The process of buying a franchise can be similar to purchasing a house. Often, like the real estate agent explaining how perfectly the sun streams through the bedroom window, franchisors paint a rose-coloured glasses version of operating a franchise.

While it is unsurprising that franchisors pitch their franchise systems in this way, it is important to consider the legal effect of the representations. Can franchisors say whatever they like to get a franchisee across the line? This article will:

  • discuss the legal implications of representations made before entering a franchise agreement; and
  • provide tips for both franchisees and franchisors who are selling or buying a franchise.

Excluding Statements and Warranties

The law recognises that franchisors may make various representations to try and convince someone to buy a franchise in their system. For example:

  • “you will make at least $200,000 annual turnover in the first year”;
  • “we are the only system with the rights to supply that product”; or
  • “we will be sending you 20 leads each month guaranteed”.

When questioned about a representation made during the buying process, franchisors cannot merely say “that was not in the contract”. Instead, they can rely on the entire agreement clause. An entire agreement clause states that the written terms of the contract are the entire agreement between the parties.

To deal with this, and with the unequal bargaining power of the parties, the Franchising Code of Conduct (the Code) states that a franchise agreement cannot exclude any verbal or written representations made by a franchisor. This means that a franchisee can rely on the representation made by the franchisor before signing the franchise agreement.

Without the Code, the clause would prevent a franchisee from taking legal action if the franchisor fails to fulfil a representation made before the singing of the agreement.

Misleading and Deceptive Conduct

Representations made before the franchise agreement is signed can be considered misleading and deceptive conduct under Australian consumer law. Here, the law requires that, in trade or commerce, a person not engage in behaviour which is misleading or deceptive. ‘Conduct’ can include:

  • verbal representations;
  • written representations; or
  • silence.

For someone to have engaged in misleading or deceptive conduct, there must be:

  1. commercial activity between the parties: for example, discussions before the franchise agreement is signed;
  2. conduct that is misleading and deceptive: for example, a statement about profit that is not supported by the historical performance of other franchises;
  3. reliance on that conduct: for example, a franchisee purchases the franchise expecting to make those profits; and
  4. a loss suffered as a result of the conduct: for example, the franchisee does not make those profits.

For Franchisees

Prospective franchisees should be aware of the law concerning representations. While franchisees have the protection of the Code, taking legal action to enforce the law can be:

  • time-consuming;
  • costly; and
  • uncertain, as there is never a guaranteed outcome. 

Furthermore, it may be difficult to prove that a representation happened if the other side disputes it. Accordingly, prospective franchisees should request that any representations or statements that they are relying are written into the contract as special conditions or warranties:

  • a special condition is an additional term outside of the usual terms of the franchise agreement; and
  • a warranty is a contractual commitment one party makes to another.

It is common for franchise agreements to contain an annexure listing special conditions and warranties. This ensures that the franchise agreement contains any representations that the parties may rely on. 

For Franchisors

Franchisors should be mindful of the law concerning representations when promoting and selling franchises to new franchisees. In addition to a franchisee taking legal action under these laws, the Australian Competition and Consumer Commission (ACCC) can penalise franchisors.

As a step to reduce the risk of disputes over representations, franchisors should prepare and sign a representations deed along with the franchise agreement. This is a deed which asks a prospective franchisee to record any representations that they are relying on when entering into the franchise agreement.

Ultimately, the representations deed does not exempt franchisors from the Code. It does, however, force franchisees to explain why the representation they are relying on was not recorded in the deed before signing.

Key Takeaways

The law surrounding representations impacts both franchisors and franchisees. Both parties should understand the law before singing a franchise agreement. While the Code provides some protections for franchisees, taking legal action to enforce the Code can be costly. Franchisors should ensure that they do not engage in misleading or deceptive conduct.

Ultimately, it is in the interest of both parties to ensure that a representation deed is signed along with the franchise agreement. If you have any questions, contact LegalVision’s franchise lawyers on 1300 544 755 or fill out the form on this page.

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