Unfortunately, franchise disputes between franchisees and franchisors occur frequently. Investors in franchise arrangements are buying into a proven formula for success that they expect will yield returns that will improve with their hard work. What happens when it doesn’t turn out as expected?
The three most common forms of complaints – relating to location; takings not meeting projections, and the unreasonableness of franchise fees – often lead to franchise disputes.
Location risks relate to start-up businesses where the franchisor selects a new location. Often this is part a promise to find “the right location, a secure lease and high standard equipment”. See this case for a great example of how a retail franchisee came to a quick became of a poor location choice by its franchisor.
Franchisor projections often do not materialise into franchisee revenue. Overstating of “profitable” revenue even when others are complaining of not reaching their breakeven turnover, is regrettably not uncommon.
“Hypothetical” and “historical” sales performances even if labelled “should not be relied upon as anything more than an indication of what you might expect” can nevertheless be a representation as to future matters. See this litigated case of alleged revenue projection misrepresentations in a pizza restaurant franchise dispute.
Some claims that have been made and the courts’ responses to them are as follows:-
- “one of the most lucrative franchise systems in the southern hemisphere” – no basis whatsoever for the claim
- “We have already established 16 ‘profitable’ (usually within one month) niche cash flow positive franchises” – turnover overstated, several existing franchisees not achieving breakeven figures
- “become part of a ‘thriving business model” – untrue
- “feasibility studies are ‘so good he could put three outlets into the territory”’- study entailed an internet search to estimate competitor numbers a short visit there to call on a number of businesses
- “profitability has proven by a mathematical formula” – an unsubstantiated assumption that 350 local businesses would support one outlet.
Franchise relationships carry many such risks but just because a business fails doesn’t mean the franchisor is at fault or that the franchisee is entitled to compensation.
The legal basis of claims in franchise disputes lies in breaches of the misleading & deceptive conduct, misrepresentation and unfair contract terms provisions of the Australian Consumer Law and breaches of the Franchising Code of Conduct which is one of several industry codes made under that law.
Such claims require careful and meticulous investigation to determine exactly what was said when by whom. Projections and historical data need to be analysed carefully, usually by a forensic accountant in order to make out the franchisee’s case. Then the court has to be convinced that the franchisee relied upon for example, in the accurate projections other promises.
Secure a safe pair of hands from among our experienced business lawyers for your claim’s investigation. The art of disputation is in the preparation of your case and its science is in the successful negotiation of your compensation entitlements.
The kinds of franchise disputes in which our Franchise Dispute Lawyers can act:
- Abandonment of the franchise during the franchise period;
- Franchise agreement breaches by franchisees;
- Non-compliance by the franchisor with the disclosure requirements of the franchising code of conduct;
- Franchisees who do not follow the franchise’s standardised procedures;
- Franchisees who do not meet minimum levels of performance;
- Franchisees who do not report or log all of their sales information;
- Franchisees who create a competing business during the franchise period;
- Franchises misusing the customer information or the franchisor’s confidential information;
- Franchisors’ misrepresentation of profits;
- Non-payment of fees to franchisors;
- Unauthorised use of the intellectual property of a franchisor.
Most retail franchise disputes are settled informally either through personal mediation between the parties themselves or through their lawyers. The Franchising Code of Conduct has additional mechanisms for dispute resolution eg through mediation processes available to franchisors and franchisees.
Our expertise in Franchise Disputes:
Our decades of experience in litigation and in the advisory side of many different types of businesses – retail, real estate, professional services, engineering, consulting services, automotive, agriculture and hospitality – provides a major value add for parties in business disputes.
We provide complete support in franchise arbitration and mediation proceedings and in each stage of dispute resolution. If urgent court action is required, we will act quickly and decisively.
Please contact us if you have needed advice about an existing or potential franchise dispute.