Thinking | 23 September 2019

Disclosure Documents and Franchise Agreements – Time for a Spring Clean!

Yes, it is that time of the year again!   If you have entered into a franchise agreement in the last financial year and/or intend to enter into any new franchise agreements in the coming financial year, it is time to make sure that your disclosure document is current.

Under the Franchising Code of Conduct (the Code), if your financial year ended on 30 June 2019, you have until 31 October 2019 to issue an updated disclosure document to your franchisees.

You must therefore ensure that all information in your disclosure document is current and provides disclosure in accordance with the recommendations of the Australian Competition and Consumer Commission (ACCC). For information regarding this, see here.

Some key items that you may be required to update include:

  • your list of officers and their business experience for the last ten years;
  • your list of “associates”;
  • your list of existing franchised businesses, including details of any franchises that have been transferred, ceased operating, bought back or acquired, or any franchise agreements that have been terminated or not extended;
  • rebates or other financial benefits that you, or your associate, receives from the supply of goods or services to your franchisees;
  • your estimate of the establishment costs and ongoing fees and payments that franchisees or prospective franchisees might reasonably be expected to incur in setting up and conducting the franchised business;
  • your intellectual property; and
  • any incidences of unilateral variations that have been made to existing agreements.

You will also need to provide:

  • updated financial records for your business reflecting your performance in the past financial year (or an independent auditor’s report);
  • updated financial records for any marketing cooperatives funds; and
  • a statement of solvency for the last financial year given by a director.

Franchise Agreements

In addition to updates to your disclosure documents, we remind you that:

Franchise agreements can be subject to the unfair contracts regime.

The inclusion of unfair contract terms in franchise agreements was a particular concern of the Parliamentary Joint Committee on Corporations and Financial Services (Committee).  In its ‘Fairness in Franchising’ report, the Committee proposed introducing penalties for the use of unfair contract terms in franchise agreements, including civil pecuniary penalties and the ability for the ACCC to issue infringement notices.

If any of your franchisees fall within the definition of ‘small business’ in the Australian Consumer Law, you should ensure that terms in your franchise agreements do not constitute ‘unfair terms’.

Particular attention should be paid to those clauses that are not necessary or appropriate to protect your interests, including overly-burdensome restraints, liquidated damages clauses, and requirements to purchase supplies from specific (more expensive) suppliers.

Application of the Privacy Act 1988 (Cth)

Amendments to the Privacy Act 1988 (Cth) came into effect in 2018.

These amendments introduced an obligation to notify individuals whose personal information is involved in a data breach that is likely to result in serious harm.

While your franchisees may not be required to comply with such amendments, any breaches pertaining to any data which you own (including customer databases) may need to be disclosed.

You should review your privacy policy and operating manuals to ensure compliance with your obligations under the Privacy Act 1988 (Cth).

Ipso facto law reforms

The ipso facto law reforms came into effect on 1 July 2018.

Under the reforms, you will not be able to rely on any ipso facto clauses in a franchise agreement where a franchisee has gone into administration if that agreement was entered into after 1 July 2018.  If you intend to enter into new franchise agreements this financial year, we recommend reviewing your termination rights under those agreements.

If you would like to discuss any of the above please feel free to contact our franchising team.

Contact

Jacqui Barrett

Partner & Head of US Practice

In the corporate space, Jacqui regularly advises and assists client with mergers and acquisitions, corporate structuring, corporate compliance and...

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