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 The company was a Melbourne based business that promoted, marketed and sold licences nationally to use its Intellectual Property for the purpose of operating employment and recruitment services.
The Franchising Code is an industry code of the Trade Practices Act, established in October 1998. It provides the definition of what is a "franchise".
For an agreement to be classified as a franchise agreement it must contain all four of the following elements.
1. An agreement - which may be written, oral or implied.
2. The granting of a right to carry out a business under an existing system or suggested marketing plan - that is controlled by the franchisor or an associate.
3. The business must be operating and be associated with a symbol or trademark.
4. A fee paid, or agreed to be paid, to the franchisor, which can include amounts incorporated into the price of goods sold to the business.
There are some minor exceptions:
The essence of the Code is to regulate business relationships. If your contract is not so much about a sale of your product but establishes a continuing business connection, then as a seller, you will have responsibilities to your purchaser. So even if you are not thinking of becoming a "franchisor", if your business fits these criteria, then the code will automatically apply and you must follow its requirements.
At the time the Code was introduced, many people inexperienced in business were taking up franchises. It aims to protect the purchaser by requiring the seller to provide enough information so the purchaser can make a more considered judgment about whether it will enter the contract. This information is provided through a prescribed disclosure document. This document must be updated annually and provided to all prospective franchisees and those who are looking to renew their contracts.
The contract this particular company used to licence its products was deemed to be a "franchise agreement", but because the company didn't realise it was creating a franchise, it didn't produce the disclosure document.
The Code also requires particular protective clauses about how to terminate the contract and how to resolve disputes. The company also didn't include these procedures in the contract. That was why it was fined. The court also found that the payments made for the licences were not enforceable.
Mr Graeme Samuel said, "This case reinforces that compliance is not optional but mandatory".
So even if you have a clear, mutually agreeable contract between your business and others who use or sell your products, be careful to consider whether the contract fits the criteria in the Code. If it does, you must comply with all the requirements of the code, at the time of entering the contract, through the term of the contract and particularly if there is a dispute during the term or if the contract is terminated because of a breach of the contract.
Source: Townsend Business & Corporate Lawyers
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