Franchisor Misrepresentation – An Australian Investor’s Guide

Ensuring Corporate Documents' Enforceability - What to Know

02/07/2021

At one point or another, the opportunity to purchase a franchise business will present itself as something you can capitalise on. There is so much potential in today’s Australian business landscape where openings are abundant. 

Whether it’s in food and beverage or the hospitality industry, franchising presents an array of benefits that are well worth looking into. When done correctly with the right company, franchising can be one of the most profitable decisions you can make! 

After doing research and establishing your acquisition budget, you’ve finally found the best opportunity based on your forecasts and inferences. Once you’re well into the inquiry process, you’ll need all sorts of information relating to your investment decision:

  • The nature of the business
  • The work involved
  • Past financial reports
  • Average profits generated by preceding investors

By seeking these details, you can set realistic expectations over how much revenue your franchise can generate. However, beyond the realms of profitability and capital, asking the right questions is critical because of one problem that can arise: franchisor misrepresentation. 

Looking Into the Details

Understanding franchisor misrepresentation will help you take the necessary precautions to seek legal remedies. Misrepresentation is a principle in contract law, and the rules around it are not defined in any legislation. Over the years, courts have developed rules to help protect investors against it. 

Based on current Australian law, claims can be made against a franchisor due to the following instances: 

  • The franchisor lied about details regarding the overall product;
  • The lie was told before the franchisee signed the franchise agreement;
  • The franchisor lied so that they could convince the franchisee to buy the franchised business, and;
  • What the franchisor lied about was crucial to the franchisee’s decision, and the franchisee signed the franchise agreement because of the lie.

Seeking Action

If you suspect that you’ve been duped into an agreement and set up for a situation that works to your disadvantage, then you’re most likely a victim of franchisor misrepresentation. Before you seek the services of a legal professional such as GLG Legal to assist in your claim, it’s important to understand what happens in the instances above: 

The franchisor lied about something: Generally, claims begin by proving that what the franchisor said was false. One example of this is when a franchisor says that someone who operated a franchise made $100,000 in profit in the second year of operating. However, figures reveal that said franchisee was making a loss during the same period. 

The franchisor lied before the franchisee signed the franchise agreement: In this situation, a franchisee can claim misrepresentation about conversations that occur before legal documents are signed. Such bases of claims often occur in a period lawyers refer to as the “pre-contractual” stage.

The franchisor lied to convince the franchisee to buy the business: It must be proven that the franchisor lied to get the franchisee to sign on the dotted line. The critical point is that the franchisor made a promise or a comment to convince the franchisee of a good opportunity. The franchisee doesn’t need to show that the franchisor was trying to defraud them but rather show that the franchisor was trying to get them to sign the agreement.

The lie was important to the franchisee: Seeking legal action on this basis requires sufficient proof that the franchisor’s lie influenced the franchisee’s decision to buy the business. If you’re seeking action based on a lie that was critical to your investment decision, you must prove it by showing you would not have signed the contract if the franchisor had not made a false promise.

Conclusion

If you want to develop a consistent income stream through franchising, it’s essential to be mindful of franchisor misrepresentation. Should you find yourself dealing with such a problem, taking note of critical details and seeking legal assistance will allow you to remedy it as productively and effectively as possible.
GLG Legal is a legal firm in Brisbane that specialises in servicing commercial law, brand protection, and corporate law needs of Australian businesses and entities. Get in touch with us today to learn more about how we can help!

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