The High Court has finally handed down its much anticipated decision in Master Education Services Pty Ltd v Ketchell. The Court unanimously decided that technical non compliance with the Franchising Code will not necessarily render a franchise agreement void. This case has been the subject of much publicity in the franchising industry and has finally provided some clarity as to the way in which the Franchising Code is to be interpreted.
This case concerned a franchisor (Master Education Services Pty Ltd) who sued a franchisee (Ketchell) for recovery of unpaid monthly franchise fees which it was owed under the franchise agreement. This case had a complicated procedural history which ultimately saw it appealed to the Court of Appeal in New South Wales. That court held that the franchisor's breach of clause 11(1) of the Franchising Code had the effect of rendering the franchise agreement illegal and unenforceable, meaning that the franchisor was not entitled to enforce the agreement and seek the repayment of monies owing. The franchisor had breached clause 11(1) by entering into a franchise agreement without having received from the franchisee written statements that the franchisee had received, read and had a reasonable time to understand the disclosure document and the Code as prescribed. The Franchisor appealed this decision to the High Court.
The High Court held that "to render void every franchise agreement entered into where a franchisor had not complied with the Code would be to give the franchisor, the wrong-doer, an opportunity to avoid its obligations", which the judges deemed not to be reflective of the intent of either the Franchising Code or the Trade Practices Act ("the Act") under which the Code was constituted.
The judges however did not dismiss the possibility that "in some cases the non-compliance [with the Code]
may be such as to warrant the court striking a contract down on the application of a franchisee [but] such a result would not necessarily follow upon any breach of clause 11(1), which may not have involved any failure to give the required information or the franchisee not understanding it".
The Court favoured a more flexible approach which will allow a court to prevent entry into a franchise agreement, to vary the terms of an agreement entered into in breach of the Code, or to terminate such an agreement or provide compensation for loss and damage, if it is shown to have been caused by that contravention. The Court's aim is to permit a franchisee to seek the relief that is appropriate to the circumstances of the case.
One of the expressed purposes of the Code was to protect franchisees and the Court considered that it would frustrate such intention if all franchise agreements entered into in breach of the Code were automatically rendered unenforceable.
With disputes currently faced by franchisors and franchisees involving "Ketchell" arguments, each party will need to consider the Ketchell decision carefully and apply it to the merits of their individual circumstances.
27-Aug-2008