Franchising offers a pathway to business ownership and brand expansion, but it also comes with a range of legal challenges. Whether you’re a franchisor or a franchisee, understanding common legal issues with franchises is essential to safeguarding your investment and avoiding costly disputes.

The common legal issues with franchises include misleading disclosures and Code breaches. Addressing them early helps avoid costly disputes.

In this guide, we’ll explore the most frequent legal pitfalls in franchising, why they occur and how you can protect yourself with the right legal strategies.

A Quick Overview: Common Legal Issues with Franchises

Navigating the franchise landscape involves more than business operations. Key legal risks include:

  • Misleading disclosure documents
  • Breach of franchise agreements
  • Intellectual property misuse
  • Unfair termination or non-renewal
  • Franchisee disputes
  • Non-compliance with the Franchising Code of Conduct

Addressing these risks early can save significant time, money and reputational harm.

Misleading or Incomplete Disclosure Documents

One of the most common sources of franchise disputes is a misleading or incomplete disclosure document.

Key issues to be aware of are:

  • Inaccurate financial performance information
  • Failure to disclose litigation or insolvency history
  • Hidden fees or obligations not outlined clearly

Under the Franchising Code of Conduct, franchisors must provide full, accurate and up-to-date disclosure. Failure to do so can result in legal penalties, rescission rights for franchisees and reputational damage.

Breach of Franchise Agreements

Franchise agreements govern the relationship between franchisors and franchisees. Breaches can lead to serious legal action.

Common breaches include:

  • Failure to pay franchise fees
  • Operating outside of territorial boundaries
  • Non-compliance with brand standards
  • Failure to supply goods or support as promised

Both franchisors and franchisees must carefully review and adhere to their contractual obligations to minimise the risk of litigation.

Intellectual Property Misuse

A franchise’s value often lies in its brand reputation and intellectual property (IP). Disputes arise when IP rights are misused or inadequately protected.

Examples of IP issues are as follows:

  • Franchisees using trademarks improperly
  • Failure to register or renew trademarks
  • Copying or modifying proprietary systems

Properly drafted franchise agreements should outline clear IP usage rights and enforcement mechanisms to protect the brand.

Unfair Termination or Non-Renewal

Terminating or refusing to renew a franchise agreement without valid grounds can expose franchisors to legal claims.

Legal triggers for termination must be:

  • Clearly outlined in the agreement
  • Supported by evidence (e.g., repeated breaches)
  • Consistent with good faith obligations under the Franchising Code

Franchisees also need to understand their renewal rights and obligations well before their agreement expires to avoid sudden business disruptions.

Franchisee Disputes and Litigation

Franchise systems often involve complex relationships, which can give rise to disputes.

Common dispute areas are:

  • Misrepresentation at the time of sale
  • Unmet expectations regarding support and training
  • Disagreements over territory or customer allocation

Disputes can damage brand reputation and franchise system cohesion. Early mediation or alternative dispute resolution (ADR) can often resolve issues before they escalate to court action.

Non-Compliance with the Franchising Code of Conduct

The Franchising Code of Conduct imposes binding obligations on franchisors and franchisees in Australia.

Areas of compliance include:

  • Mandatory disclosure requirements
  • Good faith obligations
  • Cooling-off periods for franchisees
  • Dispute resolution procedures 

Breaching the Code can lead to fines, regulatory investigations and enforcement actions by the Australian Competition and Consumer Commission (ACCC).

Employment Law Issues

Sometimes franchisors inadvertently assume employment law obligations for their franchisees’ staff.

Potential employment law traps:

  • Misclassifying workers
  • Underpayment claims
  • Failure to comply with workplace laws

Careful structuring of the franchise relationship can limit franchisor liability while ensuring franchisees meet their employment obligations.

Competition and Restraint of Trade Issues

Franchise agreements often include clauses restricting franchisees from operating competing businesses during and after the term.

Key considerations include:

  • Are the restraint clauses reasonable in scope, duration and geography?
  • Are they enforceable under Australian law?

Overly restrictive clauses can be invalidated, while insufficient restraints may leave franchisors vulnerable to competition from former franchisees.

Supply Chain and Pricing Disputes

Franchise agreements may mandate sourcing goods or services from approved suppliers. Disputes can arise when:

  • Prices are perceived as unfair
  • Supply is unreliable or inconsistent
  • Franchisees want flexibility to source locally

Clear supply terms and transparent pricing models in the agreement can reduce the likelihood of disputes.

Why Legal Advice is Essential to Avoid Franchise Legal Issues

Franchise systems are legally complex. Whether you’re entering a franchise as a franchisor or franchisee, early legal advice helps avoid hidden risks and ensures compliance.

An experienced franchise lawyer can help you:

  • Draft and review franchise agreements
  • Ensure compliance with the Franchising Code of Conduct
  • Protect intellectual property rights
  • Manage disputes and enforcement actions
  • Structure your franchise relationships to minimise liability

Prevention is far less costly than litigation. Legal guidance ensures your franchise journey starts on a solid legal foundation.

Final Thoughts

Understanding the common legal issues with franchises is crucial for both franchisors and franchisees. From disclosure obligations and IP protection to compliance with the Franchising Code, legal risks can arise at every stage.

Being proactive, informed and legally prepared can safeguard your investment, protect your brand and ensure smooth franchise relationships.

Need Help Navigating Franchise Legal Issues?

At Rotstein Commercial Lawyers, we provide expert legal advice for franchisors and franchisees alike. Whether you’re setting up a franchise, reviewing agreements or resolving disputes, our experienced team is here to help.

Protect your investment with expert legal support. Call us on +61 3 9604 7888 or visit our Contact Us page to schedule a consultation today.