The things left unsaid

09 April 2020

The things left unsaid

Business / Franchise Sale & Purchase, Trade Marks

Federal

Asked

Franchise – Failure to provide disclosure statement and voiding the franchise agreement

I act for franchisees who entered into a franchise agreement over ten years ago. When it was renewed five years ago, the franchisor failed to provide a disclosure statement and a copy of the Franchising Code.

The franchise business was subsequently sold and the new franchisor issued a disclosure statement.

The current franchise agreement runs until next year but my clients wish to terminate it now. Would they be able to claim that the agreement is void on the basis the disclosure statement was not provided before commencement, even though a disclosure statement was provided later by the new franchisor?

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 judgment summary Master Education Services Pty Limited v Jean Florence Ketchell.

To void the agreement, the franchisee will need to demonstrate misleading and deceptive conduct within the meaning of the Competition and Consumer Act 2010. 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 the 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, make an injunction unlikely.

The disclosure document issued by the new franchisor is irrelevant.

Regards

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