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In franchising, it is common for franchisees to allege that the franchisor has engaged in misleading or deceptive conduct, causing the franchisee loss. Misleading or deceptive conduct allegations may be made in relation to any conduct of the franchisor, either prior to the franchise agreement being signed or during the term of the franchise agreement. Commonly, claims of this nature relate to pre-contract warranties or representations, i.e. statements made by the franchisor to lure the franchisee to enter into the franchise agreement, which transpire to be false or misleading. There are multiple ways that a franchisee could raise such an allegation. This includes through a notice of dispute or the issuance of a letter of demand. This article will discuss the key factors to consider if a franchisee raises a claim and the steps we recommend franchisor’s take upon receipt of notification of such a claim. 

Step 1: Understand the Franchisee’s Allegation

If you, as a franchisor, have received notification of such a claim, it is important you first get a clear and unequivocal understanding of: 

  • the exact conduct or representation it is alleged was misleading; 
  • why the franchisee alleges it was misleading; and 
  • what damage the franchisee says has been caused.  

Even if you do not believe the conduct occurred, misleading or deceptive conduct claims need to be taken seriously. This is because they can have serious repercussions on franchisors. If the nature of the allegation is not entirely clear, you should seek further detail or particulars from the franchisee. You can seek this on a ‘without admission’ basis (i.e. without admitting the conduct occurred). Given the ability for words to be construed in different ways, it is recommended (particularly in the case of alleged oral representations) you ask the franchisee to set out exactly, word for word, what they believe was said. To the extent the franchisee relies on any particular documentation, you should also seek copies. 

Step 2: Assess the Validity of the Claim

Once you have a clear understanding of exactly what is alleged (the claim), you need to undertake an internal assessment to determine if the claim has merit and if you, as the franchisor, are vulnerable to such a claim being successfully pursued. As a franchisor, you (or your representatives) are continuously in communication with franchisees. It is very easy for words to be misconstrued or taken out of context. It is essential to get a complete understanding of what was communicated, prior to responding to the claim in any formal way. Particularly in the context of such claims made concerning pre-contract representations.

Here, you should internally:

  1. review any representation any of your staff members or agents may have made relating to the claim. Representations include, for example, emails, notes of meetings, and text message exchanges;
  2. review any correspondence between the parties that may relate to the claim, including which contradict it or bolster the claim; and
  3. talk to your team members, and get their position of what was said relative to the claim. 

You also should review your franchise agreement, disclosure document and any other ancillary documents at this stage. These documents will provide a framework regarding your contractual rights and obligations in dealing with misleading or deceptive conduct claims. It may well be, for example, that a franchisee signed a deed of prior representations that contradicts what is now claimed. This will assist you in responding to the claim. 

Step 3: Revisit the Code

Prior to taking any steps, familiarise yourself with the Franchising Code of Conduct (the Code) and the dispute resolution procedure set out therein. Doing this will give you an idea of the steps you must take in responding to the allegation. It will also inform you of any applicable time limits you will need to comply with. 

Step 4: Get advice

You should seek legal advice if there is any grey area. In other words, seek legal advice if the claim appears to have some merit, even if you can counter it with contemporaneous documents or similar. That advice can identify: 

  • if there are any merits to the claim;
  • the initial view on prospects;
  • the potential repercussions for the franchisor;
  • any risk mitigation measures recommended; and
  • if required, how you should respond to the claim. 

Step 5: Communicate Clearly with the Franchisee

Importantly, we do not recommend responding to such a claim until you have completed the above steps. With that said, how you choose to communicate with a franchisee may vary depending on how they raised the allegation. Suppose, based on steps 1 – 4 above, you have assessed that there is no claim to answer. In that case, the response to the franchisee is likely to be quite simple and will say just that.

However, if there is any doubt, it may be prudent to engage in ‘without prejudice and without admission’ negotiations. Doing so will help you try and come to a resolution, noting such discussions could occur through mediation or otherwise.

If allegations are in writing, either through correspondence, a notice of dispute or otherwise, it is generally a good idea to also put your position in writing to the franchisee. When responding in writing, it is vital that you:

  1. succinctly put forward your position;
  2. ensure to the extent you make any proposal or concession to try and resolve the issue, it only occurs in ‘without prejudice’ correspondence; 
  3. do not admit to any wrongdoing unless your legal advisor has advised you to do so; 
  4. be wary of raising any new issues as a defence/ counterclaim to the claim; and
  5. keep in mind your statutory obligation of good faith, and act consistently with that obligation. 

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Step 6: Dispute Resolution Processes

Dependent on the nature of the claim, you may wish to utilise the dispute resolution processes as prescribed under the Code. Sometimes, under your franchise agreement, you will include operative terms that suggest parties attempt to resolve the issues between themselves, prior to invoking the formal dispute resolution processes.

However, suppose you are unable to clearly communicate with the franchisee and reach a resolution. In that case, invoking the dispute resolution process under the Code is a good next step. Either party can issue a notice of dispute, triggering a 21-day period where parties should attempt to resolve the dispute. If you cannot resolve the dispute in this period, either party may then refer the matter to:

  • mediation; 
  • conciliation; or
  • arbitration. 

Often, informal dispute resolution processes, such as mediation, provide parties with the freedom to express the basis of their concerns and what they are hoping to achieve freely. As everything in mediation is essentially without prejudice, meaning it cannot be used against you later in court (with some exceptions), parties are more likely to speak openly. If you are going down this route, it is important you are prepared for mediation.

This is more likely to allow you and the franchisee to clearly understand each other’s position and reach a resolution that both parties are happy with (or, at least, can live with). 

Step 7: Review Your Processes, Documents and Systems

If you receive any allegation of misleading or deceptive conduct (even if you prove the claim lacks substance), you should review all of your internal processes and documents. Reviewing these processes and documents will help to determine the possible occurrence of any miscommunication. This may include:

  • amending your franchise agreement or disclosure document;
  • providing further training to staff as to procedures to follow when interacting with franchisees or potential franchisees; and
  • updating internal policies or standard documents to ensure they are relevant and up to date. 

Key Takeaways

Misleading and deceptive conduct allegations frequently occur in franchising. In dealing with such claims, you should always:

  1. review your own conduct and any changes that may need to occur in your franchised system;
  2. use your best endeavours to resolve the allegation with the franchisee;
  3. consider dispute resolution processes; and
  4. act in good faith.

If you have any questions about misleading and deceptive conduct claims or disputes brought by a franchisee, contact LegalVision’s franchise lawyers on 1300 544 755 or fill out the form on this page.

Frequently Asked Questions

What is misleading and deceptive conduct?

This is conduct that is likely to mislead or deceive. It comes under Australian consumer law and is enforced by the ACCC. It covers your advertisements, promotions and anything you say or promise to someone in the course of trade or commerce.

What is the requirement to act in good faith?

The good faith obligation means that parties to a franchise agreement must be honest in their dealings with each other and remain cooperative and open to negotiation during the term of the agreement.

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