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Franchise agreements may still be valid when franchisors fail to meet disclosure obligations
In brief — High Court decision supports franchisors
A recent decision of the High Court of Australia in Master Education Services Pty Limited & Ketchell [2008] HCA 38 has provided some good news for those franchisors in Australia who may on occasion be guilty of a relatively minor and inadvertent omission with respect to their disclosure obligations under the Franchising Code of Conduct (the Code).
Unpaid monthly fees
Jean Ketchell was a franchisee of Master Education Services Pty Limited (MES). She got into arrears with unpaid monthly fees payable under her franchise agreement and as a result was sued by MES. In defending the claim for unpaid franchise fees she alleged that MES, the franchisor, had not complied with its disclosure obligations under clause 11(1) of the Code.
She asserted that she had entered into a franchise agreement without MES first receiving a written statement from her confirming that she as a franchisee had received and read and had a reasonable opportunity to understand the disclosure document and the Code (in breach of clause 11(1) of the Code). In essence, Ketchell claimed that this contravention made the entire franchise agreement illegal and therefore the franchisor was not entitled to recover the franchise fees.
The matter started in the Local Court and worked its way up to the NSW Supreme Court, then to the NSW Court of Appeal which found in favour of Ketchell, and then to the High Court which reversed the NSW Court of Appeal’s decision.
The High Court’s decision
The High Court found that whilst a contravention of clause 11(1) of the Code may have occurred, that contravention did not necessarily result in the illegality and therefore the unenforceability of the franchise agreement. It considered that the statutory framework and the legislative intent behind the relevant provisions in the Trade Practices Act and the Code did not support the conclusion that a failure to comply with every requirement of the Code will automatically mean that a franchise agreement is rendered illegal and unenforceable.
The High Court observed that there were a number of remedies available to franchisees where franchisors failed to comply with their statutory obligations. The High Court referred to the judgement in Hoy Mobile Pty Ltd v Allphones Retail Pty Ltd (No 2), which stated that:
“…it would be an unusual result if, in that circumstance, a franchisee’s bargain was struck down in every case, regardless of the position in which it places the franchisee. It is not to be assumed in every case that a franchisee wishes to be relieved of their bargain. 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, and at the same time to place the franchisee in breach of obligations to third parties.”
Implications for franchisors
The decision of the High Court should not in any way be taken by franchisors as a reason for relaxing their disclosure requirements or any other obligations under the Code. However, it is comforting to note that in circumstances where a franchisor makes an inadvertent and arguably relatively minor omission with respect to the requirements of the Code, its franchise agreement will not automatically become unenforceable.
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