Australia: Franchisee fraud – A refresher and a non-monetary perspective

Fraudulent conduct is an occasional feature of behavior within franchise relationships. Most commonly, it involves concerns over the misappropriation of money or the under-reporting of sales by the Franchisee resulting in reduced royalties being paid to the Franchisor. This article provides a brief refresher on the key principles regarding establishing fraud by Franchisees and it also provides a perspective on the non-monetary types of fraudulent conduct which may arise.

The Refresher

The key principles regarding fraud are as follows:

  1. Fraud typically involves conduct which is dishonest and which is directed at, or results in, a monetary benefit being improperly obtained by a person at the expense of another. Deliberate under-reporting of sales by a Franchisee is a common example of fraudulent conduct.
  2. Given the seriousness of an allegation of fraud and the serious consequences of a determination that it has occurred, the Courts require strict proof of it. The evidence of fraud must be compelling before a Court will make a determination that it has occurred.
  3. Most Franchise Agreements contain an express term that entitles a Franchisor to terminate a Franchise Agreement immediately for fraud.
  4. Under the Franchising Code of Conduct, a Franchisor may terminate a Franchise Agreement immediately, without complying with other Code provisions requiring that a period of notice of the termination and an opportunity to remedy misconduct be given, provided that the Franchise Agreement gives the Franchisor the right to terminate should the Franchisee act fraudulently in connection with the operation of the franchised business.
  5. Typically, the amount of money involved in any fraudulent conduct is immaterial to the entitlement of the Franchisor to terminate the Franchise Agreement. The relationship of trust and confidence and the need for the parties to act honestly towards each other are of such paramount importance in franchise relationships that even a triflingly low amount of money which is the subject of fraudulent conduct can be sufficient to warrant legitimate termination.

Common ways in which evidence is typically obtained by Franchisors to establish fraudulent conduct by Franchisees involved in retail businesses include a combination of the following:

  1. Patterns of unusually high levels of voided sales occurring, as being indicative of under-reporting.
  2. Mystery-shopper evidence of specific transactions being made at the franchised business which then directly correspond to transactions which have been voided.
  3. A consistent and significantly higher volume of goods being purchased for the operation of the franchised business than that which would typically be required to generate the level of reported sales.
  4. Whistle-blowing disgruntled employees or business associates of the Franchisee.
  5. Covert surveillance of the operation of the franchised business.1
  6. Non-Monetary Perspective

Fraud is usually considered by Franchisors in a monetary context. However, fraud can occur in a wide variety of non-monetary ways.

The following points are worth noting:

  1. The term "fraud" is used in a relatively wide sense under the law. It can involve conduct where the wrongdoer has gone beyond that which merely amounts to a civil wrong,. Perhaps the Franchisee has indulged in sharp practice, something of an underhand nature where the circumstances required good faith, something which commercial people would say was a fraud or which the law treats as entirely contrary to public policy.2
  2. Fraud can take the form of a false representation if the Franchisee made the representation knowing it to be false, or recklessly, neither knowing nor caring whether it was false or true. This could occur in a variety of circumstances – examples could include:
    1. The provision of false information about the operation of the franchised business or its performance.
    2. The provision of false information about the status of commercial arrangements that the Franchisee has in place with 3rd parties – such as the tenure under a lease, the payment of monies owed to creditors or compliance with obligations owed to employees.
    3. The provision of false profit and loss information in relation to the Franchisee.
  1. Fraud can also involve the Franchisee's conduct vis-ŕ-vis 3rd parties. Examples of this could include:
    1. Underpayment of staff in breach of workplace laws and the resulting underpayment of group tax and superannuation contributions.
    2. Under-reporting of income to the ATO and thus the underpayment of tax and any applicable superannuation.
    3. Dishonesty in dealing with suppliers.

A Final Note of Caution

Franchisors need to remain constantly vigilant in monitoring Franchisees' conduct for evidence of fraud. This article encourages Franchisors to familiarize themselves with key concepts in relation to fraud and to think outside of the normal monetary focus when considering the types of conduct which might be fraudulent.

However, establishing fraud to the satisfaction of a Court is usually a challenging task. It requires carefully prepared and compelling evidence. Accordingly, prior to alleging fraud and certainly prior to terminating for fraud, Franchisors must proceed very carefully and with considerable caution and with the benefit of legal advice.


1 Various laws exist in each State which govern a Franchisor's ability to conduct covert surveillance.
2 London Borough of Brent v Kane [2014] EWGC 4564

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.