Disclosure document preparation and updating is seen to be
relatively straight forward exercise, a bit like filling in a form.
But the Code contains quite a few traps for the unwary, and the
overlay of the s52 prohibition on misleading or deceptive conduct
is frequently overlooked. In this article we explore some of the
traps, and note some of the common mistakes people make when
completing disclosure documents. We conclude that the relatively
low cost of external involvement in this exercise on an annual
basis is far outweighed by the likelihood and serious consequences
of producing a non-compliant document.
The most critical trap is the disclosure obligation itself. In
many cases there is a need only to produce a single disclosure
document each year, but this is not always the case. The Code
obligation needs to be considered in the context of the
the purpose of the disclosure document contained in clause 6A,
which refers to information "to help the franchisee make a
reasonably informed decisionabout the
franchise" and to give "current
information.... that is material to the running of
the franchised business, and
the prohibition on misleading or deceptive conduct contained in
s52 of the Trade Practices Act, and law to the effect that silence
can constitute misleading or deceptive conduct in certain
circumstances. A franchise relationship which is built on express
disclosure obligations could be such circumstances.
One high risk area is paragraph 6.4, where we frequently see
categorization errors. We also see situations where franchisors
claim to be able to use the exemption provided by paragraph 6.6,
yet cannot prove that the franchisee "has requested in writing
that the details not be disclosed." A signed form by a
franchisee is not a "request" if the franchisor required
the franchisee to sign it.
We see significant errors made in the completion of the
intellectual property section where intellectual property is held
by a related entity. This is also a critical area where
non-compliance would be likely to have serious consequences.
Information contained in the disclosure document must be true,
the information and the overall document must essentially contain
the whole truth, and the information and document must create a
truthful impression. We have seen many situations where the answers
given do not satisfy this test, even if they do arguably answer the
question asked by the relevant heading in the Code. In our
experience if the document is not externally vetted by an
independent person there is a much higher risk that the document
will not be compliant.
Further, we have seen situations where information that was
accurate at the time of preparation of the disclosure document has
become inaccurate. In our view, and indeed in the view of the ACCC,
there is at this point an obligation to update the disclosure
document. Those companies that have internal legal counsel or a
compliance officer may pick up this issue, but in most franchise
systems there are inadequate internal systems to ensure
On the flip side the recent changes to the Code have created
some compliance challenges, but the sometimes overlooked amendments
to clause 5(1) can provide some comfort. The new clause 5(1)(b)
provides that the amendments to the Code commencing 1 July 2010
only apply to a franchise agreement entered into on or after July
1, 2010. Yet we have already seen some franchisors that have
implemented the changes across the board. Areas where this is
particularly relevant include clause 20 requests for transfer or
novation, and notifications concerning end of term
The cost of external involvement in the updating of disclosure
documentation is relatively low. On the other hand a non-compliant
disclosure document can lead to an invalidated franchise agreement,
adverse publicity, damages or a range of other serious
consequences. Breaches of the new Code requirements in relation to
end of term arrangements, unforeseen capital expenditure and
transfer and novation are likely to be viewed by courts as being at
the serious end of the spectrum. Now more than ever clients should
be very careful if they choose to handle their own disclosure
document preparation and updating.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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