Franchising Update September 2008

Readers may remember in our Franchising Byte of April this year we signalled the High Court’s intention to consider a franchisor’s appeal in the case of Master Education Services v Ketchell (‘Ketchell’s case’): The case has now been heard, a decision has been made and franchisors around Australia can breathe a little easier. 

Background

Ketchell’s case involved a Franchisor and their failure to fulfil an obligation imposed by clause 11 of the Franchising Code of Conduct (‘Code’) and mandated by section 51AD of the Trade Practices Act (‘TPA’).   

Clause 11 of the Code provides that a franchisor must not enter into a franchise agreement unless it receives, amongst other things, a written statement that the franchisee or prospective franchisee, has received, read, and had a reasonable opportunity to understand the disclosure document and the Code. 

Section 51AD of the TPA makes the Code law by mandating that "A corporation must not, in trade or commerce, contravene an applicable industry code."

The Franchisor in this case did not obtain such a statement and faced the argument that no franchise agreement existed in light of the failure to abide by the provisions of the Code when the Franchisor tried to sue to recover certain franchisee fees owing to it.

Prior to the High Court decision

Prior to the High Court’s decision this morning, the highest court in Australia that had considered the matter was the New South Wales Court of Appeal. That Court found that failure by a Franchisor to comply with clause 11 of the Code rendered a franchise agreement illegal, thereby preventing the recovery by the franchisor of royalties owing under that agreement. 

The implication of this decision was seen as being that any failure on behalf of a Franchisor to fulfil any of their obligations under the Code could render a franchise agreement illegal and preclude the recovery of royalties under it and possibly result in recovery of moneys paid by the franchisee under the illegal document. 

This has now changed.

The law as it now is

The High Court, in a unanimous decision, allowed the appeal of the Franchisor in Ketchell’s case. In its judgement the High Court says in effect that the TPA with its wide set of remedies available to provide relief is the preferable law to determine the consequence of non-compliance.

Practically this means that, where a Franchisor fails to fulfil an obligation under the Code, the franchise agreement will not generally be rendered illegal. Instead a franchisee will be entitled to apply for relief under the TPA, ranging from, for example, the granting of an injunction against the Franchisor under section 80 precluding enforcement of terms in the agreement, applying to have the agreement declared voidable and set aside (which could have the same practical effect as if the agreement were declared illegal) to an award of damages or compensation to the Franchisee under sections 82 and 87.

Illegality not ruled out entirely

While Ketchell’s case is a win for that Franchisor, it is premature to treat this new decision as a ‘get out of jail free card’ for all behaviour in contravention of the Code.