Franchising FAQ - Relevance of the Trade Practices Act 1974 (Cth.) to franchise agreements?

Date: March 04, 2011

Q. What is the relevance of the Trade Practices Act 1974 (Cth.) to franchise agreements?

A. Most franchise agreements attempt to impose some form of contractual restriction on the trading freedom of the franchisee.  An example is a franchise agreement that restricts sales outside a particular territory or an agreement that mandates that only certain goods or services may be sold by the franchisee, or an agreement which contains other supply or pricing restrictions. 

The Trade Practices Act imposes severe penalties on franchise agreements that have not been properly considered by legal advisors.  An example is Section 47 (6) which prohibits third line forcing.  In a franchising context, this provision has the effect of prohibiting absolutely any provision in a franchise agreement that requires the franchisee to purchase goods or services from a third party.  Prohibition applies even if the third party is a related party of the franchisor.  Any "approved supplier" type provisions therefore need to be very carefully scrutinized.  Lawyers practicing in this area need to be aware of the structure of Section 47 (6) or use the notification processes under the Trade Practices Act to gain dispensation for conduct.  Section 45 and Section 4D of the Trade Practices Act are also relevant in circumstances where market sharing arrangements are established by competitors.  For instance, where a franchisor distributes goods or services through other channels as well as through the franchise channel, or has a significant number of company stores, it may be that the franchisor and franchisee are competitors.  Accordingly, arrangements in the franchise agreement for exclusive territories and other contractual provisions could breach the Trade Practices Act and expose all parties to substantial fines.  Similar problems can arise where a group of competitors establish a buying group or co-operative.  Another problem relates to the price-fixing provisions contained in Section 45A of the Trade Practices Act.  In simple terms, a franchisor cannot stipulate the prices at which franchisees sell their products.  Franchisors often wish to do exactly this.  Lawyers will need to be able to find ways of achieving the desired commercial objectives without breaching the Trade Practices Act.