Franchise agreements can be strict arrangements that leave you with little room to make specific changes to how you operate the business. Are you in a situation where your franchisor has failed to disclose important information? You may be able to ‘cancel’ your franchise agreement. In legal terms, you may be able to have your agreement set aside or voided. This article sets out when you may be able to ‘cancel’ your franchise agreement.

Franchisor Disclosure Obligations

There are strict disclosure obligations of a franchisor under the Franchising Code of Conduct (the Code). A failure to meet the disclosure obligations under the Code may mean that you are able to ‘cancel’ your franchise agreement. If your franchise agreement is cancelled, it becomes unenforceable. Once your franchise agreement is unenforceable, you no longer have to meet your obligations under the contract. However, whether a franchisor has fulfilled the disclosure obligations under the Code will depend on the circumstances.

What Documents Should I Receive When Purchasing a Franchise?

When you purchase a franchise, the franchisor should provide you with the following documents:

  • a franchise agreement;
  • a disclosure document (this document contains all the financial records and the solvency statement);
  • an information statement;
  • the Franchising Code of Conduct; and
  • any other documents relating to the franchise (e.g. sub-lease documents).

The purpose of these documents is to help you make a reasonably informed decision about whether you should buy the franchise. So, what happens if a franchisor does not provide you with a document?

Voiding or Setting Aside a Franchise Agreement

If the franchisor did not provide one of the key documents listed above, a court can ‘cancel’ or make your franchise agreement void. If this is the case, then you and the franchisor will be put back in the position as if there was no agreement. All costs incurred in relation to the franchise would be recoverable from the franchisor.

For example, this could mean that you are refunded any money you spent purchasing the franchise (as if you never purchased it).

If, however, the court sets aside the agreement, it is no longer effective. Having the agreement set aside means you will not be liable for future fees under the franchise agreement.

Circumstances Where a Franchise Agreement May Be Set Aside or Voided

Failure to Provide the Disclosure Document or Omitting Vital Information

It may be possible to ‘cancel’ the franchise agreement if the franchisor has not provided the disclosure document or omitted vital information. The disclosure document will set out the following:

  • the type of business that the franchisor currently operates;
  • details about the 14 day cooling off period;
  • the franchisor’s previous ten years of business experience;
  • details of all payments required under the franchise agreement;
  • cost of marketing and other common funds;
  • details of the intellectual property included in the agreement;
  • contact details for any franchisee within the past three years;
  • details regarding the site or territory for your franchise;
  • details regarding the supply of goods or services;
  • the exit process at the end of the franchise agreement;
  • details of any litigation involving the franchisor; and
  • a solvency statement including the franchisor’s financials from the past financial year

This list provides valuable information that helps the franchisee determine the state of the franchise and the experience of the franchisor. When deciding whether to enter the franchise agreement, this information, along with professional advice, should be enough to make an informed decision. This standard is what the court will be looking at when making their determination.

Failure to Provide Up-to-Date Information

The franchisor must provide a prospective franchisee with an updated version of the disclosure document. The disclosure document contains the financial records and solvency statement for the last financial year.

The franchisor needs to prepare a new disclosure document at the start of each financial year (July 1). The accountant needs to perform an audit of the last year, and any relevant litigation the franchisor is a party to needs to be examined. Franchisors may also want to increase fees after looking at the financial records.

The delay in preparing the disclosure document can create difficulties for franchisees. This is particularly the case if they are looking to enter into a franchise agreement shortly after July 1 as they may not have access to the most current information.

In a recent Queensland case, a franchisee sought to enter into a franchise agreement shortly after July 1, and did not have access to the most recent financial information. In this case, the disclosure document had not been updated in over a year. As a result, they were unable to make an informed decision. The most recent records would have shown that the franchise had taken a considerable downturn and was in serious financial trouble. As a result, the court determined that the agreement was unenforceable, so the franchisee was no longer bound by the ongoing obligations of the franchise agreement.

Failure to Provide Continuing Disclosure

In addition to providing all the relevant documents, franchisors must also inform the franchisee about certain events. They must do so within 14 days of becoming aware of the events. For example:

  • franchisees initiating court proceedings;
  • change of ownership; and
  • external administration etc.

In addition, if a franchisee requests an updated disclosure document, the franchisor must provide this within 14 days. Similarly, the franchisor must provide an updated disclosure document 14 days prior to any renewal of the franchise agreement. However, if the franchisor provides the document late, this delay is not sufficient to void the agreement. Instead, penalties apply to franchisors who fail to comply with their disclosure requirements. If you have suffered financial loss because of information that the franchisor should have provided, then you may also be able to recover your loss.

Key Takeaways

Franchisors are now under increasingly strict disclosure obligations. The courts are placing stricter obligations on franchisors to provide all of the required information. Failure to disclose all required information now may result in a franchise agreement being set aside or voided. This is particularly if you, as the franchisee, can show that:

  • you would not have entered into the franchise agreement if the franchisor provided you with the information; or
  • the franchisor’s failure to provide the material prevented you from making a reasonably informed decision.

However, it is relatively difficult to prove the elements above to ‘cancel’ your franchise agreement due to the extent of proof required. If you have questions about ‘cancelling’ your franchise agreement, get in touch with LegalVision’s franchise lawyers on 1300 544 755 or fill out the form on this page.

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