• Internal Code :
  • Subject Code : MGL1112
  • University : University of wisconsin
  • Subject Name : Law

Case Study: Franchise Law Assignment

Brief Facts

Sunny is a career academic who decides to be an entrepreneur. For starting his business, he needed capital worth $50,000, which he borrowed from his parents. He went to company 7-11 who promised to set up his business. For that, he had to enter into a licence agreement and payment of fees. According to that agreement,7-11 had the authority to change the interiors of the business as per their own will, to which Sunny agreed too. The 7-11 forced Sunny to change the interiors of the company with new colours. Sunny ran out of the capital so he hired Steven, an international student to pay cash. He worked for 60 hours a week on a non-pay slip basis. Steven tells this thing to his friend who suggested him to intimidate the Fair Work Australia. Fair Work Australia called Sunny and asked him to pay Steven wages and superannuation. In lieu of this, he shut down his business.

Issue-

  1. Does he have any rights and remedies against 7-11?

  2. Is sunny responsible to pay Steven superannuation and PAYG tax?

  3. Sunny parent’s rights to recover their loan from Sunny?

Application

(i) The Franchising Code of Conduct is an essential code that regulated the franchising and the conduct of the parties towards each other in Australia. It focuses on promoting growth and reduce red-tapism by encouraging an amicable business environment for the franchisor and the franchisee. It dates back in 1998 when this code was made and recently revised in 2015 as the Franchising Code of Conduct (Code) (Australian Competition and Consumer Commission, 2020). Also, a new Unfair Contract Terms (UCT regime) was enacted under the Australian Consumer Law (ACL) in 2016. It regulates the bargaining power between the franchisor and the franchisee (Verebes & Tan, 2017). It contains the disclosure agreements, the good faith part from both of the parties, various dispute resolution mechanisms like institutional or ad-hoc, the cooling-off period and various other for ending the franchising agreement (Australian Competition and Consumer Commission, 2020).

As per the code, a contract between the franchisor and franchisee does not come into existence unless a short term statement is issued in favour of the franchisee warning him about the risks and intimidating about the rewards under the agreement; a copy of code is to be given so that the franchisee is accustomed to all the responsibilities and duties on his part; a copy of the disclosure agreement stating that the contract between them is a confidential one and the disclosure of which may result in termination of the contract or any legal cases going on against the franchisor pr whether he has been bankrupt before, the number of franchises he owns or the financial reports etc; and a copy of the franchise agreement. All this paperwork should be provided to the franchisee at least 14 days prior to the entering in an agreement (Verebes & Tan, 2017).

This period of 14 days is essential for the franchisee to conduct due diligence. If the franchisor is leasing the franchisee any premises, so for that he needs to give a rent agreement or a copy of a lease or sub-lease and the benefits he shall receive as a landlord (Verebes & Tan, 2017). Along with these, the code provides other protections too like the obligation of acting in good faith by both of the parties; taking consent of the franchisor if in future one wishes to transfer the franchise to someone else; regarding termination where the franchisor has to give the franchisee a prior notice unless the franchisee acted fraudulently which shall lead to termination of the contract by the franchisor; and the dispute resolution mechanisms.

About the termination of the agreement, after conducting due diligence, if the franchisee is not satisfied and feels some sort of perils in entering into a contract, then the code gives him a cooling-off period. In this, the franchisee can terminate either the agreement to enter into an agreement, or if he did enter into an agreement before he has seven days to terminate that, or can terminate is any payment is to be made to the franchisor, whichever is earlier. This mechanism of cooling off only applies when a new agreement and not for renewals, transfer type of agreements (Verebes & Tan, 2017).

