Franchising During Covid-19

COVID-19 and the accompanying restrictions have presented many uncertainties and challenges for both franchisees and franchisors.

During this time, it is important that both parties are aware of their obligations under the Franchising Code of Conduct and other relevant frameworks to ensure a constructive and flexible working relationship.

The Code

During COVID-19, it is important both franchisees and franchisors are complying with the Franchising Code of Conduct. This is a mandatory industry code providing various obligations on parties to a franchising agreement, for which many provisions include civil penalties for contraventions. These obligations include disclosure requirements, dispute resolution mechanisms, cooling-off periods and procedures for ending franchise agreements.

Perhaps the most notable under the Code, is the requirement for both franchisees and franchisors to act in good faith. This essentially means acting honestly and extends to acting with due regard to the rights and interests of the other party. It is important to note that this good faith obligation does not prevent parties from acting in their own legitimate commercial interests.

Some key considerations as to whether a franchisor is acting in good faith include:

  • Whether the franchisor has consulted franchisees when issues or proposed changes arise
  • Whether unnecessary conditions have been imposed on franchisees
  • Whether the franchisor has made timely decisions; and
  • Whether the franchisor has acted with an ulterior purpose.

Australian Consumer Law

Franchisors must also comply with Australian Consumer Law which prevents them from acting unconscionably in their dealings with franchisees and misleading current and potential franchisees. They are also required to warn of unfair terms in contracts which cause significance imbalance.

When a franchisor does act unconscionably or not in good faith, a franchisee may report this contravention to the ACCC.

What these obligations mean during COVID-19

Where a franchisees’ services have been directly impacted by COVID-19, it is recommended they communicate with their franchisor to discuss options for adjusting fees and payments as well as contractual obligations during this period.

A franchisee may consider asking their franchisor to delay, suspend or reduce fees such as marketing or service fees on the basis of reduced income. In order to continue trading, franchisees may also ask for changes to business practices or services provided such as adjusting opening hours.

Where payments for marketing funds or royalties are altered or suspended, it is important to ensure corresponding obligations are still being met. It may be the case that parties agree to a ‘standstill arrangement’ where these rights and corresponding obligations are both suspended during this time.

Franchisors have an obligation to proactively review services and costs passed on to franchisees which require them to consider whether it is appropriate to cancel or suspend these services and costs during this turbulent time.

It is important to ensure both parties have received independent legal advice before signing any agreement or variation to ensure it is put in writing and drafted appropriately.

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