The Australian recently reported that the High
Court is currently considering an appeal in the
Ketchell case that "could destroy the franchise
industry of Australia". That's right, the
franchise industry's own Judgement Day could apparently
be on the way.
Is the situation really that dramatic? Not quite. However,
for our franchise industry the High Court's decision
will be important and franchisors and franchisees should take
notice of what happens.
What is the Ketchell decision?
In Ketchell, a franchisee wanted to avoid the
obligation to pay franchise fees under the franchise agreement.
The franchisee successfully argued that the agreement was
illegal and unenforceable, because the franchisor had not
complied with clause 11 of the Franchising Code before entering
Under clause 11 of the Code, franchisors are required to
receive a signed statement from the franchisee to say that:
the franchisee has received, read and had time to
understand the disclosure document and the Code; and
the franchisee has either obtained, or been told to but
has elected not to obtain, independent advice.
This statement has to be received by the franchisor before
they enter into the franchise agreement or accept payment from
Why is Ketchell so important?
If the High Court agrees with Ketchell, then the
result applies to all franchise agreements now in place or
entered into in the future.
There are fears that the Ketchell decision will be
used by disgruntled franchisees to try to dodge their
contractual obligations to franchisors. This could destabilise
long-established franchise networks.
The Franchise Council of Australia (FCA)
shares this concern. Given the threat that the decision poses
to the stability of the sector, the FCA believes that it can
not be allowed to stand unchallenged.
The FCA considers it "the biggest single legal issue
the FCA has faced in its 25-year history". This is why the
FCA is funding the High Court appeal.
The Federal Court (in another recent case called Hoy
Mobile vAllphones) has also voiced its fears,
commenting that the Ketchell decision is "plainly
wrong" and refusing to follow it. It fears that
"there would be commercial havoc where franchisors had
perhaps innocently and inadvertently failed to do everything
required by the Code." Perhaps the recent Federal Court
decision will influence the High Court's thinking on
But is it really Judgement Day?
Though the Ketchell case might disrupt businesses, we
don't think franchisors should fear Judgement Day for 2
reasons. Irrespective of the High Court's judgment,
Ketchell highlights how important it is for
comply with the Code; and
build and maintain strong commercial relationships with
Franchisors are and should always be in control of entering
into their franchise agreements, and franchisors can prevent
spurious claims by franchisees by complying with the Code.
Looking back, perhaps some franchisors will fear Judgement
Day. We can expect these franchisors to be sharing thoughts
along the lines of:
"did we send off that disclosure document far
enough ahead of signing the agreement" or
"was our disclosure document accompanied by the
"did we receive a signed
You get the drift.
It might be useful for franchisors to audit their agreements
and measure the risk.
What Ketchell proves is that building and
maintaining strong commercial relationships with franchisees is
a far more effective tool for managing any "havoc"
that a franchisee could cause.
The sobering fact is that by the time a franchisee tries to
avoid its obligations under the agreement, the relationship
between franchisee and franchisor has probably already reached
its Judgement Day.
Newsflash For Franchise Industry
The appeal to the High Court was heard on Tuesday 10 June
2008. The judges have adjourned to consider their decision. The
High Court's decision will be delivered in the next
weeks or months.
On 12th November 2016, new laws will commence to protect small businesses from unfair terms in standard form contracts.
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