Disclosure document preparation and updating is seen to be relatively straight forward exercise, a bit like filling in a form. But the Code contains quite a few traps for the unwary, and the overlay of the s52 prohibition on misleading or deceptive conduct is frequently overlooked. In this article we explore some of the traps, and note some of the common mistakes people make when completing disclosure documents. We conclude that the relatively low cost of external involvement in this exercise on an annual basis is far outweighed by the likelihood and serious consequences of producing a non-compliant document.

The most critical trap is the disclosure obligation itself. In many cases there is a need only to produce a single disclosure document each year, but this is not always the case. The Code obligation needs to be considered in the context of the following:-

  • the purpose of the disclosure document contained in clause 6A, which refers to information "to help the franchisee make a reasonably informed decisionabout the franchise" and to give "current information.... that is material to the running of the franchised business, and
  • the prohibition on misleading or deceptive conduct contained in s52 of the Trade Practices Act, and law to the effect that silence can constitute misleading or deceptive conduct in certain circumstances. A franchise relationship which is built on express disclosure obligations could be such circumstances.

One high risk area is paragraph 6.4, where we frequently see categorization errors. We also see situations where franchisors claim to be able to use the exemption provided by paragraph 6.6, yet cannot prove that the franchisee "has requested in writing that the details not be disclosed." A signed form by a franchisee is not a "request" if the franchisor required the franchisee to sign it.

We see significant errors made in the completion of the intellectual property section where intellectual property is held by a related entity. This is also a critical area where non-compliance would be likely to have serious consequences.

Information contained in the disclosure document must be true, the information and the overall document must essentially contain the whole truth, and the information and document must create a truthful impression. We have seen many situations where the answers given do not satisfy this test, even if they do arguably answer the question asked by the relevant heading in the Code. In our experience if the document is not externally vetted by an independent person there is a much higher risk that the document will not be compliant.

Further, we have seen situations where information that was accurate at the time of preparation of the disclosure document has become inaccurate. In our view, and indeed in the view of the ACCC, there is at this point an obligation to update the disclosure document. Those companies that have internal legal counsel or a compliance officer may pick up this issue, but in most franchise systems there are inadequate internal systems to ensure compliance.

On the flip side the recent changes to the Code have created some compliance challenges, but the sometimes overlooked amendments to clause 5(1) can provide some comfort. The new clause 5(1)(b) provides that the amendments to the Code commencing 1 July 2010 only apply to a franchise agreement entered into on or after July 1, 2010. Yet we have already seen some franchisors that have implemented the changes across the board. Areas where this is particularly relevant include clause 20 requests for transfer or novation, and notifications concerning end of term arrangements.

The cost of external involvement in the updating of disclosure documentation is relatively low. On the other hand a non-compliant disclosure document can lead to an invalidated franchise agreement, adverse publicity, damages or a range of other serious consequences. Breaches of the new Code requirements in relation to end of term arrangements, unforeseen capital expenditure and transfer and novation are likely to be viewed by courts as being at the serious end of the spectrum. Now more than ever clients should be very careful if they choose to handle their own disclosure document preparation and updating.

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.