The relationship between franchisor and franchisee is a unique commercial relationship. As a franchisor:

  • you are the creator of a brand. This includes all business operations, policies, procedures and marketing;
  • which you license to another party (the franchisee);
  • who then uses that brand to build a profitable brand is maintained to a high standard.

A franchisee’s conduct in operating their business impacts you and your franchise brand and in some instances, you may be at risk of being held liable for your franchisee’s conduct. As a franchisor, it is likely that you will want to:

  • protect your brand; and
  • avoid any legal liability for your franchisee’s conduct.

This article will explore where potential liabilities may arise for franchisors and what steps you can take to monitor franchisee compliance and minimise your risk of liability.

When Can a Franchisor Be Liable for a Franchisee’s Conduct?

Despite the independent nature of the franchisor and franchisee relationship, there are a variety of situations where a franchisor may be liable for the conduct of its franchisee. The most obvious is where legislation imposes liability. For example:

  • the prohibition against misleading and deceptive conduct under the Australian Consumer Law gives rise to actions against persons whose behaviour causes loss or damage. A franchisor can, therefore, be liable for a franchisee’s misleading conduct;
  • additionally, under consumer law, a franchisor may be considered the manufacturer of products sold by franchisees. As the manufacturer,  they will be liable for products with safety defects; and
  • also, the Fair Work Act renders responsible anyone ‘involved’ in a breach of the Act. In addition, the Act imposes additional obligations on franchisors to ensure compliance with employment law.

How Can Franchisors Minimise Their Liability?

Franchisors can take steps to minimise their potential liability before their franchisees’ businesses are fully operating. Those steps include:

  • awareness of your legal obligations and potential liability under the law by getting legal advice;
  • issuing an employment contract for your franchise network, to minimise risk;
  • training your franchisees on a range of legal issues, including consumer and employment law;
  • prescribing an audit system in your franchise operations manual;
  • ensuring your franchise agreement contains an audit power;
  • selecting an online point of sale and accounting software, to ensure you can monitor franchisee compliance remotely and regularly.

What Audit Powers Do Franchisors Have?

Most franchise agreements will contain a provision that allows for random or periodic audits of a franchise. These clauses will generally enable the franchisor to:

  • firstly, audit the franchisee’s books and records;
  • secondly, visit the franchisee’s business premises at any time to inspect the premises and observe the employees as well as the business operations;
  • finally, investigate the franchisee’s performance of, and compliance with, the franchise agreement.

As a franchisor, it is essential to be aware of the procedures for audits set out in your franchise agreement and operations manual. Given that you may need to take legal action, it is also essential to keep a record of audits you conduct.

What Surveillance Methods Can Franchisors Implement?

If you want to implement surveillance procedures in your franchisee’s businesses, set out the parameters for this in your franchise agreement. The provisions of your franchise agreement should:

  • include a requirement to implement and use specific surveillance methods. For example, requiring the installation of particular equipment and software; and
  • require that the franchisee provides access to its surveillance records upon request.

Examples of surveillance include:

  • camera surveillance;
  • computer surveillance;
  • GPS-tracking; and
  • listening devices.

As the laws governing surveillance vary between states, it is important to be aware of the law in the states that your franchise operates. For example, in New South Wales, the law requires that employees are:

  • given a minimum period of notice before surveillance takes place; and
  • advised of the duration of the surveillance.

Breaches of the requirements under the legislation carry heavy financial penalties, so it is vital that you have adequate mechanisms in place to ensure your franchisees are complying with the laws.

What Should You Do if You Discover a Breach?

If you discover your franchisee has breached the franchise agreement, you should:

  • collate all evidence you can legally obtain; and
  • assess what is required to rectify the breach.

If the matter is serious enough to warrant termination under the Franchising Code of Conduct (the Code) or the franchise agreement, you may need to issue a breach notice under the Code. This allows the franchisee a reasonable time to remedy their breach. However, if the franchisee does not correct the breach, you can proceed to issue a termination notice.

Usually, terminating a franchise agreement will be the last resort. In many instances, breaches of the franchise agreement can be remedied by working with your franchisee to help turn the issue around.

Key Takeaways

For franchisors, there are areas of potential liability that may arise in the course of a franchise relationship. However, there are steps franchisors can take to monitor franchisee compliance with the franchise agreement. Above all, as a franchisor, you should ensure that your franchise agreement contains audit powers and surveillance mechanisms, allowing you to monitor and record franchisor compliance.

If you have any questions, contact LegalVision’s franchise lawyers on 1300 544 755 or fill out the form on this page.

Bonnie-Anne Talese
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