The High Court decision in Master Education Services Pty Ltd v Ketchell, [1] delivered on 27 August 2008, has wide reaching implications for the franchise industry. Finding in favour of the franchisor, the Court held in a unanimous joint judgment, that non-compliance with cl 11(1) of the Franchising Code of Conduct (“the Code”) would not automatically invalidate a franchise agreement.
In Brief: Implications for Franchise Businesses
Although the decision deals with the contractual validity of franchise agreements, it leaves open the issue to be determined on a case by case basis, as to the consequences of non-compliance. Accordingly, it is important for franchisors and franchisees to be aware that:
- Contravening clause 11(1) of the Code will not render franchise agreements unenforceable or illegal;
- Compliance with the Code remains mandatory under the Trade Practices Act;
- Franchisors risk legal action for non-compliance under s 51AD of the Trade Practices Act;
- Remedies for a breach of the Code could include variation of terms or damages, as provided by legislation and should be proportionate to the circumstances.
Background
The franchisor, Master Education Services (“MES”), sought payment from the franchisee, Ketchell, of unpaid franchise fees. Ketchell argued that the agreement was void as a consequence of the franchisor’s failure to obtain a statement indicating that the franchisee had received and read the disclosure document and Code, as required under cl 11(1).
Clause 11(1) of the Code provides:
(1) The franchisor must not:
(a) Enter into, renew or extend a franchise agreement; or
(b) Enter into an agreement to enter into, renew or extend a franchise agreement; or
(c) Receive a non-refundable payment (whether of money or of other valuable consideration) under a franchise agreement or an agreement to enter into a franchise agreement;
unless the franchisor has received from the franchisee or prospective franchisee a written statement that the franchisee or prospective franchisee has received, read and had a reasonable opportunity to understand the disclosure document and this Code.
Under s 51AD of the Trade Practices Act 1974 (Cth) (“TPA”), a corporation must not, in trade or commerce, contravene an industry code. Section 51AE of the TPA and cl 3 of the Trade Practices (Industry Codes – Franchising) Regulations 1998 (Cth) provide that the Code is mandatory for all participants in franchising.
Lower Court Decisions
MES brought proceedings against Ketchell to recover its unpaid fees in a Local Court in 2003. After a remittal back to the Local Court, the New South Wales Supreme Court [2] found that non-compliance with the Code did not render the agreement illegal, citing the decision of Windeyer J in The Cheesecake Shop v A & A Shah Enterprise, [3] in support. Ketchell then appealed successfully to the Court of Appeal. Mason P departed from The Cheesecake Shop decision and held that non-compliance with the Code and s 51AD rendered the agreement unenforceable and illegal at common law. [4]
In the period between the Court of Appeal decision and the recent High Court ruling, a similar issue came before the Federal Court in Hoy Mobile v Allphones Retail.[5] In Allphones, Rares J described the Ketchell decision as ‘plainly wrong’ [6] as it potentially contradicted the purpose of the Code to protect franchisees. His Honour held that the contract remained valid despite non-compliance with the Code.
High Court Findings
The Court accepted the MES’ submission that failure to comply with cl 11(1) of the Code did not render the franchise agreement illegal and unenforceable. [7] In overturning the Court of Appeal decision, the High Court concurred with the judgment in Allphones, that the earlier Ketchell decision erred in creating an opportunity for wrong-doing franchisors to avoid franchise obligations by deliberately failing to comply with the Code.[8]
The fact that Ketchell had received and read the disclosure documents and obtained independent legal advice regarding their content was undisputed.[9]
Central to the Court’s determination, was the issue of the interaction between Pt IVB of the TPA and the common law.[10] The Court followed their previous decision in Australia Competition and Consumer Commission v Baxter Healthcare Pty Ltd [11] which had cited the earlier Yango Pastoral rule that ‘the principle that a contract the making of which is expressly or impliedly prohibited by statute is illegal and void is…longstanding but it has always been recognised that [it]…is necessarily subject to any contrary intention manifested by the statute’.[12]
In assessing these authorities, the Court considered that the case would ultimately be decided through statutory interpretation of the relevant TPA provisions. Their Honours found that s 51AD did not expressly render agreements void due to non-compliance.[13] The Court declined to imply such a prohibition in light of the purposes of Pt IVB and of the Code.[14] Both instruments were implemented to ‘regulate the conduct of persons in the franchising industry in order to improve business practices, to provide some protection to franchisees proposing to enter into franchise agreements and to decrease litigation’.[15]
Striking down all contracts made by non-complying franchisors was considered unnecessary to the purposes of the various schemes.[16] In utilising the exception supplied by the common law principle in Yango,[17] the Court noted that the TPA provides flexible provisions to deal appropriately with non-compliance.[18]
As a consequence of the franchisee agreement being upheld, the franchisee was ordered to pay the franchise fees to the franchisor plus interests.
