The Franchising Code of Conduct (the Code) requires all franchisors to prepare a Disclosure Document. Item 4 of the Disclosure Document requires a franchisor to disclose in relation to itself, a director, an associate and/or a director of an associate the following:
- Details of any proceedings alleging:
- A breach of a franchise agreement;
- Contravention of trade practice laws or the Corporations Act 2001 (Cth);
- Unconscionable conduct;
- Misconduct; or
- An offence in dishonesty; and,
- Details of any proceedings in relation to section 12 of the Independent Contracts Act 2006 (Cth) and any statutory instruments related to workplace relations or independent contractors; and
- Whether any party has:
- Been convicted of a serious offence in the past ten years;
- Had a judgement made against it in relation to the types of proceedings set out above in the past five years; and
- Been bankrupt, insolvent or under administration in the previous ten years.
For most of the disclosure requirements set out in item 4, they are relatively clear. Some, however, are less so and some clarification and explanation is required. This article explores some of the technical and vague terms in item 4.
Who is an Associate?
You will notice that the obligation of disclosure extends beyond just the franchisor and also includes its associates and directors of its associates. It is important to state that the term “associate” under the Code differs to its definition under the Corporations Act 2001 (Cth). It is much wider and includes in addition to any directors or related body corporates:
- A shareholder (directly or indirectly) that holds or controls at least 15% of the shares in the franchisor entity;
- A partner of the franchisor; and
- Any party (being a person or company) that has a relation that is “relevant to the franchise system”.
The last point is the most important, as it is exceptionally wide and can make it difficult to define. The Code does, however, provide some guidance here by stating that it includes:
- Any party that gives a franchisee the right to occupy premises;
- Any party who owns any intellectual property used by the franchise system; and
- Any person involved in marketing and promoting the franchise.
Associates that fall into categories 2 and 3 are relatively straightforward. However, it becomes more difficult for those who fall into categories 1 and 4.
It is unrealistic for a franchisor to list all their suppliers although it would be expected to set out any which are important to the franchise system. For example, a café franchise would be expected to disclose its coffee bean supplier especially if it sources its beans only from one company.
As to point 4, again, if a franchisor relies entirely upon one party to provide its marketing, then it would need to be disclosed. It is, however, a matter of judgment and will depend upon the specific circumstances of the relationship. Nevertheless, it is worthwhile emphasising that the purpose of disclosure is to ensure that a franchisee is given as much information as possible so as to allow it to make an informed decision. If a relationship may be relevant, then likely it will need to be disclosed.
Proceedings and Judgments
Disclosure is required in relation to any proceedings that allege any of the claims as set out above. In most cases, as they these types of proceedings are brought by a franchisee against a franchisor, it is easy to determine whether the claim satisfies the requirements. It’s important to recall however that disclosure is required not just for any current proceedings but also any judgments made in the past five years that included an allegation. This includes any judgments made in favour of the franchisor.
In determining whether a franchisor needs to disclose a matter as a “serious offence” or not, the Code provides guidance by defining a serious offence as:
- Any offence where a person is imprisoned for at least five years; or
- A contravention of any provision of the Corporations Act 2001 (Cth).
Disclosure Document Obligations
It is important to ensure that a franchisor discloses all relevant information in the Disclosure Document. A failure to disclose can not only result in a franchise agreement being declared void, but it can also lead to significant penalties. Item 4 of the Disclosure Document is not the only provision of the Disclosure Document that contains ambiguity. However, this article should hopefully provide you with some guidance. If you are unsure about your disclosure obligation, contact our franchise lawyers on 1300 544 755.