What is the Contract formation process in franchising?

We recently set out what documents are typically included in the Franchise Suite of Documents, and their purpose. Once a franchisor has all these documents prepared and a prospective franchisee in the wings, it is important to ensure the proper contract formation process is followed. The Franchising Code is prescriptive concerning some time limits and when certain documents need to be provided, so this is not merely best practice, but also legally required. Adhering to the requirements of the Franchising Code with respect to contract franchisors will ensure franchisors avoid potential penalties and other less-than-desirable legal ramifications.

Step 1NDA and Information Statement – before any key documents are signed, a franchisor should have a prospect sign a Non-Disclosure Agreement (NDA). This should be signed by all relevant parties, namely by any corporate prospective franchisee and its directors/ key personnel. Having a properly drafted NDA will protect the franchisor from unauthorised disclosure of the contents of its Franchise Suite of Documents, and any other confidential information provided during the negotiation process. It will also ensure the prospect cannot rely on the information for any other purpose (i.e., to set up in competition). Where the Franchising Code requires the Information Statement to be provided ‘as soon as practicable, and not later than 7 days after the prospective franchisee formally applies or expresses an interest in acquiring a franchised business’ (see clause 11), it is best practice to provide the Information Statement together with the NDA.

Step 2Provision of Template Franchise Suite (and optional receipt of deposit) – after the NDA is signed, the franchisor may provide to the prospective franchisee its Template Franchise Suite, being the Franchise Agreement (unpopulated for the relevant proposed grant), the Disclosure Document, the Key Facts Sheet, a copy of the Franchising Code itself, and any relevant lease documents. Commercially, this Step 2 should only occur if the franchisor believes the prospect would make a good franchisee, and should follow a process of consultation and due diligence. A franchisor may also (but is not required to) take a deposit from the prospective franchisee at this stage. Importantly, if a franchisor does take a deposit, they must not characterise that deposit as ‘non-refundable’, where the Franchising Code requires the disclosure period to have elapsed before receipting any non-refundable amounts (see clause 10).

Step 3 – Provision of Customised Franchise Suite – typically, the franchisor will then provide the Customised Franchise Suite. In most cases, lawyers will be engaged by the franchisor to prepare the Customised Franchise Agreement, which will list all the parties and other schedule items (such as fees and the term/ commencement date), and incorporate any relevant special conditions. A Documentation Fee (usually about $3,000 + GST) is typically charged by the franchisor to the franchisee to cover the costs of having lawyers prepare the documentation.

Step 4Expiration of Disclosure Period – The franchisee must have the Franchise Suite for 14 days before they can sign the Franchise Agreement (see clause 9). It is not entirely clear if this 14-day period is triggered by the provision of the Template Franchising Suite (i.e., the unpopulated version), or only commences on the provision of the Customised Franchise Suite (that is, where the Franchise Agreement has been completed for the specific franchise grant). Here, the Franchising Code provides the Franchise Agreement must be given ‘in the form in which it is to be executed’ (see clause 9) but goes on to say the 14 days is not restarted if the Franchise Agreement is amended ‘to give effect to a franchisee’s request, to complete required particulars, to reflect changes of address or other circumstances, for clarification of a minor nature, or to correct errors or references’ (see clause 9). While it is arguable the insertion of the franchisee’s details and other schedule items could be characterised as ‘required particulars’, this is a grey area of law. The best practice then to err on the safe side is to provide that Customised Franchise Suite before commencing the 14-day disclosure period.

Step 5 – Execution – once the Franchise Suite has been provided, the 14-day disclosure period has expired, and any negotiations are concluded, the documents should be executed. The Franchise Agreement must be first executed by the franchisee parties (being any corporate franchisee, the guarantor/s and any named principal or nominated person). This is because the Franchising Code requires the franchisee to sign statements that the prospective franchisee has been provided advice by a legal advisor, business advisor or independent accountant, or that the franchisee has been told that kind of advice should be sought but decided not to seek it (see clause 10). These statements must be provided by the franchisee to the franchisor ‘before a Franchise Agreement is entered into’, hence these should be provided before the Franchisor signs on the dotted line and the contract is formed. Typically, a lawyer will coordinate execution, which may occur electronically or in hard copy, to ensure execution has been correctly carried out.

Step 6 – Cooling Off Period – once the Franchise Suite is signed by all parties, the Franchise Agreement becomes a binding contract and the cooling off period commences. Here, the Franchising Code provides a franchisee may terminate a franchise agreement within 14 days after entering into the agreement (see clause 26). If a franchisee exercises those cooling-off rights, the franchisor must, within 14 days, repay all payments made by the franchisee to the franchisor connected with the agreement, less its reasonable expenses, provided those expenses or their method of calculation were set out in the Franchise Agreement.

As you can see, the process of entering into a Franchise Agreement has numerous legal requirements and various steps. If you need any assistance with a franchise grant, we would love to help. Please contact us .

Disclaimer: This article contains general information only and does not constitute legal advice. Magnolia Legal disclaims any liability arising from reliance on this article. Our terms of use apply