1 min read
30 Aug 2023
Legal disputes can result in potential or actual litigation which is never the desired outcome. Even minor disputes can damage relationships, tarnish brands, incur significant costs, as well as impact resources. Whilst most franchisors are now aware that class actions and ACCC crackdowns are becoming increasingly common, informed franchisors recognise that it is avoidable.
Understanding your obligations and seeking up-to-date legal advice is essential in reducing your exposure to liability and to minimise your chances of a dispute. In this article, we examine some of the most recent examples where things have gone “wrong” for franchisors and how you can avoid making the same mistakes.
Compliance with the Franchising Code of Conduct (Code) and the Australian Consumer Law (ACL) is now more important than ever. With the 2022 reforms to the Code imposing additional obligations on franchisors, the ACCC has greater enforcement powers and there are increased penalties for non-compliance of the Code.
The consequences of non-compliance of the ACCC’s Code include:
(a) expensive litigation; and, more importantly
(b) damage to your brand and a subsequent decline in attracting new franchisees.
Let’s look at some of the common pitfalls to avoid:
In 2019 Ultra Tune received a penalty in excess of $2 million dollars for Code non-compliance and misleading and deceptive conduct. Despite this costly mistake, the ACCC is once again pursuing Ultra Tune for failure to make timely and adequate disclosures to its franchisees.
The outcome of this case highlights the strict disclosure requirements and timeframes that the ACCC will enforce. It should serve as a warning to Franchisors of the hefty penalties for failure to meet Code obligations.
In the preliminary discussions and subsequent documents provided to a 7-Eleven franchisee, the franchise term was noted as 10 years. However, an accompanying explanatory note in the Franchise Agreement contradicted this, permitting the franchisor to end the franchise term on expiry of the lease, which essentially reduced the franchise term to 6-years.
The Court found the franchisor’s representation of a 10-year franchise term, despite the explanatory note, was misleading and deceptive conduct. The explanatory note was deemed insufficient as it was in small text with an asterisk and the words ‘Lease Term’, but, more importantly, was not brought to the attention of the franchisee. The Court emphasised the importance of highlighting disclaimers, especially when they may impact a franchisee’s rights.
Failure to adequately and clearly highlight a disclaimer which limits a franchisee’s or prospective franchisee’s rights under the Franchise Agreement, can result in a claim of misleading and deceptive conduct, as in the 7-Eleven case.
All businesses, including franchises, are required to comply with the Fair Work Act 2009. Failure to ensure your franchisees are complying with employment laws may result in a claim against you by the Fair Work Ombudsman. Headlines of “wage theft”, “underpayment” and “employee exploitation” can tarnish the most trusted brands.
Here are some examples of recent lawsuits against major franchisors.
Failure by McDonalds’ franchisees to provide 10-minute breaks to their employees has resulted in a $250 million class action against the fast-food giant.
The Fair Work Ombudsman commenced action against the café franchisor “85 Degrees” for failing to prevent the underpayment of staff and ineffective record-keeping by their franchisees. This may result in 85 Degrees being liable for the underpayments and penalties of every franchisee breach. An update on the outcome of this case will be provided in due course.
Failure to take steps to ensure that your franchise network complies with workplace legislation may result in you being liable for the conduct of your franchisees.
Each of these situations are characteristic of the legal challenges that franchisors constantly face. As the franchising industry becomes increasingly more regulated and scrutinised by enforcement agencies, getting the right legal advice is vital. At PCL Lawyers, we understand the significance of legal compliance in maintaining a franchisor’s brand and reputation. Our franchising lawyers are experts in advising franchisors on their rights and responsibilities, with a view to minimising their liability and preventing litigation. To ensure that your franchise system is meeting its legal requirements, contact PCL Lawyers’ franchise team.
Disclaimer: This article has been prepared for general information purposes and may not apply to your situation. This information should not be relied upon for legal, tax or accounting advice. Your individual circumstances will alter any legal advice given. The views expressed may not reflect the opinions, views or values of PCL Lawyers and belong solely to the author of the content. © PCL Lawyers Pty Ltd.
If you require legal advice specific to your situation please speak to one of our team members today.
Chris is an Accredited Commercial Law Specialist and a Partner at PCL Lawyers. Chris has approximately 30 years’ experience in commercial and property law. Chris has extensive expertise in complex...
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