No one wants to be caught up in expensive and time consuming litigation – least of all franchisors intent on growing their networks. Inconsistencies between the Trade Practices Act (TPA) and the Franchising Code of Conduct (Code) increase the risk of litigation for franchisors unless they take the time to ensure full compliance with both.
Many franchisees are inexperienced business owners. Often, they buy into a franchise because they believe an established business holds less risk than a start-up. It is here franchisors must be cautious. Even if franchisors meet all their obligations under the Code, an aggrieved franchisee might still claim misrepresentation of the business opportunity and commence legal action under the TPA.
There can be no doubt that entering into a franchise agreement carries some risk – franchising is not a magical formula that eliminates the possibility of failure. Properly structured and executed it can, at best, mitigate some risk through offering a proven business formula and an established brand. As such, the ultimate decision as to the viability of the enterprise must rest with the franchisee.
Under the Code, all franchisors are required to advise potential franchisees to seek independent business, legal and accounting advice. In addition, making misleading representations or promises about the business opportunity is both a clear contravention of the TPA and poor business practice.
However, the prudent franchisor will go beyond their legal obligations and strongly advise and caution potential franchisees to fully investigate and test the system on offer. Further, they will obtain specialist legal advice as to the content and scope of their representations ensuring they do not leave themselves open to a claim under the TPA.
Gaurav de Fontgalland
DC Strategy -
franchise consultants 5-Aug-2008