High Court case brings certainty to the franchising industry

The franchising industry has waited with baited breath for the outcome of the High Court appeal in Master of Education Services Pty Limited v Ketchell.

Background

Section 51AD of the Trade Practices Act 1974 (Cth) provides that a company must not contravene an industry code.

Clause 11(1) of the Franchising Code of Conduct (which governs franchise agreements) prohibits franchisors from entering into or receiving any non-refundable money under a franchise agreement unless the franchisor has received from the franchisee a written statement notifying that it has received, read and had a reasonable opportunity to understand the disclosure document and the Code.

The Case

In 2003, Master of Education Services Pty Ltd brought proceedings against Ms Ketchell to recover monthly fees due under a franchise agreement plus interest. Ms Ketchell claimed that Master of Education Services Pty Ltd failed to comply with clause 11 of the Code so that it was unlawful for them to demand the monthly fees.

The NSW Court of Appeal ruled that non-compliance with the Code rendered the agreement illegal and unenforceable.

The question on appeal to the High Court was whether the franchise agreement entered into by Master of Education Services Pty Ltd was void and unenforceable because they had not received the required disclosure statement from Ms Ketchell.

Outcome

The unanimous High Court ruling was that a failure to comply with clause 11(1) of the Code is a breach of section 51AD of the Act, but does not necessarily bring the contract to an end. This means that a technical breach of an agreement may not necessarily render it void.

The case is a welcome result for all those in the franchising industry as the decision of the NSW Court of Appeal was believed by many to have set a dangerous precedent, allowing even procedural or trivial circumstances of non-compliance with the Code to bring the contract to an end.

While the High Court case removes the opportunity for disgruntled franchisees to rely on the Court of Appeal decision as a way of avoiding their contractual obligations, franchisors should not become complacent.

The Court stressed that section 51AD was aimed at securing compliance with the Code. The court held that a consequence of contravention is the grant of remedies under the Trade Practices Act which may include:

• compensation for loss and damage;
• varying the terms of the agreement;
• termination of the agreement.

What Franchisors should do

To avoid claims for compensation, or variation or termination of the agreement, franchisors should ensure that they:

• implement procedures to ensure compliance with the Code; and
• obtain legal advice to ensure their franchise documents and procedures are compliant.

If you would like more information on Franchising please contact a member of our team on 3231 2444.