Remedies Available to Franchisees for Misleading and Deceptive Conduct

In Short

• Misleading and deceptive conduct by franchisors can include false advertising, misleading financial statements, or verbal misrepresentations.
• Franchisees can seek remedies through Australian consumer law, including compensation or contract termination.
• The ACCC can investigate serious breaches and impose orders to address misconduct and prevent future violations.

Tips for Businesses

Ensure all promotional materials, financial data, and verbal statements are accurate and not misleading. Fulfil your disclosure obligations under the Franchising Code of Conduct. Train your team on compliance to avoid breaches. Clear, honest communication with franchisees builds trust and reduces legal risks.

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Table of Contents

• Types of Misleading and Deceptive Conduct
• Remedies for Franchisees
• ACCC Intervention
• Common Law Protections
• Key Takeaways
• Frequently Asked Questions

Some franchisors engage in misleading or deceptive conduct during the initial stages of selling a franchise to a prospective franchisee. They might withhold certain information or misrepresent details in their offer or initial negotiations. As a franchisee, you may be frustrated and disappointed if the franchisor makes specific promises to induce you to enter into a franchise agreement, which turns out to be false. This article explores remedies available to franchisees where a franchisor has engaged in misleading and deceptive conduct.

Franchisor Guide to Misleading and Deceptive Conduct

As a franchisor, you must not engage in misleading and deceptive conduct. We explain what it is and how to avoid it.

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Types of Misleading and Deceptive Conduct

Misleading and deceptive conduct by franchisors can come in many forms, including:

• marketing or promotional materials by the franchisor, such as advertisements, brochures and exhibition demonstrations;
• operational documents provided to franchisees, such as misleading financial statements and sales data; and
• misleading statements or other verbal representations made to a franchisee.

Franchisors must comply with their disclosure obligations under the Franchising Code of Conduct. They are required to disclose certain information to the franchisee. The heavy disclosure obligations on franchisors aim to reduce the risk of franchisees being misled or deceived.

Remedies for Franchisees

If you negotiate with a franchisor before entering into a franchise agreement, obtain legal advice concerning any potentially misleading or deceptive terms. A legal professional can help you better understand the implications of the deal. They can ensure that you make an informed decision while addressing specific issues in the franchise agreement that may lead to a misleading or deceptive contract. 

Under the Competition and Consumer Act 2010 (Cth) (the Act), protections and remedies are available for franchisees who have received misleading conduct and misrepresentations by franchisors. These protections are in addition to the protections under common law for misrepresentations one party makes to another before they enter into a contract.

Through this, Courts have broad discretionary powers to order damages to franchisees who can prove they have suffered loss due to such conduct. It is important to note that this statutory remedy does not automatically result in the franchise agreement being voided. The court’s decision to award damages is discretionary and depends on the specific circumstances of each case. For a successful claim, franchisees must establish that their loss occurred as a direct result of the franchisor’s breach of the Act. The key focus is on the consequence of the misleading or deceptive conduct, not just the misconduct itself or the mere existence of damage.

ACCC Intervention

One of the key remedies franchisees have available to them is contacting the Australian Competition & Consumer Commission (ACCC). The ACCC is an independent Commonwealth statutory authority. They enforce the Act and other legislation to promote competition and fair trading. Once you alert the ACCC to the potential misleading or deceptive conduct, they may undertake the following to remedy the issue: 

1. Compensation Order 

Suppose the ACCC finds that a franchisor has engaged in misleading or deceptive conduct, causing financial harm to a franchisee. In that case, they may issue an order requiring the franchisor to compensate the affected party. This compensation aims to place the franchisee back in the position they would have been in had the misconduct not occurred. The amount of compensation will depend on factors such as the extent of the loss suffered and the nature of the misleading or deceptive conduct.

2. Adverse Publicity Order 

This order requires the franchisor to acknowledge their wrongdoing publicly. This can have significant reputational consequences. The franchisor may be required to publish notices in newspapers, their website, or other relevant media. They may have to detail the nature of their misconduct and the steps to rectify the situation.

3. Non-Punitive Orders

The ACCC may sometimes issue non-punitive orders to promote compliance and prevent future breaches. These orders can take various forms, such as:  

• requiring the franchisor to undergo educational training on lawful marketing practices; 
• implement comprehensive compliance programs; or 
• perform community service.

These orders aim to address the primary cause of misconduct and ensure it does not happen again.

4. Disqualification Order 

In more serious circumstances, the ACCC may seek a disqualification order against a franchise director, preventing them from managing a corporation for a specified period. This severe sanction is typically reserved for individuals who have engaged in egregious or repeated breaches of the law. This order protects the public and future franchisees from directors disregarding their legal obligations. 

The ACCC will assist in the most serious cases where serious breaches are in the public’s best interest and must be addressed. 

Common Law Protections

Under the common law, a franchisee induced into entering a franchise agreement because of a franchisor’s misrepresentations may be entitled to terminate the franchise agreement. 

Notably, a franchise agreement is a legally binding contract. Before terminating it, be sure you understand your legal rights and follow the correct process for termination. Otherwise, you may breach the contract. Seeking legal advice from a franchise solicitor is invaluable. Further, a court may award you damages (monetary compensation) if your solicitor can prove the misrepresentation occurred and you relied on it to your detriment.

However, it is quite challenging to prove that a misrepresentation occurred. As a franchisee, keep files of all communications before and after entering into a franchise agreement. When a franchisor has made misrepresentations, these filings will demonstrate a story and show that you relied on these to your detriment. 

Key Takeaways

Buying a franchise can be an exciting step in your business journey. However, when negotiating with a franchisor about the franchise business, be wary of misleading and deceptive conduct. Certain advertising material, operational documents and communications with the franchisor might induce you to sign a franchise agreement. If you rely on certain misleading information to your detriment, you have remedies under Australian consumer law and common law. Further, the ACCC can investigate the issue and impose various orders. 

For guidance on how to proceed when you believe a franchisor has misled or deceived you, our experienced franchise lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.

Frequently Asked Questions