The high cost of deficient disclosures to prospective franchisees

The Federal Court has issued its first financial penalties under the Franchising Code of Conduct (Code) for failing to provide adequate disclosure to a prospective franchisee.

‘Pastacup’ system, Morild Pty Ltd has been ordered to pay $100,000 for providing deficient disclosure about the franchise. The co-founder and former Director Mr Bernstein has also been ordered to pay $50,000 for being knowingly concerned in the breaches.

The disclosure document failed to disclose that the Mr Bernstein had been in directorship positions for two previous franchisors of the ‘Pastacup’ system which had both become insolvent. The Court held that this was relevant business experience that should have been disclosed to prospective franchisees to enable them to make fully informed business decisions about entering into a franchise.

These are the first court ordered penalties for breaches of the Code and should serve as a serious message to franchisors about their obligations to disclose relevant matters as provided for under the Code. Examples of relevant matters include such things as changes in the ownership of the franchise or one of its associations, litigation against the franchisor or one of its directors or changes in ownership of the intellectual property.

If you have any questions about your obligations relating to disclosure under the Code or any general franchising questions, please contact us.