What happens when a franchisee discovers a franchisor has provided them with misleading information? ItÍs a concern for all franchisors in preparing their Franchise Agreements and in the past some have added disclaimers as a form of self-protection for the information disclosed to franchisees.
Should franchisors add disclaimers to their Disclosure Documents? The mandatory guidelines for the franchising industry, The Franchising Code, impose obligations on a franchisor to provide to the prospective franchisee minimum prescribed information regarding its business. This includes both business experience, history of litigation, existing franchises, intellectual property, supplying of goods and services, marketing and earnings information.
The code envisages that the franchisor may or may not include earnings forecasts. In providing this information to a franchisee, if predictions are made they must be done so based on reasonable facts and any assumptions should be reported carefully.
In preparation of the facts, the franchisor information may amount to misleading or deceptive conduct. The intention of the franchisor is not relevant to a breach of the Trade Practices Act. Quite simply, if the information provided is misleading the franchisor will be guilty of misleading conduct. Indeed a misrepresentation might even result from a failure to disclose relevant information.
The practice has arisen overtime to establish procedures whereby franchisors either state in documentation or in the Franchise Agreement or the Disclosure Document where they endeavour to disclaim liability or seek to put the onus on franchisees by getting them to waive (release) rights they would otherwise have.
Franchisees be warned! Recent amendments to the Franchise Code effective from the 1st March 2008 have resulted in prohibiting Franchise Agreements including a waiver of verbal or written representations made by the franchisor.
The waiver acts as an intentional release of a right a franchisee may have; for instance, a waiver might be in place to prevent a franchisee from enforcing a right against the franchisor for an omission or a misrepresentation made in the Franchise Agreement.
However franchisees are still protected from misleading information. The effect of such a waiver in agreements does not relieve the franchisor from their obligations when it comes to representations. A franchisor cannot contract out of his obligations under the Trade Practices Act and the right of action will always be available to a franchisee for misrepresentation under the Trade Practices Act.
It will always be important for franchisors when providing information to qualify any representations with a disclaimer articulating specifically the assumptions under which the representation is made.
However franchisees must know that if they discover the representations to be false or misleading the franchisor may still be liable.
This article was written by Tony Garrisson, a principal in the franchising division of Mason Sier Turnbull. You can contact Tony on (03) 8540 0271 or via email at tony.garrisson@mst.com.au.