When deciding to purchase a Franchise the Franchisor is required to provide to the potential Franchisee a disclosure document, that among many other things details the current financial position of the franchisor. Under the Franchising Code of Conduct the franchisee is to be provided with a ‘current’ disclosure document, however the term ‘current’ is not defined in the Code. Generally a franchisor will update their Disclosure Document at the end of each financial year.
A recent decision of the Full Court of the Federal Court in Spar Licensing Pty Ltd v MIS QLD Pty Ltd [2014] FCAFC 50 has highlighted the fact that updating the Disclosure Document once a year may not be sufficient to meet the obligations the Franchisor has to the potential Franchisee.
In this case MIS entered into negotiations with SPAR to purchase a SPAR franchise in mid 2010. MIS was provided with a Franchise Agreement that included a Disclosure Document in July 2010. It was not until February 2011 that MIS entered into the Agreement with SPAR to operate a SPAR branded supermarket in Queensland.
The Disclosure Document provided to MIS included financial statements from the 2009 financial year, however SPAR’s financial position had changed drastically between this time and the time MIS entered into the Agreement, with the franchisor having lost $5.8 million during the financial year ended 30 June 2010. This change in their financial position was not disclosed to MIS.
Six months after entering into the Agreement MIS sough to terminate the arrangement with SPAR in order to enter into an alternative Franchise Agreement with IGA, a competitor of SPAR. SPAR refused the request of MIS to terminate the Agreement and the issue was brought before the Court.
In deciding whether to allow the terminate of the Agreement the court had to consider whether MIS should have been provided with an updated Disclosure Document closer to the date of February 2011, in which they actually entered into the Agreement with SPAR.
In considering this the Court had to consider the meaning of the term ‘current’ due to it not being defined in the Code. The Court was unanimous in its decision to set aside the Agreement as it did not believe that SPAR had provided a ‘current’ Disclosure Document to MIS, due to the financial information contained within.
The financial information provided to SPAR in July 2010 was in the Court’s opinion out of date even at this time, as the Code requires for the Disclosure Document to contain a solvency statement current to the end of the last financial year. The information provided was for the financial year ended 30 June 2009, meaning it did not comply with the Code.
Further to this the court inferred that more up to date financial information should have been provided to MIS, as by the time MIS entered into the Agreement in 2011 the financial information contained within was even further out of date and therefore the court found that SPAR had breached its disclosure obligations under the Code. Financial information from the 2010-2011 financial year should have been provided to MIS.