The New South Wales Court of Appeal in the case of Alpha Centauri Enterprises Pty Ltd v Mortgage House Australia Pty Ltd [2010] NSWCA 188, has clarified that an agreement between parties can be a ‘Franchise Agreement’ for the purposes of the Trade Practices Act 1974 (Cth) and the Franchising Code of Conduct regardless of the name given to the agreement. It has also illustrated that it will be the substance of the rights and obligations provided for in the agreement that will categorise an agreement as a ‘Franchise Agreement’.
This case re-emphasises the need for parties to ensure when structuring agreements to reflect on the requirements that are met to constitute a franchise agreement and if participation in the franchising regime is to be avoided to draft appropriately.
1. The Facts
Mortgage House of Australia Pty Ltd (Mortgage House) operates a mortgage broking business providing financial services to members of the public through arrangements with ‘business partners’. Between 2001 and 2005, Alpha Centauri Enterprises Pty Ltd (Alpha) was one such business partner.
The ‘Business Partner Agreement’ (Agreement) between the parties was terminated in April of 2005 with Alpha then bringing proceedings alleging that Mortgage House had repudiated the Agreement. Mortagage House cross-claimed, seeking relief for loss and damage suffered by it as a result of the alleged repudiation by Alpha. Both claims had since been dismissed, however, Alpha then brought an appeal against the rejection of some of its claims.
Clause 4.2 of the agreement between the parties required that Alpha “use only stationery…. supplied by [Mortgage House]… at the cost of [Alpha]”, whilst Clause 19.3 of the agreement required that Alpha pay Mortgage House one-third of the sale price of the business when it was transferred.
Furthermore, an arrangement existed with respect to the $600 application fee paid in respect of a loan application by which that fee was collected by Alpha and banked by it, subject to an obligation to account to Mortgage House for $375 for each loan that settled.
2. Central Issue
The main issue was whether the agreement was a franchise agreement for the purposes of the Trade Practices Act 1974 (Cth) and the Franchising Code of Conduct (Code) made under that Act.
If the agreement was in fact held to be a franchise agreement, issues arose as to the consequences of failure to serve disclosure documents, the purported repudiation of the agreement by Mortgage House and Alpha consequently abandoning the business.
3. The Decision
Ultimately the appeal was dismissed. The court held that the agreement between the parties did in fact constitute a franchise agreement under paragraph (d) Clause 4.1 of the Code.
Justice Hodgson was of the opinion that by virtue of Clause 4.2 the agreement between the parties was an agreement by Alpha to pay for goods which were to be supplied Mortgage House within Clause 4.1(d)(ii) of the Code.
As Mortgage House was contractually entitled to require payment to itself for goods it supplied, and Alpha was contractually bound in that event to pay Mortgage House for them, Clause 4.1 of the Code was satisfied.
With respect to Clause 19.3 of the agreement, Justice Hodgson highlighted that Mortgage House had to agree, as a condition for entering into or continuing the business that such a payment would be made if those circumstances occurred. He held that paragraph (d) is engaged ‘not merely by actual payment, but also by the making of an agreement to pay.’
Finally, the loan application fee was properly described as a ‘franchise service fee’, thus satisfying clause 4(d)(iii) of the definition of a ‘franchise agreement’ in the Code.
This amount was not shown to be a payment for goods or services provided by Mortgage House and, such evidence as there was before the Court, established on the probabilities that it was not such a payment. Rather, it was a fixed amount which might properly be described as a ‘franchise service fee’ within the meaning of paragraph (d)(iii) Clause 4.1 of the Code.
Subsequently there was a requirement that Alpha be given a disclosure document prior to entering the agreement in addition to a requirement that Mortgage House provide notice of intention to terminate, before terminating the agreement
4. Consequences
This case illustrates that a franchise agreements governed by the Trade Practices Act 1974 (Cth) and the Code can exist regardless of the name given to the agreement.
Where an agreement involves payments for goods or services, or payments of fees from one party to another within the ambit of Clause 4.1(d) of the Code, the parties may be obligated to abide by numerous duties laid out in the Code.
Parties would therefore find it prudent to ensure that any agreement, regardless of what they call it, does not involve the mandatory payment of fees or the mandatory purchase of goods or services such that it will fall within Clause 4.1(d) of the Code.
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The material contained in this publication is no more than general comment. Readers should not act on the basis of the material without taking professional advice relating to their particular circumstances.
© DibbsBarker 2010
