The recent NSW Court of Appeal case of Ketchell v Master Education Services Pty Ltd ("Ketchell") serves as a warning to all Franchisors that failure to provide proper disclosure in accordance with the franchising code may render their franchise agreement void.

In Ketchell, the Franchisor could not enforce the franchise agreement because it did not receive a prior statement from the Franchisee confirming it had received, read and understood the Franchising Code ("Code") and disclosure document (as required under Regulation 11 of the Code).

An appeal has been lodged against this decision in the High Court of Australia. Further information will be provided on our website when a decision is handed down.

 

Changes to the Code - How these may affect your franchise

Significant changes to the mandatory Code come into force from 1 March 2008. These reinforce the heavy onus placed on Franchisors to provide proper disclosure to Franchisees.

The major effects of these changes are:

• the content of disclosure documents and internal procedures will need to be updated and additional information provided to ensure compliance with new mandatory requirements; and
  
  
• Franchise agreements need to be reviewed to ensure they meet new restrictions under the Code.

Important changes to note:

1. Franchisors must now include a complete copy of the franchise agreement with the disclosure document. This was previously optional, but is now mandatory.
   
   
2. All associated agreements and contracts to be signed by a Franchisee must be included with the disclosure document before signing the franchise agreement. All documents required to be signed by a Franchisee must be made available to the Franchisee at least 14 days before signing the franchise agreement or before any non-refundable deposit is paid. Where documents are not available at that time, those documents must be provided when available.
   
   
3. A section 87B undertaking must be disclosed to the Franchisee not more than 14 days after the undertaking is given. The Government was of the opinion that timely knowledge of the existence and content of section 87B undertakings may be material to the ability of the franchisee to make informed decisions.
   
   
4. Franchisors must disclose any rebate or other financial benefit from the supply of goods and services to a Franchisee including the name of the business providing the rebate or financial benefit. Amounts, however, do not need to be disclosed nor the method of calculation.
   
   
5. Clauses waiving any oral or written representations made by a Franchisor are no longer permitted. Franchisors should carefully check their franchise agreements for any waivers and ensure they are removed. These waivers may not always be easy to spot and it is recommended you seek the advice of a lawyer. Franchisors inevitably will need to be careful what they promise during negotiations with Franchisees as such representations are binding.
   
   
6. Each Franchisee must be provided with a full account of marketing and co-operative funds together with auditors’ reports. This statement will need to be more detailed and must be prepared and sent to all Franchisees within four months after the end of the financial year (irrespective of whether or not a request for it is made by the Franchisee).
   
   
7. Franchisors are now obliged to provide details of names, location and contact details (where the Franchisee’s consent has not been withheld and where that information is available to the Franchisor) of past Franchisees.
   
   
8. The opt-out provision for short form disclosure has been removed.
   
   
9. The Code now requires that all materially relevant facts be communicated to Franchisees within 14 days (rather than the previous 60) from the date the Franchisor becomes aware of the facts. This is to ensure Franchisees are provided with timely disclosure of information which is materially relevant to operation of their franchise.
   
   
10. The Code will no longer provide exemptions for Franchisors not resident, domiciled or incorporated in Australia with one franchise only in Australia. Consequently, an Australian master franchisee will now have to give to sub -franchisees a disclosure document covering the master franchisee/sub-franchisee relationship.
    
    
11. The Code requires details of proceedings involving directors of Franchisors, as well as criminal convictions for non serious offences committed by directors of Franchisors, are disclosed to Franchisees. Previously, these details were only to be disclosed in actions against the Franchisor itself.
    
    
12. The Franchisee must also be provided with financial reports for any consolidated entity to which the Franchisor belongs.
    
    
13. Franchisors must now create a disclosure document within four months after the end of each financial year. This amendment was to align the audit period under the Code with the audit period stipulated in the Corporations Act 2001 (Cth).
    
    
14. A copy of the Code must be attached to the disclosure document.
    
    
15. A current disclosure document must be provided whenever there is an extension of either the scope or term of a franchise agreement.

In light of these new amendments, it is recommended that Franchisors conduct a thorough review of disclosure documents and internal procedures to ensure they comply with these new requirements under the Code.

If you require any further information on these changes, please contact Damien Wurzel on +61 3 9608 2288 or d.wurzel@cornwalls.com.au or Daryl Lim on +61 3 9608 2150 or d.lim@cornwalls.com.au