Franchisors need to be careful that they do not mislead
potential franchisees with the hope that they will receive a
minimum 'guaranteed' income. The Australian Competition
& Consumer Commission ("ACCC") is closely monitoring
such representations after receiving many complaints. The bulk of
the complaints relate to franchisors in the cleaning and home
Franchisors misrepresenting the potential income of a franchise
can be subject to litigation and court imposed penalties of up to
$1.1 million per contravention.
Recently, in SPAR Licensing Pty Ltd v MIS QLD Pty Ltd (No
2), the Federal Court emphasised the importance of disclosing
current financial documents prior to entering into a franchise
SPAR Licensing Pty Ltd v MIS QLD Pty Ltd (No 2)
SPAR Licensing Pty Ltd ("Franchisor") and MIS Qld Pty Ltd
("Franchisee") entered into negotiations in 2010 in
relation to the grant of the franchise. In July 2010, the
Franchisee was given the draft franchise agreement and disclosure
document. However, it wasn't until 1 February 2011 that the
franchise agreement was executed.
The disclosure document included a Statement of Solvency which
expressly related to the position as at 30 June 2009, and an
independent auditor's statement which claimed there were
"reasonable grounds to believe that SPAR Licensing Pty Limited
will be able to pay its debts as and when they fall due". The
disclosure document did not contain any financial reports in
respect of either SPAR Licensing or the consolidated SPAR
The Franchising Code requires a franchisor to give a
current disclosure document to a prospective franchisee at
least 14 days before entering into a franchise agreement. The
contents of a long form disclosure document are set out in Annexure
1 to the Franchising Code, and relevantly in this case, include
disclosure of certain financial details of the franchise in the
form of financial reports for the last two financial years or an
independent auditor's report.
In this case, the relevant financial statements were finalised
on 10 September 2010, which was after the provision of the
disclosure document but before the execution of the franchise
agreement. However, these financial statements were not disclosed
to the Franchisee, nor was the Franchisee provided with a solvency
statement in respect of the financial year ended 30 June 2010, nor
any supporting independent auditor's report.
During the six month delay between when the Franchisee received
the disclosure document and when the franchise agreement was
ultimately executed, the financial position of the SPAR Group
seriously deteriorated as was reflected in the 2010 financial
statements and report finalised on 10 September 2010. The financial
report stated that there was "significant uncertainty whether
the group will be able to continue as a going concern".
The Court held that the Franchisor's failure to provide the
Franchisee with current financial information prior to entry into
the franchise agreement deprived the Franchisee the ability to make
an informed decision about whether or not to enter into the
franchise. The Franchisor should have disclosed the 2010 financial
statements and report to the Franchisee. Therefore, the Franchisor
had contravened the Franchising Code.
Despite the seriousness of the Franchisor's contravention, the
Court did not consider it was appropriate to set aside the
franchise agreement. Rather, it considered that, it was appropriate
to vary the terms of both the franchise agreement to enable the
Franchisee to terminate those agreements on payment of the
requisite termination and associated fees.
It was also held that the Franchisee did not establish any basis
on which they should receive an additional award of damages in
respect of the breach as their loss was offset by a growth in
The case outlines the importance of providing current financial
documents prior to entering into a franchise agreement. Prior to
entering into a franchise agreement, franchisors will need to
review disclosure documents to ensure there is no material change
in circumstances which renders prior disclosure misleading or out
More recently, reports have emerged that three franchisees from
the fast food chain Pie Face are threatening to sue their
franchisor for millions of dollars, claiming they were misled with
regard to both cost and profits when they first bought into the
business and have lost heavily from their investment. Other Pie
Face franchisees that have faced similar issues may also join the
case, meanwhile others await the outcome from a complaint to the
Accusing franchisors of misrepresenting the potential costs and
profits is not uncommon. The ACCC regularly receives complaints of
this nature from disgruntled franchisees.
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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