The High Court handed down its decision in the Ketchell case
on 27 August 2008, overturning the New South Wales Court of
Appeal's decision and confirming that a breach of the
Franchising Code of Conduct (Code) in failing
to obtain a legal sign off, does not mean the contract is dead.
But the case is not a green light for franchisor's to
ignore the Code.
The New South Wales Court of Appeal said that a breach of
the Code rendered a franchise agreement illegal. This gave
franchisors and the entire sector cause for serious concern.
However, the High Court unanimously held that a breach of a
franchise agreement did not necessarily bring a franchise
contract to an end as there are other remedies available.
It is the other remedies available when the Code is breached
that franchisors need to bear in mind. Though you might have a
contract prepared in breach of the Code and this case says you
can still sue on it, the breach of the Code can still bring
claims for damages, injunctions and specific orders.
History of the case
The proceedings began as a result of unpaid monthly
franchise fees which then quickly became a dispute and question
concerning the legality of the franchise agreement.
The breach of the Code in the facts of this case concerned
clause 11(1) which requires the franchisor to obtain a written
statement from the franchisee stating that they have received,
read and had reasonable opportunity to understand the
disclosure document and the Code.
The High Court agreed that a failure to comply with clause
11(1) was a contravention of section 51AD of the TPA, however
this did not mean that the contract was void and unenforceable.
Remedies under the TPA include:
compensation for loss and damage;
varying the terms of an agreement entered into in breach
of the Code; or
termination of an agreement.
Therefore the High Court held that there was not an
intention within the legislation that the common law remedy for
illegality was to automatically apply.
The High Court case is important as it confirms a contract
between parties remains paramount and it requires clear
language from legislation to render contracts ineffectual.
Importantly, the case also makes it clear that the Code is
there to control behaviour and there are consequences for non
compliance that a franchisor cannot afford to ignore.
For further advice in relation to franchise agreements,
please contact us.
We discuss whether certain clauses commonly found in ordinary commercial contracts could be considered to be penalties.
Some comments from our readers… “The articles are extremely timely and highly applicable” “I often find critical information not available elsewhere” “As in-house counsel, Mondaq’s service is of great value”
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).