Disclosure Documents – The Importance of Being Earnest and Current

Franchising, as a way of doing business, can be very financially rewarding. When things go wrong though, the source of the problem can often be traced back to the beginning, when the franchise was being set up.

Amongst the number of important elements to consider, the franchisor needs to ensure that a Franchise Disclosure Document is available for potential franchisees to review prior to entering into a Franchise Agreement.

The Disclosure Document needs to be accurate and it also needs to comply with the Franchising Code of Conduct. The Franchising Code of Conduct was established in 1998 by the Trade Practices (Industry Codes – Franchising) Regulations 1998 and governs the relationship between a franchisor and a franchisee.

The recent case of SPAR Licensing Pty Ltd v MIS QLD Pty Ltd [2014] FCAFC 50 (1 May 2014) highlights the importance of providing prospective franchisees with a disclosure document that is not only accurate at the time of writing, but is also up to date relative to the time of entering into a franchising arrangement.

Facts

Spar Licensing Pty Ltd (‘SPAR’) were suppliers of dry groceries and related services to independent retail grocery outlets. They supplied a supermarket store on Macleay Island in Queensland via a franchise agreement. The only other supermarket on the island was supplied by Metcash, more commonly known as the IGA brand of supermarkets. There was fierce competition between the two suppliers. Metcash had made several attempts to convince the Macleay Island supermarket, MIS, to leave SPAR and sign up Metcash as their suppliers.

MIS eventually sought to leave the franchise agreement with SPAR before the end of term in order to sign up with Metcash.

First Hearing

In the original hearing at the Federal Court SPAR claimed that MIS was not able to leave the franchise early as the franchise agreement did not give MIS the right to do so.

Amongst other cross claims against SPAR, MIS claimed that SPAR contravened Clause 6B and 10 of the Franchising Code of Conduct and consequently s51AD of the Trade Practices Act as they did not provide them with current financial information prior to MIS entering the franchise agreement.

S51AD of the Trade Practices Act 1974 (applicable at the time of the SPAR – MIS franchise agreement) states that “a corporation must not, in trade or commerce, contravene an applicable industry code”.

SPAR had supplied MIS with a disclosure document on 21 July 2010. However, the franchise agreement between SPAR and MIS was not executed until 1 February 2011. Between July 2010 and February 2011, SPAR’s financial position had seriously deteriorated.

The trial judge found for MIS on all aspects of the cross claim which SPAR then appealed.

Appeal

In the Full Federal Court appeal heard by Buchanan, Foster and Farrell JJ, SPAR claimed that they had given MIS the disclosure document and it was current at the time it was given. They failed on this point since Clause 6A(b) of the Franchising Code of Conduct describes the purpose of the disclosure document is to give the franchisee current information from the franchisor that is material to the running of the franchised business. There is also a requirement on the franchisor, per Clause 6B to give a current disclosure document to a prospective franchisee or franchisee.

The term current disclosure document is not defined within the Code of Conduct and whilst there is a minimum of 14 days prior to agreement execution to give the disclosure document, there is no maximum imposed.

Justice Buchanan found that the disclosure document that SPAR gave MIS was not current at the time of the franchise agreement being executed and thus defeated the purpose of providing the disclosure document.

Summary

The SPAR case neatly illustrates that it is not enough to provide an accurate disclosure document – it is important that it is current at the time that a franchisee enters into an agreement with the franchisor. Whilst the Franchising Code of Conduct does not give us a definition of a current disclosure document, it’s the prudent franchisor that will attend to the currency of the disclosure document in order to avoid disputes with potential franchisees.

Marta was a solicitor with Adams & Partners until April 2016.