High Court Steps in for Franchisors

The recent High Court Decision in Master Education Services Pty Ltd v Ketchell (2008) 82 ALJR 1322 has been greeted with relief by franchisors.  In looking at the question of whether a franchise agreement should be struck down for non-compliance with the Franchising Code of Conduct ("the Code"), the court was more interested in matters of substance rather than form in determining the issue. 

In brief the relevant facts were:-

• Clause 11.1 of the Code provides that prior to entry into a franchise agreement the franchisor must obtain a written statement from the franchisee confirming that it has received and  understood the disclosure document and the Code.
• The franchisor failed to obtain the statement.
• There was no dispute that the franchisee had been given a disclosure document and a copy of the code, and had received legal advice prior to entering into the franchise agreement. 
• The franchisee has also conducted the business without a commitment for 12 months prior to signing the franchise agreement.
• The franchisor claimed that monies were owed by the franchisee under the agreement.
• The franchisee argued that the agreement was unenforceable due to non-compliance with the Code.

In the lower court the decision was that a technical breach of Clause 11 of the Code rendered the franchise agreement unenforceable.  The decision of the High Court was in effect that non-compliance with the Code, in form rather than substance, did not necessarily mean that the agreement should be struck down, referring to the fact that the Trade Practices Act 1974 provided for other remedies.  Consequently, in this case the franchise agreement remained in force and the franchisor was able to recover monies owing under the franchise agreement.

Notwithstanding this decision, it is still important for both franchisors and franchisees to appreciate the importance of the Code.  A failure to comply by the franchisor can result in actions under the Trade Practices Act where the relief sought could range from compensatory damages through to amendment or setting aside of the franchise agreement.