Is it enough for franchisors to simply update their disclosure document at the end of each financial year? A recent decision of the Full Court of the Federal Court,SPAR Licensing Pty Ltd v MIS QLD Pty Ltd [2014] FCAFC 50, suggests it might not be.

The case dealt with the extent of a franchisor’s obligation under the Franchising Code of Conduct to provide a franchisee with a ‘current’ disclosure document.

Background facts

SPAR and MIS entered into negotiations for a franchise in mid-2010. The franchise agreement provided that MIS, the franchisee, would operate a SPAR branded supermarket in Queensland. SPAR delivered the disclosure document to MIS in July 2010 but the franchise agreement was not entered into until February 2011.

The disclosure document included financial statements from the 2009 financial year. However, SPAR’s financial position had changed markedly since the preparation of those statements, having lost $5.8 million during the financial year ended 30 June 2010. This information was not disclosed to MIS.

Six months into the operation of the agreement, MIS sought to terminate the arrangement with SPAR in order to enter into an alternative arrangement with SPAR’s competitor, IGA. MIS cited representations made by SPAR that it could terminate on the payment of a ‘break fee’ however SPAR refused to allow MIS to terminate.

Breach of the Code?

One issue was whether an updated disclosure document should have been provided to MIS closer to February 2011, when the agreement was actually entered into.

The Code requires franchisors to provide prospective franchises with a ‘current’ disclosure document; however this term is not defined. The Code does not expressly require a franchisor to provide a ‘fresh’ disclosure document, except in certain cases such as a change in ownership of the franchisor.

The Court unanimously agreed that SPAR failed to give MIS a ‘current’ disclosure document and ordered that the franchise agreement be set aside.

Justices Buchanan and Foster held that the currency of a disclosure document is assessed at the time the franchise agreement is entered into, which in this case was February 2011. The fact that SPAR had given a disclosure statement at an earlier point in time did not mean they had already satisfied the obligation. At the time the agreement was entered into the disclosure was not current and the franchisor had breached its disclosure obligations under the Code.

Under a different line of reasoning, Justice Farrell was not satisfied that the disclosure document delivered in July 2010 was current, even at that point in time. The Code requires a disclosure document to include a solvency statement current to the end of the last financial year. Her Honour found that the disclosure statement provided in July 2010 did not comply with the Code as the solvency statement included in it was one prepared for the year ending June 2009. SPAR should have included a solvency statement for the year ending June 2010.

Misleading conduct?

The Court also considered whether SPAR’s representation regarding the ‘break fee’ was misleading or deceptive under the Trade Practices Act (now Australian Consumer Law).

The Court focused on the accuracy of the representation at the time it was made. SPAR’s termination policy at the time of the negotiations was consistent with the representation made, and was therefore not misleading or deceptive. It did not matter that SPAR’s policy had changed since.

Lessons to be learned

The case reiterates the importance of providing a genuinely ‘current’ disclosure document to prospective franchisees. The issue will soon become even more critical for franchisors, with the impending introduction in January 2015 of new penalties for breaches of the Code.