The High Court unanimously found that contravention of clause 11(1) of the Franchising Code of Conduct (code) does not result in a franchise agreement becoming illegal and unenforceable, overturning the decision of the New South Wales Court of Appeal (
Master Education Services Pty Limited v Ketchell [2008] HCA 38 (27 August 2008)).
That part of the code prohibits franchisors from entering into franchise agreements before obtaining a statement from a prospective franchisee that (among other things) she or he has read the franchise disclosure document and the code.
This franchisor had failed to obtain such a statement. However, the franchisee had received the disclosure document, received legal advice, negotiated amendments to the franchise agreement and had conducted the business on a trial run basis for 12 months.
The High Court held that it is a matter of statutory construction as to whether entering into a franchise agreement in prohibited circumstances makes the contract void.
The relevant statue (Section 51AD of the Trade Practices Act 1974 (Cth)) (Act) does not prohibit entry into agreements in situations prohibited by the code or make performance of them unlawful, but instead provides a range of remedies. These include court orders declaring a contract void, varying a contract or providing for compensation. In that context, it is unnecessary to imply an intent into the Act that franchising agreements that are entered into in contravention of the code are automatically void.
The High Court looked at the stated purpose of the code, which is to regulate the conduct of participants in franchising towards each other and stated:
‘It is no part of the scheme and unnecessary to the purposes mentioned, to strike down a contract made by a non-complying franchisor. It is sufficient for the purpose of the scheme that a franchisor is aware of the obligations imposed by the code and that action may be taken by a franchisee under the Act with respect to a contravention of section 51AD …
One of the purposes of the code is the protection of the position of the franchisee. It is not expressed to prohibit the franchisee from entering into an agreement where a franchisor had not complied with clause 11 … it is not to be assumed in every case that a franchisee wishes to be relieved of their bargain … A preferable result, and one for which the Act provides, is to permit a franchisee to seek such relief as is appropriate to the circumstances of the case.’
The Franchise Council of Australia had estimated that up to 5,000 franchise agreements could have been affected, if the New South Wales Court of Appeal decision was upheld.
This article was written by Amalia Stone, Senior Associate, Sydney.
More information
For information regarding possible implications for your business, please contact Kristin Stammer or Amalia Stone.