Disclosure document preparation and updating is seen to be relatively straight forward exercise, a bit like filling in a form. But the Code contains quite a few traps for the unwary, and the overlay of the s52 prohibition on misleading or deceptive conduct is frequently overlooked. In this article we explore some of the traps, and note some of the common mistakes people make when completing disclosure documents. We conclude that the relatively low cost of external involvement in this exercise on an annual basis is far outweighed by the likelihood and serious consequences of producing a non-compliant document.

The most critical trap is the disclosure obligation itself. In many cases there is a need only to produce a single disclosure document each year, but this is not always the case. The Code obligation needs to be considered in the context of the following:-

• the purpose of the disclosure document contained in clause 6A, which refers to information "to help the franchisee make a reasonably informed decisionabout the franchise" and to give "current information.... that is material to the running of the franchised business, and
• the prohibition on misleading or deceptive conduct contained in s52 of the Trade Practices Act, and law to the effect that silence can constitute misleading or deceptive conduct in certain circumstances. A franchise relationship which is built on express disclosure obligations could be such circumstances.

We see significant errors made in the completion of the intellectual property section where intellectual property is held by a related entity. This is also a critical area where non-compliance would be likely to have serious consequences.

The cost of external involvement in the updating of disclosure documentation is relatively low. On the other hand a non-compliant disclosure document can lead to an invalidated franchise agreement, adverse publicity, damages or a range of other serious consequences. Breaches of the new Code requirements in relation to end of term arrangements, unforeseen capital expenditure and transfer and novation are likely to be viewed by courts as being at the serious end of the spectrum. Now more than ever clients should be very careful if they choose to handle their own disclosure document preparation and updating.

This article is available in full at Mondaq.