In the September 2010 issue of LAWPRO Magazine, we asked our claims counsel about what they feel are the biggest malpractice hazards in each area of law based on the claims files they work on every day. Here is an excerpt from that article dealing with franchise law. Click here to read the full article “Practice Pitfalls”.
Acting for franchisors can be particularly risky for lawyers, warns LAWPRO Claims Counsel Anna Reggio. Although some franchisors are large multinationals, many are small and relatively unsophisticated businesses.
One area of risk involves the onerous disclosure requirements imposed upon a franchisor by the governing statute, the Arthur Wishart Act, notes Reggio. Inadequate disclosure entitles a franchisee to rescind the franchise agreement within two years and to extensive damages, including the return of its investment in franchise fees, inventory and equipment costs, as well as compensation for any losses incurred by it in acquiring, setting up and operating the franchise business.
Faced with such a heavy damages claim, a franchisor will often claim against the lawyer, alleging that the lawyer either drafted an inadequate disclosure statement or failed to warn the franchisor of the consequences of inadequate disclosure. Given the potentially significant damages involved, lawyers who practise in this area should seriously consider carrying excess insurance.
Lawyers should avoid dabbling in franchise law, says Reggio. “A lawyer should either be an expert in franchise law or have his or her client retain a franchise law expert.” The client should also retain a chartered accountant familiar with franchises. The detailed financial disclosure requirements are beyond the scope of a lawyer’s typical expertise.
For their own protection, lawyers who represent franchisors must thoroughly explain to them, among other things, the disclosure requirements and the severe consequences of inadequate disclosure. Of course, they should document in writing all advice given and instructions provided.
For a more extensive discussion of the risks inherent in practising franchise law, see “Franchise law tenet: Disclosure! Disclosure! Disclosure!”