Franchise
13. Franchisor Responsibilities
Authors: Staff Legal Eagle
Firm / Chambers:
Last updated: 27 Jul 2015
- In addition to working hard to establish your franchise and expand your business there are a number of obligations imposed on franchisors over and above those imposed on other types of business owners.
- As a franchisor you have ongoing duties of disclosure to your current and prospective franchisees.
- As a franchisor you must provide any potential franchisees with an information sheet that details the main risks and rewards of entering into a franchise business.
- You are required to provide any prospective franchisees with a disclosure document at least 14 days before entering into any franchise agreement. This document aims to inform the franchisee of the current and ongoing status of the business so that they can make informed decisions about whether to:
- purchase;
- extend;
- renew; or
- exit the arrangement.
- As a franchisor you are obliged to provide a high degree of transparency regarding the money that may be required for advertising and marketing.
- You must also disclose whether you or the franchisee has the ability to sell online under the franchise agreement.
- These disclosure obligations don't stop after the agreement is signed. You must continue to disclose any relevant facts throughout the duration of the franchise agreement and before renewing or extending a franchise.
- There are also some situations that must be declared to the franchisee within 14 days of a franchisor becoming aware of them. These are referred to as 'materially relevant facts'.
- Materially relevant facts can include a change in ownership of the franchise. They can also be any court proceedings brought against the franchisor by a public agency relating to a:
- breach of franchise agreement;
- contravention of trade law;
- unconscionable conduct;
- misconduct or dishonest offences; or
- conviction for any serious offences.
- The purpose behind such disclosure obligations is to ensure that the franchisee is well informed of the business risks posed by the franchisor.
- As a franchisor you are obliged to advise the franchisee to obtain independent advice before entering into any legal arrangement.
- The franchisee must provide a franchisor with a written statement stating that they have received, read and have had a reasonable opportunity to understand the disclosure document and code. They must also provide a written statement stating that they have received advice from an independent legal or business advisor or an accountant.
- The aim of this requirement is to encourage franchisors to provide accurate information to franchisees and to ensure that a more even balance of power exists in the franchise relationship.
- Recent criticisms of the law governing franchises have noted that the balance of power often swings in favour of franchisors.
- Rather than working with a franchisee to resolve issues some franchisors will wait for the franchisee to fail. They then sell the franchise on to a new purchaser leaving a franchisee with little recourse to recover costs associated with their initial investment. However using this power against franchisees can have consequences for brand reputation.
- Given that the success and expansion of your brand depends heavily on the success of your franchisees it is important that you work collaboratively with them to give them every opportunity to succeed.
- The 2015 amendments to the franchising code of conduct impose a duty on both franchisors and franchisees to act in good faith in their dealings with each other.
- If a court is deciding whether you have acted in good faith as a franchisor they will consider whether you acted honestly and not arbitrarily and whether you cooperated to achieve the purposes of the franchise agreement. This is intended as a guide for understanding the obligation of good faith. Additional considerations may also be taken into account depending on the specific circumstances of your case.
- Working with franchisees to resolve problems can be a more productive and profitable approach than waiting for the franchisee to fail before addressing the issues. Stability of brand presence and maintained quality of the products or services offered by the franchise over time are what supports a strong identity in the marketplace. It also allows a franchise to expand exponentially.
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