Under the Franchising Code of Conduct (FCC) a franchisor is obliged to update a disclosure document which has been issued previously to a franchisee within 4 months after the end of each financial year.
Recent proceedings initiated by the ACCC suggest an increasing focus on and scrutiny of disclosure obligations in the protection of franchisees.
Disclosure exemption
Updated disclosure is not required under a Disclosure Exemption where a franchisor:
- during the last financial year – did not enter into more than one franchise agreement (including transferring, renewing or extending a franchise agreement); and
- in the following financial year – does not intend to enter into another agreement.
However, in each 12 month period, if a franchisee makes a written request for a disclosure document then, within 14 days of the franchisee’s request, a franchisor must provide a franchisee with a copy of its latest disclosure document so that it reflects the franchise’s position as at the end of the financial year before the financial year in which the request is made.
If a franchisor does not have an updated disclosure document, as it is otherwise covered by the Disclosure Exemption, then the FCC provides a franchisor with an additional period of up to two months to update the disclosure document and to provide a copy to the franchisee.
Scope of update
A franchisor is obliged to provide franchisees and prospective franchisees with updated disclosure of matters that are ‘materially relevant facts’.
A materially relevant fact is a key piece of information about a franchisor or its franchise system, which could have an effect on a franchisee’s business and includes:
- ownership and control – a change in majority ownership or control of the franchisor, franchise system, or an associate of the franchisor;
- litigation – relevant court proceedings or judgments against the franchisor or one of its directors;
- intellectual property – a change in the intellectual property, or ownership or control of the intellectual property that is material to the franchise system.
Breach of disclosure obligations
In a recent Media Release the ACCC indicates that it intends to take court action relating to alleged breaches of the revised FCC (which was introduced in 2015), to demonstrate that the new model Code has the power to penalise franchisors in breach.
Ultra-Tune and Geowash proceedings
In May 2017, the ACCC commenced Federal Court proceedings against a franchisor (Ultra-Tune) for alleged breaches of the FCC, which include:
- failure to update its disclosure document, or provide copies of it, to a franchisee within the specified time period;
- failure to provide a prospective franchisee with disclosure documents, which must be provided before accepting a non-refundable payment.
In addition, in early June 2017, the ACCC applied to the Federal Court for leave to commence proceedings against Geowash Pty Ltd (subject to Deed of Company Arrangement) (Geowash), a national car wash franchisor that has been marketing and selling hand car wash franchises since 2013.
Amongst other things, the ACCC alleges that Geowash’s directors failed to disclose commissions paid to directors from franchisee funds. The ACCC has stated that it is ‘particularly concerned’ about the allegations of improper commission payments from franchisee funds and franchise company directors using funds in a way other than what is permitted by franchise agreements.
If granted leave to commence proceedings against Geowash, the ACCC has the capacity to seek declarations, injunctions, an order for the payment of pecuniary penalties, orders for non-party consumer redress, corrective notice orders, and costs.
What to do?
The Ultra-Tune and Geowash proceedings signal that franchisors and their directors must be particularly vigilant when it comes to the disclosure requirements under the FCC.
In prosecuting franchisors who are in breach of the FCC disclosure requirements, the ACCC has a range of penalties it can impose including issuing infringement notices (up to $9,000 per breach), or the initiation of court proceedings and to seek civil penalties (currently up to $54,000 per breach).
Franchisors should be aware of their disclosure obligations under the FCC. Compliant disclosure documents must be provided within the prescribed timeframes and particularly in circumstances where a pre-existing franchise agreement is renewed, transferred or varied.
Should you require advice about your obligations under the Franchising Code of Conduct, or require assistance in preparing a variation to your pre-existing agreements, please contact our Commercial Principals Mark Fitzgerald or Georgina Odell.