6682

Q&As and counting

February 2020

Franchise - Disclosure statement

February 2020
Business / Franchise Sale & Purchase, Trade Marks
Federal

Asked

I act for Franchisees.

They entered into a franchise agreement in 2008. This was renewed when a new agreement was executed and it commenced on 1 January 2016. At that time the Franchisor failed to provide a Disclosure Statement and a copy of the Code.

The Franchise was sold in 2018 and the new Franchisor issued a Disclosure Statement dated 12 February 2019.

The current franchise agreement runs until 1 January 2021 but my clients wish to terminate it now. Would they be able to commence court proceedings seeking an order that the agreement is void on the basis the disclosure statement was not provided before commencement of the new agreement, even though a disclosure statement was provided in 2019 some two and half years after the agreement commenced?
 

Answered

Thank you for the question.

The former franchisor had an obligation under the Franchising code of conduct to provide a disclosure document prior to making the first franchise agreement and prior to the renewal. Its failure to do so exposes it to the risk of civil penalties. However, this failure does not void the franchise agreement or of itself give rise to a right to terminate – See the High Court judgement summary Master Education Services Pty Limited V Jean Florence Ketchell.

To avoid the agreement, the franchisee will need to demonstrate misleading and deceptive conduct within the meaning of the Competition and Consumer Act. If some material matter was withheld from the franchisee through the failure to give a disclosure document AND there is a causal connection with a loss AND damages are not an adequate remedy, the court has a discretion to void the agreement and restrain its enforcement.

The fact that the franchisee renewed the agreement and the agreement has been assigned to a bona fide purchaser, a new franchisor, work against an injunction.

An injunction seems most unlikely.

The disclosure document issued by the new franchisor is irrelevant.

Regards

Mentor

Business / Franchise Sale & Purchase, Trade Marks
Federal