In the decision of Leon Cycle Pty Ltd v Hi5 Scooters Pty Ltd and Jamal Raad Raad [2025] VCC 1914, Her Honour Judge Burchell held that a licensing agreement between Leon Cycle and Hi5 Scooters was not a franchising arrangement for the purposes of the Franchising Code of Conduct.
Background
In 2019, Leon Cycle Pty Ltd (Leon Cycle) commenced business in Australia.
Jamal Raad Raad (Mr Raad) is the Managing Director of Hi5 Scooters.
Around March or April 2021, Leon Cycle and Hi5 Scooters Pty Ltd (Hi5 Scooters) commenced discussions regarding an agreement by which:
Leon Cycle would supply bicycles and spare parts to Hi5 Scooters on consignment;
Hi5 would sell the bicycles in Leon Cycle branded stores;
customers would pay directly to Leon Cycle; and
a commission would be payable to Hi5 Scooters based on agreed rates.
On 3 June 2021, Leon Cycle and Hi5 Scooters executed the draft agreement (Licensing Agreement).
Between June and November 2021, Hi5 Scooters entered into an agreement with Ignotus Pty Ltd (Ignotus), a company run by Philip Rigoli (Mr Rigoli), the Non-Executive Director of Leon Cycle and Managing Director from 21 April 2020 to 31 December 2022.
Under that agreement, Ignotus was to provide consulting services, establish inventory management software, supply smart tags and assist with digital marketing.
Following a deterioration of the relationship between Leon Cycle and Hi5 Scooters, Leon Cycle issued a Default Notice alleging that Hi5 Scooters had breached the Licensing Agreement by:
failing to remit sale proceeds after 23 February 2024 to Leon Cycle;
authorising advertisements without Leon Cycle’s approval;
using Leon Cycle’s brand on a Hi5 Scooters website; and
using the name ‘Leon Cycle’ in its trading and corporate name.
On 24 July 2023, Leon Cycle issued a Notice of Termination.
Key Issues
The key issue for the Court was whether the arrangement between Leon Cycle and Hi5 Scooters had been a franchise agreement despite being called a licensing agreement.
Hi5 Scooters argued that the Licensing Agreement was actually a franchise agreement and that Leon Cycle had breached the Franchising Code of Conduct (Code) by:
not giving disclosure documents;
not acting in good faith; and
unilaterally changing the Licensing Agreement to impose onerous terms on Hi5 Scooters.
Hi5 Scooters also allege that terms of the agreement between Hi5 Scooters and Ignotus should form part of the Licensing Agreement and be considered in the determination of whether a franchise arrangement existed.
Court Findings
Judge Burchell held that the arrangement between Leon Cycle and Hi5 Scooters was not a franchise agreement and therefore the Code did not apply.
Clause 5(1)(d) of the Code provides that the application of the Code is limited to arrangements where the franchisee pays or agrees to pay to the franchisor or an associate of the franchisor an amount.
However, this was not the arrangement on the facts.
Pursuant to the Licensing Agreement, customers would directly pay Leon Cycle, and it would subsequently remit an agreed upon commission to Hi5 Scooters on a fortnightly basis. There was no arrangement for Hi5 Scooters to pay Leon Cycle.
Clause 5(1)(b) of the Code provides that a purported franchisee must be subject to a marketing plan substantially controlled by the franchisor.
While Leon Cycle had retained a level of control over matters relating to marketing, it was consistent with an interest to protect their brand. Their control was limited to providing guidance and training, with a discretion to veto or provide advice when necessary. Hi5 Scooters retained substantial control to make marketing decisions.
Her Honour also held that the agreement between Hi5 Scooters and Ignotus was distinct and separate from the Licensing Agreement between Hi5 Scooters and Leon Cycle.
Mr Rigoli entered into the agreement with Hi5 Scooters into his capacity as the sole director of Ignotus, not of Leon Cycle.
As a result, the Court found that the Code does not apply to the Licensing Agreement, as it was not a franchising agreement.
The Court further reiterated that because the Code is a mandatory industry code, the following criteria are not determinative of whether an arrangement is a franchising agreement between the parties:
the subjective intention of the parties; or
the inclusion or exclusion of the words ‘franchise’, ‘franchisee’, ‘license’ or ‘licensee’ in the Licensing Agreement.
Key Takeaways
When considering whether a proposed arrangement is captured by the requirements mandated under the Franchising Code of Conduct the use of branding is not solely determinative in establishing that a franchise arrangement exists.
To establish a franchise arrangement, it is critical that:
the franchisor substantially controls the business model and marketing of the franchisee;
third party arrangements will not usually be able to be used to create a franchise relationship unless it is contingent to the parties entering into the primary contract.
If you would like to discuss this article or issues it raises please contact:
Alicia Hill
Principal
T: +61 3 9611 0180 | M: +61 484 313 865
E: ahill@sladen.com.au
Penny Qin
Law Clerk
E: pqin@sladen.com.au
This article was originally published on the Sladen Legal website: The line between licence and franchise: is the agreement a franchise?
