Franchise Case Law: Understanding Franchisor Disclosure

Case

SPAR Licensing Pty Ltd v MIS QLD Pty Ltd [2014] FCAFC 50; 314 ALR 35

Introduction

According to our Franchise Lawyers, this is one of the leading franchising cases on disclosure. The Full Court of the Federal Court held in this case that franchisors are under a responsibility to ensure that a disclosure document, provided to a prospective franchisee prior to that franchisee entering into a franchise agreement, is current at the time the franchise agreement is entered into, as distinguished from current at the time the disclosure document was given.

Facts

In February 2011, MIS Qld Pty Ltd (MIS) entered into a franchise agreement with SPAR Licensing Pty Ltd (SPAR). The franchise agreement was a culmination of over 12 months of ongoing negotiations.

The disclosure document, upon which MIS relied when entering into the franchise agreement, was received by MIS on July 2010. That disclosure document contained a “Director’s Statement” and an “Independent Auditor’s Report” for the financial year ending June 2009. At that time (i.e. July 2010), the financial information contained in the Disclosure Document, was current, as SPAR:

1. had not yet updated its financial records; and
2. was not required to update the financial information contained in the Disclosure Document until 4 months after the end of the financial year (October 2010).

Following a dispute between SPAR and MIS, MIS sought to end the franchise relationship by arguing that SPAR had breached the Franchising Code by not providing it with a “current” Disclosure Document.

MIS’s argument

MIS argued that SPAR breached the Franchising Code of Conduct, as it required franchisors to provide a “current franchise agreement” to franchisees before they enter into a franchise agreement. According the the franchise legal team at LegalVision, this is still the case. MIS argued that by the time the franchise agreement was entered into, (i.e. February 2011), the Disclosure Document, which they had received in July 2010, was no longer “current”, as the financial information which they had been provided was relevant to the financial year ending 2009 and not to the financial year ending 2010.

This was especially relevant because between the end of the financial year ending 2009 to the end of the financial year ending 2010, SPAR’s financial position had deteriorated considerably and MIS argued that they would not have entered into the franchise agreement had they known the financial situation of SPAR.

Decision

By a decision of 2:1, the Full Court of the Federal Court agreed with MIS’s argument and set aside the franchise agreement (i.e. the franchise agreement came to an end). As to when the franchise agreement was to be held to have come to an end, it was decided on the facts, with Buchanan J and Foster J agreeing, that neither side was entitled to their respective claims of damages (if it was held that the franchise agreement came to an end from the commencement date, then MIS would be entitled to damages, if it was held that the franchise agreement came to an end at a later date, then SPAR would be entitled to damages) and therefore the franchise agreement was to come to an end as of the date of judgment. 

Conclusion

As it has been shown in this case, it is important that franchisors understand the following:

1. that disclosure obligations do not end after a disclosure document has been provided to a prospective franchisee;
2. that care should be taken during the end of a financial year/ beginning of a new financial year; and
3. that the contents of their disclosure documents always remain up to date.

If you would like to speak with a LegalVision franchise lawyer, get in touch with our Client Care team on 1300 544 755. They will happily provide you with a free legal health check, and a fixed-fee quote for any legal work you may need.