The UCT regime is for further protecting the franchisee from unfair businesses. It is applied on standard form of contract and small businesses contract and if any term of a contract is unfair. The standard form of contract means where the franchisee is not able to negotiate a healthy agreement with the franchisor and did enter into a contract (Verebes & Tan, 2017). This happens when the franchisor plays a hard ball of having the same agreement for all the other franchisees and would not alter it on the basis of negotiations. A small business contract is where at the time of entering it the franchisor and the franchisee has less than 20 employees and the upfront amount is less than $300,000 or $1,000,000 if the contract is beyond 12 months. Unfair term/s in a contract means when any of it causes and a substantial amount of imbalance to the rights and obligations of the parties or where the terms do not have to be there just to serve the interest of the franchisor or shall be injurious to the franchisee in future (Verebes & Tan, 2017).

Hence, the remedy that Sunny can claim against 7-11 is that the contract or the licence agreement between the two is void. The agreement does not conform to the set standards for the Code. The reason, when Sunny came to 7-11 to start the business they did not give him the time of 14 days to conduct his due diligence. 7-11 did not give any short information statement or the copy of the code or any disclosure agreement whatsoever needed by Sunny to know the business well. There has to an adequate term of the contract between the two which should entail all of the above information along with clauses which may lead to termination of the contract or the dispute resolution mechanisms, etc. he handed over a license agreement which also does not justifies the fact that that agreement gave 7-11 to make any changes as per their will in the interiors of the business. Along with that, assuming the fact the agreement did give 7-11 the right to change the colours of the interiors of the business, so how come they asked Sunny to pay for the changes to be made. 'The payment of fees' is very ambiguous as it does not tell that it is payment for entering into a contract as a franchisee or payment for the licence agreement. Therefore, the contract between the two is void and Sunny can claim this.

(ii) Superannuation (super) is an amount that an employer sets aside for the employee to live or for his retirement life. An employee can withdraw this after attaining senior-citizenship meaning above 65 years of age. The eligibility of this is that the employee has to be either 18 or above of age and is paid $450 or more before his tax in a calendar month or if below than 18 years, being paid $450 or more before tax in that calendar month and working more than 30 hours a week. This concept is applicable for all types of employees whether working on a casual basis or part-time basis or full-time basis. It also applies to temporary residents situated in Australia (Australian Taxation Office, 2020).

From July 2014 the rate at which the employer is entitled to pay this at the rate of 9.5% of the ordinary time earnings of the employee. 'ordinary time earnings' is what an employee incurs working for the employer at an ordinary period. This includes the over-award payments, bonuses, allowances and paid leaves. This does not include the over-time payments (Australian Taxation Office, 2020). The employees are entitled to choose the super fund they want to be contributed into. If an employee is eligible, then within 28 days of his working for the employer's hand over a standard choice form to make a choice. If the employee does not do that or does not want to choose himself, the employer does that (Australian Taxation Office, 2020).

For the payment of PAYG (Pay As You Go), the employer has to huge role to play in it. The employer is bound to withhold payments to their employees who have to meet their tax liabilities at the end of the year (Australian Taxation Office, 2020). This is not just limited to the employees but also to contractors whom the employers have an agreement with or businesses that do not their Australian business number (ABN) (Australian Taxation Office, 2020).

A few things that the employer should consider is that he must be registered with the PAYG withholding before he starts with withholding the employees' payments. If the employer is no longer an employer anymore, then he should de-register himself from the PAYG withholding. The employees have to check, before working for anyone that the employer is a registered employer in Australia (Australian Taxation Office, 2020).

In the given problem, Sunny employed Steven to work for him to renovate the store as required by 7-11. He was an international student and was working 60 hours a week with no pay-check. As per the taxation policy of Australia and the Fair Work Act, the employer is entitled to pay his employees the superannuation and PAYG. The given problem being silent on the part that what is the age of Steven so we shall consider the fact that superannuation is not just limited age-wise but on the type of employment as well, like casual employment, part-time employment etc. the employer is entitled to pay 9.5% minimum as super to his employees. Since Steven is an employee of Sunny, though on a contractual basis only, Sunny has to pay him superannuation amount.

