Franchising has become a popular way for many Australians to start their own business. According to IBISWorld, there are 1,267 franchising businesses in Australia as of 2023. However, the franchising industry has also seen its fair share of controversy, with high-profile cases of franchisee exploitation and underpayment. This has led to increased scrutiny and regulation of the industry, with the introduction of the Franchising Code of Conduct in 2015 and recent amendments in 2021. 

As commercial litigation lawyers in Sydney, we understand the importance of protecting yourself from litigation in franchise agreements, especially in the current climate. In this article, we’ll provide practical tips to help you navigate the complex world of franchising and minimise your legal risks.

What Is The Franchise Agreement?

A franchise agreement is a legally binding contract between the franchisor (the owner of the franchise system) and the franchisee (the individual or company buying the right to operate a franchise location). It outlines the terms and conditions of the franchisor—franchisee relationship, including the rights and obligations of each party. Not only does it allow for effective conflict resolution, but it also provides a legal basis for enforcing the terms of the agreement in case of a breach.

The franchise agreement typically includes several key components, such as the franchise fee, royalty fees, marketing fees and territorial rights. It may also include provisions related to training and support, intellectual property rights and dispute resolution.

If you are a potential franchisee, it is crucial to review and understand the franchise agreement before signing it. The agreement is a complex legal document that can have significant implications for your business and financial future. If you sign the agreement without fully understanding its terms, you may be putting yourself at risk of legal disputes and financial loss.

Identifying Potential Legal Risks

Franchise agreements are complex legal documents that can give rise to a range of legal risks for both franchisors and franchisees. Breaches of contract, intellectual property disputes and unfair contract terms are just a few examples of the legal issues that can arise in a franchise agreement. 

For instance, franchisors may face challenges with franchisees who fail to meet their contractual obligations or misuse proprietary information, while franchisees may face issues with franchisors who impose unfair terms or fail to provide adequate support. These types of disputes can be costly, time-consuming and damaging to the reputations of both parties involved. 

You probably know a number of high-profile franchise disputes in Australia, such as the case of 7-Eleven and the underpayment of workers or the dispute between Pizza Hut and a group of franchisees over menu pricing. These cases highlight the importance of identifying potential legal risks in franchise agreements and taking proactive steps with the help of a commercial litigation lawyer in Sydney to address them before they escalate into costly legal disputes. 

Practical Tips for Minimising Legal Risks

Here are some practical tips that you can follow to help protect your interests:

Conduct due diligence on the franchisor and their business model.

Before signing a franchise agreement, review the franchisor’s financial statements, market position and reputation in the industry. Consider speaking with other franchisees to learn about their experiences and any legal issues they may have faced. Conducting due diligence can help you identify any potential red flags and ensure that you’re partnering with a trustworthy and successful franchisor.

Negotiate favourable terms in the franchise agreement.

Don’t be afraid to negotiate the terms of your franchise agreement to protect your interests. You should work with your lawyer to identify any areas of the agreement that could pose legal risks and negotiate more favourable terms. For example, you might negotiate a clause that limits the franchisor’s ability to terminate the agreement without cause or one that requires the franchisor to provide adequate support and training.

Maintain accurate records and communications with the franchisor.

Clear communication and accurate record-keeping are essential to minimise legal risks. Make sure that you have a system in place for documenting all communications and transactions with the franchisor. This can include keeping copies of emails, receipts and any other relevant documents. Accurate records can help prevent misunderstandings and provide evidence in case of a legal dispute.

Seek alternative dispute resolution options before resorting to litigation.

If a dispute arises, consider alternative dispute resolution options before resorting to litigation. Mediation or arbitration can be more cost-effective and less stressful than a full-blown legal battle. It’s essential to approach any dispute with an open mind and a willingness to compromise. Seeking alternative dispute resolution options can help you resolve the issue in a more amicable way while still protecting your interests.

Consider legal advice from a commercial litigation lawyer.

Finally, it’s always a good idea to seek legal advice from a commercial litigation lawyer in Sydney. They can help you review the franchise agreement, negotiate favourable terms on your behalf, identify any potential legal risks and advise you on strategies for minimising these risks. They can also explain any legal jargon or technical language that may be confusing to you, ensuring that you have a clear understanding of the agreement’s implications. With their support, you can feel more confident about entering into a franchise agreement and protecting your interests.

How Madison Marcus Can Help You

Protecting yourself from litigation in franchise agreements requires careful consideration, due diligence and expert legal advice. At Madison Marcus, our team of experienced commercial litigation lawyers is dedicated to helping you navigate the complex legal landscape of franchising. From conducting due diligence to negotiating favourable terms and seeking alternative dispute resolution options, we are committed to minimising legal risks for our clients.

With experience in all state and Commonwealth courts and tribunals, our litigation lawyers are well-equipped to assist clients with a wide range of legal issues. Whether you need help with breach of contract, intellectual property disputes or other legal challenges in the franchising industry, our team has the knowledge and experience to provide effective solutions. 

For all enquiries, contact us here.