The Full Court of the Federal Court handed down a decision this year that has the potential to affect Business people who might not consider themselves involved in a franchise relationship.
The decision also places in doubt the extent to which a Franchisor must go, when undertaking the process of issuing a disclosure document. We believe that this process must be dictated by the particular circumstances of the Franchisors Associates. It must be noted however that it may not be sufficient to issue a disclosure document to the Franchisee alone. It is probably necessary to also issue that disclosure to directors and shareholders if dealing with a company and if dealing with a trust then also to the beneficiaries of the trust. A brief summary of the case is provided in our Article published on 27 August 2012. The case reference for those who may wish to read it is Rafferty V Madgwicks (2012) FCAFC 37.
Where there is a passive investor, the Franchisor must serve the Disclosure separately upon that investor. This is because the definition of franchise being “an interest in a franchise” extends to a beneficial interest in shares in a company that owns a franchised business.
It is also worth noting that even before the actual franchise agreement is provided to a franchisee, a heads of agreement might be considered to be a franchise agreement and that heads of agreement may be caught by the Code. This will depend upon the particular circumstances however, it is likely that if the heads of agreement is intended to be binding upon the parties (in relation to entry into the franchise) then it makes sense that a disclosure must be issued and all the usual time frames relating to a Franchise Agreement will apply.