For the PAYG, Steven being the employee of Sunny, he is entitled to pay him PAYG as Steven has to pay his taxes at the end of the year. Before he does that, Sunny has to be enrolled in PAYG withholding. This mechanism is not subject to being registered in PAYG withholding. The employer has to register even if he does not withhold this.

(iii) For a contract to be legally binding there have to be six elements of a contract. First, intention to create a legal relationship, second, and offer, third, an acceptance, fourth, the capacity to form a legal relationship, fifth, consideration and sixth, the contract should be legal.

For a family contract, there is this assumption that the intention is not necessary. There is this presumption that in time of repudiation of the contract, the family members shall not sue. But this is not universal. It depends upon subjective perception. Legally it can be challenged if the plaintiffs can prove that due to the repudiation of the contract, their economic condition got changed substantially. This means that if the plaintiff can show that the breach had cost him a lot and that had disturbed their financial stability.

The breach of contract happens when the main term of the contract is vitiated and that resulted in a major loss to be suffered by the plaintiffs. The plaintiffs can either cancel the contract or sue for damages, this is the only option they are left with.

As for Sunny's parents, they can sue Sunny for breaching the contract and claim the damages. For this they have to show that their financial stability was infringed as the money which they gave Sunny, $50,000 was a part of their savings. They had kept it for their retirement and now when Sunny refused to pay it then that has left them in a very precarious position. Since the family contracts are subjective contracts meaning though it is presumed that family won't turn around for breaching the contract, still it is subject to each family idols. Hence this cannot be termed to be a universal fact that breaching a family contract won't get questioned.

Conclusion-

To sum it all, Sunny does not owe to 7-11 as there was no valid contract between the two. 7-11 did not follow the code and hence he can not blame Sunny for leaving the business high and dry. The reason, when Sunny came to 7-11 to start the business they did not give him the time of 14 days to conduct his due diligence. 7-11 did not give any short information statement or the copy of the code or any disclosure agreement whatsoever needed by Sunny to know the business well. There has to an adequate term of the contract between the two which should entail all of the above information along with clauses which may lead to termination of the contract or the dispute resolution mechanisms, etc. he handed over a license agreement which also does not justifies the fact that that agreement gave 7-11 to make any changes as per their will in the interiors of the business.

For the payment of super and PAYG to Steven, so yes Sunny being his employer is bound to pay him this as per the Fair Work Commission. As per the taxation policy of Australia and the Fair Work Act, the employer is entitled to pay his employees the superannuation and PAYG. The given problem being silent on the part that what is the age of Steven so we shall consider the fact that superannuation is not just limited age-wise but on the type of employment as well, like casual employment, part-time employment etc. the employer is entitled to pay 9.5% minimum as super to his employees. Since Steven is an employee of Sunny, though on a contractual basis only, Sunny has to pay him superannuation amount.

For the legal implication that Sunny's parents have against him so yes they can bring a suit against him as he didi breached the essential term of the contract that is to pay $50,000 within 12 months. For this they have to show that their financial stability was infringed as the money which they gave Sunny, $50,000 was a part of their savings. They had kept it for their retirement and now when Sunny refused to pay it then that has left them in a very precarious position.

References

Australian Competition and Consumer Commission. 2020. Franchising Code. Retrieved from https://www.accc.gov.au/business/industry-codes/franchising-code-of-conduct/franchising-code

Australian Taxation Office. 2020. Your superannuation basics. Retrieved from https://www.ato.gov.au/General/Other-languages/In-detail/Information-in-other-languages/Your-superannuation-basics/

Australian Taxation Office. 2020. PAYG withholding. Retrieved from https://www.ato.gov.au/Business/PAYG-withholding/

Verebes, C & Tan, C. 2017. Australia: Franchising & the law - Important changes. Retrieved from https://www.mondaq.com/australia/franchising/576088/franchising-the-law--important-changes

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