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Reminder Franchisors

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Pursuant to the Franchising Code of Conduct (the Code), franchisors are required to create and maintain a Disclosure Document in the form prescribed by the Code. The Disclosure Document is to be provided to prospective franchisees and franchisees renewing their Franchise Agreements or extending the scope or term of their Franchise Agreements.

The purpose of a Disclosure Document is to provide a prospective franchisee or a franchisee proposing to renew or extend its Franchise Agreement with sufficient information to enable the franchisee to make an informed decision about whether or not to enter into a franchise or renew or extend the franchise, and to provide franchisees with current information that is material to the operation of the franchised business.

In addition, although there is no specific requirement for a franchisor to provide a current Disclosure Document to each of its existing franchisees (who are not renewing or extending their Franchise Agreements), a Franchisor must provide its current Disclosure Document to a franchisee within 14 days of receiving the franchisee’s written request for it. Franchisees are entitled to make such a request once within a 12 month period.

We often receive queries from franchisors about how often their Disclosure Document should be updated and the appropriate time to do so.

Pursuant to clause 6 of the Code, the franchisor’s Disclosure Document must be updated within 4 months of the end of each financial year. What this means is that a Disclosure Document does not need to be updated more than once per year. So a Disclosure Document dated 31 October, will be valid until 30 October the following year. Accordingly, there is no need to amend the statistical information in the Disclosure Document (ie the numbers and details of franchisees) each time there is a change in the network.

Of course, the above is subject to the provisions of clause 18 of the Code which lists material facts or matters that a franchisor must inform a franchisee or prospective franchisee about, in writing, within a reasonable time not exceeding 14 days after the franchisor becomes aware of the fact or matter. The facts or matters detailed in clause 18 of the Code are as follows:

  • a change in the majority ownership or control of the franchisor
  • proceedings against the franchisor or a franchisor director in Australia alleging:
    • breach of Franchise Agreement or contravention of trade practices law
    • contravention of the Corporations Act 2001
    • unconscionable conduct or misconduct or
    • an offence of dishonesty
  • a judgement against the franchisor (other than for unfair dismissal) under various provisions of the Independent Contractors Act 2006, the Industrial Relations Act 1996 (NSW) and the Industrial Relations Act 1999 (QLD)
  • civil proceedings in Australia against the franchisor or a franchisor director by at least 10% or 10 of the franchisor’s franchisees in Australia
  • any judgement entered against the franchisor in Australia that is not discharged within 28 days for at least $100,000 for a small proprietary company or $1M for any other company
  • proceedings that would otherwise need to be disclosed in Item 4 of the Disclosure Document
  • if the franchisor becomes an externally administered body corporate
  • a change in the intellectual property or ownership or control of the intellectual property which is material to the franchise system
  • the existence and content of any undertaking or order of s87B of the Trade Practices Act 1974 (Cth)

Additional obligations regarding the provision of Disclosure Documents arise where there is a master franchise relationship. In such cases, both the Head Franchisor and the Master Franchisee/Sub-Franchisor must provide the prescribed disclosure information, either by providing a joint Disclosure Document that addresses their respective obligations or by each issuing a separate Disclosure Document.

For those franchisors whose financial year ends on 30 June, their Disclosure Document must be updated annually by no later than 31 October.  Additional amendments may be required this year to incorporate the Code changes which came into effect on 1 July 2010. Any Disclosure Document and Franchise Agreement issued on or after 1 July 2010 must comply with the amended Code so franchisors should take this opportunity to ensure their documents are appropriately updated.

Author: Esther Gutnick

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