Why every franchisor should require their franchisees to obtain legal advice

The Franchising Code encourages franchisees to consult a franchise lawyer before signing on the dotted line. Surprisingly, many dive in without seeking professional advice, even if they’re new to franchising. This not only puts them at risk but also creates headaches for franchisors.

Skipping legal advice might seem like a shortcut, but it’s more like a detour through a minefield. Without a franchise lawyer’s guidance, franchisees might miss crucial details in the agreement, leading to trouble later on. And it’s not just the franchisees who suffer—franchisors can end up with unhappy partners and costly disputes.

In short, when it comes to franchising, cutting corners on legal advice is a risky move for everyone involved. This article explains why, in our view, every franchisor should require their franchisees to obtain legal advice. 

Obtaining Legal Advice means franchisees understand their obligations

Franchise agreements are notorious for their hefty volumes, cramming in a stack of information—from franchisee responsibilities to reporting protocols, communication channels with franchisors, legal compliance, and post-franchise obligations. Unfortunately, amidst the legalese and boilerplate clauses, these critical obligations often get lost in the shuffle.

But here’s where a savvy franchise lawyer steps in: by seeking independent legal advice, franchisees can unearth and comprehend their obligations buried within the agreement. Armed with this knowledge, they’re better equipped to navigate the franchising landscape and become proactive, compliant partners once their business launches.

In a revealing submission released by the ACCC in 2023 (see our article here), it was highlighted that a persistent issue in franchising is the widespread lack of understanding among franchisees regarding their rights and the inherent risks. Franchise legal counsel acts as a beacon of clarity in this murky sea, shedding light on rights and risks, empowering franchisees to make informed decisions.

Obtaining Legal Advice reduces the prospects of a claim for misleading and deceptive conduct being pursued against the Franchisor and will bolster a defence to such a claim

In the world of franchising, the Australian Consumer Law (ACL) is important. Section 18, in particular, is a hotspot for legal battles, especially when it comes to alleged misleading and deceptive conduct by franchisors. When franchisees bring disputes against their franchisors, they often claim:

  1. Certain information or assurances were given by the franchisor or their representatives.
  2. They relied on this information or assurances when signing the franchise agreement.
  3. The information or assurances turned out to be false or lacked a reasonable basis.
  4. Their reliance on this misinformation led to their detriment.

To win a claim for misleading and deceptive conduct, franchisees must prove that the information provided was false or that the franchisor should have known it was false. Additionally, if the information pertains to future matters, franchisees must demonstrate that there was no reasonable basis for providing it.

Some well-known franchise networks, such as 7-Eleven, UFC Gyms, and Ultratune, have faced the consequences of breaching these provisions. Not only have they been hit with significant damages claims and sometimes penalties, but they’ve also endured negative publicity—a nightmare scenario for any franchisor.

Understanding their rights under the ACL can help franchisees from falling victim to misleading or deceptive conduct in the franchising arena, which can also be a nightmare for franchisors. 

When a franchisee seeks legal advice, a savvy franchising lawyer will dive into the nuances of misleading and deceptive conduct provisions. They’ll probe for any additional representations or assurances relied upon by the franchisee but not documented in the agreement. If such representations exist, the lawyer typically recommends recording them either as a special condition to the franchise agreement or in a separate deed of prior representations.

Franchisors can leverage the fact that franchisees received legal advice as a defense against claims of misleading and deceptive conduct. Simply put, if a franchisee is informed that certain information must be included in the agreement to be binding, it becomes difficult for them to later claim reliance on that information if they choose not to pursue its inclusion. This lack of action, as courts have ruled, suggests a lack of reliance—a key component of a misleading and deceptive conduct claim.

While mandating legal advice doesn’t outright dismiss claims of misleading and deceptive conduct, it serves as a valuable defense tool for franchisors. Moreover, it can act as a deterrent, as franchisees may learn about the implications of entire agreement clauses and similar provisions during legal consultations, potentially preventing claims from arising in the first place, and generally making them better informed.

Obtaining legal advice promotes the enforceability of security provisions

A franchise agreement typically contains several security provisions, including personal guarantees, PPSA clauses, indemnity provisions and sometimes even clauses entitling franchisors to register a caveat over real property. These safeguards are vital, especially when the franchisee entity solely exists for operating the franchised business, making it vulnerable to closure once operations cease.

Despite their intent, guarantee and security provisions can be challenged on various legal grounds, from duress to unconscionable conduct or the doctrine of non-est factum.

Enter the franchise lawyer: requiring legal advice for guarantors and on security provisions shores up their enforceability against potential legal challenges. Just as banks insist on independent legal advice for guarantors, mandating it within a franchise agreement reduces the franchisor’s exposure to claims of misunderstanding or unenforceability.

Obtaining legal advice means documents are more likely to be signed correctly

It’s astonishing how often legal agreements fall victim to improper signing procedures. In the intricate realm of franchising, proper execution goes beyond a mere signature—it involves navigating specific certificate requirements and adhering to prescribed timelines, as outlined in our comprehensive guide on the contract formation process in franchising, here

Enter the franchise lawyer: their expertise ensures that franchisees sign documents correctly and at the correct time; safeguarding their enforceability. With legal guidance, franchisees can navigate the intricate web of execution requirements, ensuring their agreements stand strong in the face of legal scrutiny.

In the world of franchising, precision is paramount. By enlisting the help of a seasoned franchise lawyer, franchisees can dot their i’s, cross their t’s, to the benefit of all parties to the agreement. 


Can Franchisors require legal advice? 

While the Franchising Code does not make legal advice mandatory, only recommended, a franchise agreement can mandate the requirement for franchisees to obtain legal advice by way of a relevant clause. Many franchise agreements stipulate pre-conditions for the operation of the franchised business, often including a requirement for franchisee parties to obtain independent legal advice prior to signing the agreement—a clause aimed at ensuring mutual understanding and safeguarding the interests of both parties.

At Magnolia Legal, we believe in the benefits of franchisee parties seeking independent legal advice before committing to a franchise agreement. This empowers franchisees with knowledge while providing franchisors with assurance that their partners fully comprehend their obligations.

To facilitate this process, we offer two comprehensive franchise review packages tailored to meet the diverse needs of franchisees. Whether a seasoned franchisee or a newcomer to the franchising world, our expert legal team is here to guide you through the intricacies of franchise agreements.

Disclaimer: This article contains general information only and does not constitute legal advice. Magnolia Legal disclaims any liability arising from reliance on this article. Our terms of use apply