Being a diligent potential franchisee means understanding the full breadth of your legal relationship with the franchisor, including exactly what terms and conditions you are agreeing to. The pre-contractual stage of a franchise arrangement are filled with discussions and back-and-forth with the franchisor – it is easy to forget what you have actually agreed on! The simple rule is to not rely on the franchisor’s verbal representations and if you do want to rely on it, request that they include it in writing as a special condition to the franchise agreement.
What is a Representation?
A representation refers to a statement, either verbally or in writing, that is provided from the franchisor to a franchisee. A representation usually refers to the franchise system generally or provides information on how the franchise system operates, including but not limited to forecasts regarding sale figures and the level of support provided to a franchisee.
Can I Rely on a Representation?
The Franchising Code of Conduct has strict requirements that franchisors need to follow to prevent them from requiring you to waive your rights with regards to any representations you receive during the negotiation stage. As a potential franchisee, it is your job to ensure that a franchisor complies with their obligations. This means ensuring that the franchisor does not make a representation during the negotiation that is not included in the franchise agreement or that ends up being false once you start operating the franchise.
What Can I Do to Protect Myself?
Due diligence is an important part of the pre-contractual stage of entering into a franchise arrangement. The best way to protect yourself is to receive professional advice from lawyers, accountants and business advisers so you understand what questions you need to be asking. Some practical tips include:
- Take notes during any conversation you have with the franchisor and date it;
- When possible, request the franchisor to summarise your discussions in an e-mail so you have further written records of your conversations;
- Look out for an “entire agreement” and “representation and warranties” clauses in the franchise agreement and get advice on exactly what they mean;
- Don’t be afraid to request for special conditions to be included in the franchise agreement; and
- Ask many questions!
Although the Franchising Code of Conduct includes many provisions that protect franchisees, including the requirement to act in good faith and the restricted ability for a franchisor to waive any verbal or written representations that are provided during pre-contractual negotiations, it is your duty to be aware of your rights and to enforce them. Representations are particularly important once the franchise is in operation and the franchisee’s expectations have not been met. Everything that you do during the pre-contractual stage may be of assistance in case a dispute arises while operating the franchise.
Questions? Let our Franchise Lawyers know on 1300 544 755.