Relief for Franchisors

KETCHELL DECISION GOOD NEWS FOR FRANCHISORS  

The recent decision of the High Court in the case of Master Education Services Pty Ltd -v- Ketchell has brought some long awaited good news for Franchisors.

In this case the Franchisor, Master Education Services Pty Ltd had sued the Franchisee, Ms Ketchell for outstanding Franchise Fees. Ketchell responded by arguing that the Franchisor had breached his obligations under the Franchising Code of Conduct and therefore the Franchise Agreement was illegal, meaning the Franchisor couldn’t recover the outstanding fees.

Clause 11 (1) of the Franchising Code of Conduct states that a Franchisor must not enter into a Franchise Agreement unless the Franchisor has received from the perspective Franchisee a written statement that the prospective Franchisee has received, read and had a reasonable opportunity to understand the Disclosure Document and the code.

In this case the Franchisor had failed to obtain this statement from Ketchell and the NSW Court of Appeal ruled in favour of Ketchell, finding that the contravention of the code by the Franchisor led to the agreement being illegal.

The Franchisor had complied with all of its other disclosure requirements under the Franchising Code of Conduct.

This of course led to widespread concern amongst the franchising industry, with sometimes relatively minor breaches of the code leading to agreements being illegal and unenforceable by Franchisors (and Franchisees).

The case was appealed to the High Court which has now ruled in favour of the Franchisor. The Court ruled that a breach of clause 11 (1) of the Franchising Code of Conduct does not necessarily lead to the agreement being illegal. There are other remedies available to an aggrieved Franchisee, such as damages, and each case is to be considered on its merits.

The Court also was of the view that rendering all Franchise Agreements illegal where such a breach of the Code has occurred could often adversely affect the Franchisee’s position. Of course, if a Franchisee is trading well and is happy with the franchised business, it is not going to want it to be rendered illegal.

The Court found that the preferable and correct view is that if a Franchisee has a grievance in relation to a particular breach of the Franchising Code by the Franchisor then the Courts can consider any such claim and any appropriate remedies.

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