Skip to content.

Home

Allens Arthur Robinson

Focus: Franchising – June 2008

Landmark Federal Court decision on franchisor disclosure transgressions

In brief: In a welcome breath of commercial pragmatism, a Federal Court decision, handed down last week, has paved the way for a reversal of the Ketchell decision. Partner Andrew Wiseman (view CV) explains.

How does it affect you?

  • The actual and potential impact of the Ketchell decision on the franchising community has been profound. Failure to comply with clause 11 of the Code strikes down the franchise agreement.
  • Special leave to appeal from the decision to the High Court has been granted and the High Court is expected to hear it in August.
  • A recent Federal Court decision refuses to follow Ketchell and presents a much more comfortable and commercially realistic position.
Introduction

The New South Wales Court of Appeal in August 2007 delivered Ketchell v Master of Education Services Pty Ltd [2007] NSWCA 161, a landmark decision that reversed the previous understanding of the franchising community in relation to transgressions on the part of franchisors in the disclosure regime required under the Australian Franchising Code of Conduct. The Court of Appeal held that non-compliance with clause 11(1) of the Code resulted in an illegal contract. This, of course, meant the contract was unenforceable.

Prior to that, the franchising community had understood that this type of transgression would result in an enquiry into damages that might have been occasioned by reason of the breach.

The decision

Justice Rares, of the Federal Court sitting in NSW, in a bold and commercially argued judgment delivered in Hoy Mobile Pty Limited v Allphones Retail Pty Limited [2008] FCA 810 on 30 May 2008, appears to have returned to the pre-Ketchell position.

In brief, the dispute involved the franchise model for the retail sale of mobile telephones. Unlike many models, this model was not tied to any particular mobile carrier, whether by handset or service. The parties encountered a range of issues.

The judge was clearly less than impressed by the conduct of both parties, making findings of fraud against each.

However, for the purposes of Ketchell, one thing is clear. The franchisor admitted that it had not complied with clauses 10 and 11 of the Code, clause 11 being the very provision of the Code upon which the Ketchell decision was based. (This is the provision that requires a franchisor to obtain from a franchisee prior to entering into a franchise agreement a statement that it has received, read and has had a reasonable opportunity to understand the disclosure document and the Code.)

Justice Rares provided three reasons why the Court of Appeal's decision in Ketchell should not be followed:

  1. Ketchell was based on a different legislation (ie an earlier version of the Code that was not in force at the time when the parties to the Hoy proceedings entered into their franchise agreement).
  2. The subsequent decision of the High Court in Australian Competition and Consumer Commission v Baxter Health Care (2007) 237 ALR 512, which demonstrates that the approach to construction adopted by the Court of Appeal was wrong.
  3. Justice Rares was convinced that the decision of the Court of Appeal was just plainly wrong.

In coming to this decision, Justice Rares was adamant about the principal purpose of the Code, which is to protect franchisees. He argued that mere non-compliance by a franchisor with any requirement of the Code, including clause 11, could not have intended to have the draconian consequence of invalidating any agreement with a franchisor entered into by a franchisee. The intention of the Code was to protect franchisees, not to denude them of the capacity to enforce rights against their franchisor (under their agreement or the Code itself).

Clause 6A of the Code, which was brought in in the 2001 amendments, explains the purpose of the disclosure regime under the Code. This is to:

  • provide information from the franchisor to help the franchisee make a reasonably informed decision about the franchise; and
  • provide current information from the franchisor that is material to the running of the franchised business.

Justice Rares' first reason for departing from the Ketchell decision was the recognition that this clause 6A of the Code had not been enacted at the time of the franchise agreement the subject of the Ketchell proceedings. This was not the case in relation to the franchise agreement he was considering. Justice Rares considered it plainly wrong and inconsistent with clause 6A and the Code as a whole, to find that it was the Parliament's intention to make a franchise agreement itself illegal 'as opposed to stigmatising the conduct of the franchisor for its failure to comply with the Code'. (page 35).

His second reason was that, in his view, the Court of Appeal in Ketchell had failed to carry out the task of statutory construction emphasised in a number of High Court decisions. Justice Rares regarded it necessary to consider carefully the whole of the Code and the provisions of the Trade Practices Act 1974 (Cth) to see whether it was the intention of the Code to strike down as void every franchise agreement entered into, whether technically or deliberately, in non-compliance with clauses 10 or 11 of the Code. In particular, he refers to the recent Baxter Health decision, where the High Court notes that there is nothing unusual about legislation providing for a circumstance in which making or giving effect to a contract involves an offence by one party to the contract, but not by the other. He noted that President Mason of the NSW Court of Appeal said there was no need to seek guidance from implications in the legislative framework. Justice Rares countered, however, that one express purpose of the legislation was to protect one of the parties to such a contract by giving that party rights arising from a corporation's failure to comply with an industry code. This consequence tends to suggest that non-compliance with the Code was not intended to avoid the contract, but rather to give rise to rights under the Act to have the contract varied or made void so as to remedy the consequence of non-compliance with the Code.

Justice Rares was of the opinion:

[T]he Code does not evince a legislative policy of striking down every franchise agreement entered into by a franchisor who fails to comply with any provision in clause 11. To the contrary, I am of opinion that the intention of the Code is to place an obligation on a franchisor by setting a norm of conduct with which it is to comply. Failure to comply with that norm of conduct gives the franchisee rights to rely upon that failure in order to seek the setting aside of the agreement, if that relief is appropriate, and also to seek relief because of the unconscionable conduct such non-compliance by the franchisor may evidence. ... (page 37)

Finally, in all the circumstances, Justice Rares was of the opinion that the reasoning of President Mason in Ketchell was plainly wrong.

Return to top

What does this mean for you?

The threat of an unenforceable contract in circumstances where a technical non-compliance with the provisions of clause 11 of the Code has occurred has hopefully been removed. The courts will instead focus on whether the technical or deliberate non-compliance has given rise to circumstances in which some relief is appropriate. This relief may be by way of setting aside the agreement. It may result in a variation of the agreement or it may result in damages. What it should not do is to automatically make the franchise agreement void. It would defeat the clear purpose of the Code if franchisors can rely on their own breach of obligations imposed under the Code to deny a franchisee with whom it had entered into a contract, the entitlement to enforce that contract against it or seek some other relief from it.

Return to top

For further information, please contact:

Return to top

Tweet or bookmark with
Tweet this article

What are these?

 

Recent Intellectual Property publications