.
Further it was found that WSA had failed to comply with either the pre-contractual disclosure requirements in clause 6 of the Franchising Code of Conduct or the pre-termination requirements in clause 21 of the Franchising Code of Conduct…and thus had breached s 51AD of the Competition and Consumer Act 2010 (Cth).
The Court of Appeal found that Simple would not have entered into the agreement had there been compliance with the Franchising Code of Conduct and that, as a result, Simple lost $208,178.39.
Simple, the “franchisee”, was awarded damages in the sum of $208,178.39.
So… What is a Franchise Agreement?
There are some exceptions, but generally a franchise agreement is an agreement, whether in writing, verbal or implied, under which:
one party (the franchisor) grants another party (the franchisee) the right to carry on a business supplying goods or services under a specific system or marketing plan substantially determined, controlled or suggested by the franchisor or an associate of the franchisor
the business is associated with a particular trademark, advertising or a commercial symbol owned, used, licensed or specified by the franchisor or its associate
the franchisee is required to pay, or agree to pay an amount to the franchisor before starting or continuing the business.
If it appears I have a Franchise Agreement but haven’t complied with my disclosure obligations, can I cure the breach?
Not without the franchisee’s support… but if you’ve got that support, then yes… the necessary documentation should be able to be executed and filed in a safe place for future reference.