Prior to the decision of the NSW Court of Appeal in Ketchell it had been assumed a breach of the Franchising Code of Conduct ("the Code") had no automatic consequences, but instead entitled a party to seek relief as appropriate under the Trade Practices Act ("the TPA").
But the Court of Appeal applied the common law concept of illegality. This found that a breach of clause 11 of the Code, rendered illegal a franchise agreement entered into.
The facts of Ketchell's case are relatively straightforward, and were largely uncontested. Ms Jean Ketchell ("the Franchisee") acquired an educational coaching franchise from Master of Education Services Pty Ltd ("the Franchisor"). Sometime later, the franchisor sued Ms Ketchell for unpaid franchise fees. In her defence, Ms Ketchell claimed that the franchise agreement was invalid because the Franchisor had not complied with clause 11(1) of the Code. It was agreed between the parties that substantive disclosure had been provided, and there was no evidence that she had been mislead. However the franchisor had not received from the franchisee the written certificate as required by the Code. As a consequence, the franchisor had entered into the franchise agreement and received a non-refundable payment in breach of clause 11(1) of the Code. The Court of Appeal held the franchise agreement was illegal and not enforceable.
The decision sent Shockwaves through the franchising industry. With some 50,000 franchise agreements in existence, the Franchise Council of Australia ("the FCA") estimated that about 10 per cent - or 5000 agreements -could be affected. The decision impacted on not only the ability of franchisors to effectively enforce their agreements, but on the ability of franchisees to sell their businesses confident they have a valid franchise agreement in place. The case was seen to be of such significance to the franchise sector that the FCA championed an appeal to the High Court.
On 8 February 2008, the High Court of Australia granted special leave to the franchisor to appeal the decision. In the transcript of the application for special leave, Justice Gummow referred to an affidavit provided by the FCA noting the significance of the case to the franchise sector. Clearly the affidavit was a critical factor in the High Court granting special leave to appeal the earlier decision. Indeed, the court specifically referred to the FCA in its decision to grant leave to appeal, and subsequently imposed a condition which essentially put the acid on the sector to fund the costs of both parties in the appeal as a condition of allowing the appeal to take place. The FCA did so, and the appeal proceeded.
The High Court of Australia heard the case on June 10 2008 and has reserved its decision. Although it is difficult to predict the likely outcome, it appears to the author the High Court disagreed with the Court of Appeal's decision not to consider the purpose of the legislation. The franchisor's counsel introduced substantial extraneous material as evidence of the intention of the legislature, providing compelling evidence that Parliament had intended to focus on conduct, as opposed to prohibiting the making of contracts. The franchisor's counsel provided numerous examples of statements by the Federal Government that seemed to suggest Parliament had specifically turned its mind to the sanctions that would apply in the event of breach of the Code, and it was not necessary to bring into play the common law concept of illegality. For example, the Explanatory Memorandum to the Trade Practices Act (Fair Trading) Amendment Bill 1997 explicitly states that "contravention of an applicable code will attract a range of sanctions under the TPA, including injunctive relief and damages." Counsel also noted the relevant penalties and sanctions sections of the TPA were expressly amended to apply to breaches of codes of conduct when the legislation was introduced.
In quite a coincidence, the reasoning of the Court of Appeal was expressly considered and rejected a matter of weeks before the High Court of Appeal was heard. The Federal Court in Allphones refused to follow the Court of Appeal decision in Ketchell’s case. In Allphones, the Federal Court felt that it was indeed appropriate to look to the intention of the legislation. It observed a principal purpose of the Code is to "protect the position of franchisees, not to denude them of the capacity to enforce rights against their franchisor, either under the agreements they entered into, or under the Code itself." The Federal Court also felt it was important to protect third parties such as lessors and financiers. "If the franchisees were suddenly , to be told that there was no franchise agreement at all that they could enforce, and that they would have to resort to court proceedings to establish their franchise agreement ... there would be commercial havoc where franchisors had perhaps innocently and inadvertently failed to do everything that was required by the Code." Justice Rares noted that "I am of opinion that, in such circumstances, it is plainly wrong and inconsistent with clause 6A and the Code as a whole to find that it was the intention of the Parliament to make a franchise agreement itself illegal, as opposed to stigmatising the conduct of the franchisor for its failure to comply with the Code." The consequence of Ketchell is that any — even the most insignificant or technical breach of clauses 10 or 11 of the Code - renders a franchise agreement void, even if the franchisee wishes to enforce it. Such an outcome defeats the intention of the Code to protect a franchisee."
One hopes that the High Court prefers the logic of the Federal Court in Allphones to the Court of Appeal in Ketchell. Those present at the hearing who observed the argument and the nature of the questioning of the High Court judges are quietly confident. A decision is expected within the next month or two.
By Stephen Giles, Deacons Lawyers
19-Nov-2008