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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