Franchise Law

Monday, July 4, 2016

The appeal case of Ketchell v Master of Education Services Pty Ltd dealt with Franchising agreements and the outcome has important implications for both Franchisors and Franchisees. What in effect the decision does is invalidate contracts made between the franchisor and franchisee in circumstances where the franchisor failed to obtain a signed statement by the person entering the franchise that they understood the Franchising Code of Conduct (“the Code”).

The Code, which is prescribed by Clause 3 of the Trade Practices (Industry Codes Franchising) Regulations 1998 (Cth), imposes a number of duties on a franchisor and franchisee. Clause 10 requires the franchisor to provide a copy of the disclosure document (created within the requirements of the code) and a copy of the Code to the franchisee prior to entry into the Franchise Agreement. Clause 11 provides that the franchisor must not enter into a Franchise Agreement without receiving from the franchisee a written statement stating that they have read and have had a reasonable opportunity to understand the disclosure document and the Code.

In this case, it was never disputed that the respondent franchisor failed to comply with Clause 11 of the Code by entering into a franchise agreement with Ms Ketchell without receiving from her as franchisee a written statement confirming her understanding of the disclosure document and the Code. The main issue was whether a contravention of clause 11(1)(a) and resulting contravention of Clause 11(1)(c) of the Code, rendered the franchise agreement unenforceable for statutory illegality.

In deciding that the franchise agreement was unenforceable for statutory illegality, the Court put much weight in s51AD of the Trade Practices Act 1974 (Cth) which deals with industry codes and provides that:

“A corporation must not, in trade or commerce, contravene an applicable industry code.”

The Court held that the effect of this provision was that a breach of the Code was a breach of the Trade Practices Act which rendered the contract void for illegality.

As a consequence of this decision, Franchisors will no longer be able to take a passive approach to Code compliance. They will now be forced to take steps to ensure that they meet the requirements of the Code to the letter. While the effect of this decision is yet to be fully felt in the market sector, a line has been drawn in the sand which potential franchisors must be conscious of if they seek to avoid similar consequences. The matter is now on appeal to the High Court.

Sources:

Ketchell v Master of Education Services Pty Ltd[2007] NSWCA 161.

K Towers, ‘Franchise Law Shock’, Herald Sun Newspaper, October 18 2007.

Liability limited by a scheme approved under Professional Standards Legislation.

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