Franchising has become a popular business model globally, offering entrepreneurs the opportunity to own and operate a business under an established brand. The franchising industry in Australia has seen significant growth over the years, contributing to economic development and employment opportunities. However, amidst the success stories, there have been instances of misleading and deceptive conduct in franchise agreements, raising concerns about the fairness and transparency of such arrangements.
UNDERSTANDING FRANCHISE AGREEMENTS
A franchise agreement is a legally binding contract between a franchisor (the owner of the brand) and a franchisee (the individual or entity operating the business). These agreements typically outline the terms and conditions governing the relationship, including the rights and responsibilities of both parties, financial obligations, and operational guidelines.
LEGAL FRAMEWORK AGAINST MISLEADING AND DECEPTIVE CONDUCT
Australia has comprehensive laws in place to protect franchisees from misleading and deceptive conduct. It is the franchisor’s responsibility to ensure that it abides by the law.
Misleading and deceptive conduct refers to any action that creates or likely creates a false impression or misleads another party. The Australian Consumer Law (ACL), under the Competition and Consumer Act 2010, prohibits a person in trade or commerce engaging in conduct that is misleading or deceptive or likely to mislead or deceive another person.
In the context of franchise agreements, this could involve false representations about the profitability and revenue of the business, the suitability of the premises, the level of support provided by the franchisor, or the overall success of the franchise model. The representations can be made via the franchisor’s employees or documents supplied to the franchisee. It is irrelevant if the franchisor did not intend to mislead or deceive the franchisee or if the franchisor merely omitted information that it ought to have disclosed to the franchisee. If evidence suggests that the franchisor’s conduct would likely mislead or deceive the franchisee, the franchisee may bring an action against the franchisor.
The Franchising Code of Conduct (Code) is a mandatory industry code that regulates the conduct and relationship of franchisors and franchisees. The Code sets out requirements for disclosure, dispute resolution, and the overall fairness of franchise agreements.
The ACL provides avenues for franchisees to seek legal remedies in case of breaches. The Australian Competition and Consumer Commission (ACCC) plays a crucial role in enforcing compliance with the Code and the ACL. In cases of proven misleading and deceptive conduct, the ACCC can take enforcement action, including issuing infringement notices, seeking court orders, or pursuing civil penalties and damages.
COMMON FORMS OF MISLEADING CONDUCT IN FRANCHISING
FINANCIAL PERFORMANCE REPRESENTATIONS
Franchisors may be tempted to present optimistic financial projections to attract potential franchisees. However, if these representations are not based on realistic data or are intentionally inflated, they can be deemed misleading. Predictions concerning the future must not be made as promises or without reasonable grounds.
FAILURE TO DISCLOSE MATERIAL INFORMATION
Franchise agreements often require the disclosure of certain information, such as financial statements, litigation history, or any known risks associated with the business. Failure to provide accurate and complete information can lead to claims of misleading and deceptive conduct.
UNFAIR CONTRACT TERMS
Franchise agreements containing unfair contract terms, such as one-sided clauses heavily favouring the franchisor, can be considered misleading and deceptive. The ACL provides protections against unfair contract terms, and the ACCC closely monitors compliance.
The IP House Lawyers has assisted many franchisors and franchisees in drafting and reviewing franchise documents to ensure compliance.
For any further information or queries on the above content, please contact the authors or the key contact below.
The Author
Jean Kallmyr | Lawyer, The IP House Lawyers | t: 0435 799 831 | e: admin@theiphouse.com.au
Key Contact
Claire Darby | Managing Director/Lawyer, The IP House Lawyers | t: 0412 998 951 | e: claire@theiphouse.com.au
Disclaimer
The information and contents of this publication do not constitute any legal or financial advice. This publication is intended only for reference purposes for The IP House Lawyers’ clients and prospective clients.
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