The question of what is a franchise and how does it differ from other business agreements is one of the most common questions. So exactly when is a business a franchise, even if it doesn’t call the arrangement it has with its resellers a Franchise Agreement?

There are many different options out there for businesses that are seeking to expand via owner-operator style agreements, with franchising just one of them alongside the likes of distributorships, licensing and agents.

However, if it looks, smells and tastes like franchising in everything but name then it is most likely to be a Franchise Agreement and all parties will need to operate within the Franchising Code of Conduct.

This important issue of whether or not some other form of agreement in fact constitutes a Franchise Agreement came under the spotlight in a court ruling – Workplace Safety Australia v Simple OHS Solutions Pty Ltd [2015] NSWCA 84.

This case clearly highlights the consequences that can arise when compliance with the Code has not been met, regardless of what you and your reseller call the agreement.

The message is that if you are a business owner seeking to deliberately structure your agreements in ways to avoid being captured under the Code, then it won’t work. Calling them something else, such as a distributorship, when it is in effect a Franchise Agreement and is deemed as such by the courts, can prove costly.

In this case, Workplace Safety Australia (WSA) and Simple OHS Solutions Pty Ltd (Simple) had entered into a Distribution Agreement, whereby Simple agreed to act as distributor for WSA.

The Distribution Agreement was unsuccessful and WSA terminated the contract on the grounds that Simple had failed to pay one of the quarterly instalments and had also failed to meet the customer subscription requirement of the Distribution Agreement.

The main issue considered by the court was whether the Distribution Agreement in fact amounted to a Franchise Agreement within the meaning of the Code.

The Court ultimately ruled that there was a Franchise Agreement in place and accordingly WSA was not entitled to terminate without complying with the relevant provisions of the Code. This meant WSA’s termination was wrongful and Simple was entitled to recover the loss suffered as a result of entering into the agreement.

As well as being an adverse and no doubt costly ruling against a company claiming to be offering something that was in effect a Franchise Agreement, this case is yet another reminder of the importance of due diligence.

For those entering into agreements, it is crucial to closely consider the true substance of what is being offered, not just the name given to it, prior to entering into a contract.

Business owners on both sides of an agreement need to thoroughly investigate all of the options available to them, understand exactly what is involved with each, and then select the optimum model that is best suited to their individual business.

Franchising is not for everyone, but its foundations are clear and the Code is very accessible and succinct in articulating what constitutes a Franchise Agreement. If all parties start from a basic understanding of knowing exactly what they are getting into, then there is a greater chance of creating more successful and sustainable agreements.

The significance of the above case stems back to a business prudently deciding what form of agreement, franchise or otherwise, is best suited to the successful expansion of their business. This decision needs to be made on these grounds alone, not just for the purposes of avoiding compliance under the Code.

Thinking that you can’t afford the cost of compliance is a very short-term saving. The requirements of the Code are not that onerous and in many ways just make plain business sense.

Why, for example, would a business deliberately not have a marketing plan or trademark, just to avoid compliance, when this would have an obvious detrimental effect on their business? This sort of approach would also put off potential owner-operators willing to invest in your business, therefore decreasing the total pool of talent available for expansion.

For prospective business owners entering an agreement, whether you are to be a distributor, agent, licensee or franchisee, it is very important to fully understand exactly what you are signing up to.

If someone is offering a distributorship or license, investigate it fully. Ask yourself is this actually a franchise in everything but name and if so, what do I need to be doing or expecting in line with the requirements of the Code?

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