The Franchising Code of Conduct requires franchisors to provide prospective franchisees with a disclosure document at least 14 days before they sign a franchise agreement or hand over non-refundable money. Annexure 1 to the Schedule of the Code sets out information that the franchisor is required to disclose, such as information about existing and former franchisees and franchised businesses.

A franchisor’s disclosure document could be defective if it contains inaccurate or wrong information, or it omits information that is required to be disclosed. However, a franchisee is not automatically entitled to terminate the franchise agreement or to receive an award of damages. The franchisee or its directors need to satisfy the Court the franchisor’s defective disclosure caused them to suffer identifiable loss and damage.

For example, in St Leger Investments Pty Ltd v True Blue James Pty Ltd & Anor [2013] FCCA 601, the franchisor’s disclosure document omitted the entity and contact details of a former franchisee and a state master franchisor. However, the Court was not prepared to award damages to the franchisee because:

• the franchisee’s director chose to enter into the franchise agreement, notwithstanding his knowledge that there had been the unsuccessful involvement of other franchisees in his area in the past; and

• the Court was not satisfied that even if the franchisee’s director had contacted the previous franchisee and state master franchisor, that he would not have committed himself to the franchise business.

Similarly, in Dorrian & Anor v Rushlyn Pty Ltd & Anor [2013] FMCA 101, the franchisor’s disclosure document did not disclose that up to fifteen regional master franchisees that had ceased to operate. The franchisee’s directors claimed that if they been aware of this information, they would have made further enquiries and would not have entered into the franchise agreement unless given a satisfactory explanation by the franchisor. However, the Court was not prepared to make an award for damages because the franchisee’s directors did not demonstrate:

• what an unsatisfactory explanation would have been; or

• whether the evidence indicated that the circumstances of the closures, whether individually or cumulatively, would or would not have been “unsatisfactory” and whether they would have proceeded with the transaction or not.

Although the franchisors were not penalised for their non-disclosure in these cases, franchisors should be aware that they may have to pay pecuniary penalties for future breaches of the Code if recommendations accepted by the Australian Government in 2013 in respect of the enforcement of the Code are introduced as anticipated.