Implications
The decision confirms that franchise agreements will not be automatically void, despite non-compliance with s 11(1) of the Code. It remains uncertain however, which instances of non-compliance may invalidate a franchise agreement. Irrespective of contractual issues, franchisors must comply with the Code, otherwise they risk legal action being taken by the ACCC for non-compliance of s 51AD of the TPA which places an obligation on the franchisor to comply with the industry Code of Conduct implemented under the TPA.
The Court has indicated that remedies for a breach of the Code should be proportionate to the circumstances, as provided by the TPA. Such remedies may include variation of contractual terms or damages.
The Australian Competition and Consumer Commission (ACCC) is responsible for the administration and enforcement of the Code. The Code and guidelines to assist franchisors and franchisees are available from the ACCC website. The ACCC guidelines relating to compliance with the Code are yet to be amended following the Ketchell decision; franchisors are advised to follow the existing ACCC recommendations.
The Parliamentary Joint Committee on Corporations and Financial Service is also currently reviewing the Code and is expected to deliver its report in December 2008.
Stephens Lawyers & Consultants have a high level of expertise in trade practice and franchise law.
Our lawyers represent leading companies in both litigious and commercial matters, and have significant experience in writing submissions to government on behalf of clients.
[1] [2008] HCA 38 (Unreported, Gummow ACJ, Kirby, Hayne, Crennan, Kiefel JJ, 27 August 2008).
[2] Master Education Services Pty Ltd v Ketchell [2006] NSWSC 28.
[3] [2004] NSWSC 625.
[4] Ketchell v Master Education Services Pty Ltd [2007] NSWCA 161, [30].
[5] Hoy Mobile Pty Ltd v Allphones Retail Pty Ltd [2008] FCA 810.
[6] Hoy Mobile Pty Ltd v Allphones Retail Pty Ltd [2008] FCA 810, [97].
[7] Master Education Services Pty Ltd v Ketchell [2008] HCA 38 (Unreported, Gummow ACJ, Kirby, Hayne, Crennan, Kiefel JJ, 27 August 2008) [10].
[8] Master Education Services Pty Ltd v Ketchell [2008] HCA 38 (Unreported, Gummow ACJ, Kirby, Hayne, Crennan, Kiefel JJ, 27 August 2008) [39].
[9] Master Education Services Pty Ltd v Ketchell [2008] HCA 38 (Unreported, Gummow ACJ, Kirby, Hayne, Crennan, Kiefel JJ, 27 August 2008) [6].
[10] Master Education Services Pty Ltd v Ketchell [2008] HCA 38 (Unreported, Gummow ACJ, Kirby, Hayne, Crennan, Kiefel JJ, 27 August 2008) [11].
[11] (2007) 232 CLR 1, 29 [45]-[46] (Gleeson CJ, Gummow, Hayne, Heydon and Crennan JJ).
[12] Yango Pastoral Co Pty Ltd v First Chicago Australia Ltd (1978) 139 CLR 410, 423 (Mason J).
[13] Master Education Services Pty Ltd v Ketchell [2008] HCA 38 (Unreported, Gummow ACJ, Kirby, Hayne, Crennan, Kiefel JJ, 27 August 2008) [15].
[14] Master Education Services Pty Ltd v Ketchell [2008] HCA 38 (Unreported, Gummow ACJ, Kirby, Hayne, Crennan, Kiefel JJ, 27 August 2008) [19].
[15] Master Education Services Pty Ltd v Ketchell [2008] HCA 38 (Unreported, Gummow ACJ, Kirby, Hayne, Crennan, Kiefel JJ, 27 August 2008) [25].
[16] Master Education Services Pty Ltd v Ketchell [2008] HCA 38 (Unreported, Gummow ACJ, Kirby, Hayne, Crennan, Kiefel JJ, 27 August 2008) [25].
[17] Yango Pastoral Co Pty Ltd v First Chicago Australia Ltd (1978) 139 CLR 410, 423 (Mason J).
[18] Master Education Services Pty Ltd v Ketchell [2008] HCA 38 (Unreported, Gummow ACJ, Kirby, Hayne, Crennan, Kiefel JJ, 27 August 2008) [38].
27-Nov-2008