The Franchising Code of Conduct sets out rules governing the
franchising relationship - but what happens if they are not
followed? The High Court today answered that question in Master
Education Services Pty Limited v Ketchell  HCA 38:
failure to comply with the Code does not automatically mean the
agreement is void and unenforceable.
The franchising agreement, disclosure and the written
Under clause 11 of the Code, a franchisor must not enter
into a franchise agreement or receive non-refundable money
under a franchise agreement unless the franchisor has received
a written statement from a prospective franchisee. The
statement is that the prospective franchisee has received, read
and had a reasonable opportunity to understand the disclosure
document and the Code.
This Code is an industry code which has the force of law,
and corporations must not, in trade or commerce, contravene
applicable industry codes (section 51AD of the Trade Practices
Master Education Services Pty Limited provided a disclosure
document and a copy of the Code to Ms Jean Ketchell, but did
not get the written statement from her. There was no suggestion
that Ms Ketchell had not read or understood the agreement. When
she was sued for unpaid monthly fees, she argued that the
failure to get a written statement meant the franchising
agreement was void and therefore she didn't owe those
This argument succeeded in the NSW Court of Appeal, a result
which left franchisors in an uncertain position.
Why a breach of the Code doesn't automatically make
a franchising agreement void
Neither the Act nor the Code state that this failure makes
the franchising agreement illegal, so the High Court looked at
the context in which they were made and their underlying
purpose. It held that the non-compliance did not automatically
make a contract void for three reasons:
Both the Act and the Code are intended to regulate the
conduct of persons in the franchising industry in order to
improve business practices, to provide some protection to
franchisees proposing to enter into franchise agreements and
to decrease litigation. These aims don't require that
a contract made by a non-complying franchisor be struck down
The Act sets out a whole range of flexible remedies that
can be used to deal with non-compliance, such as preventing
entry into a franchise agreement, varying the terms of an
agreement entered into in breach of the Code, or even
Finally, if the contract was void, this could operate
unfairly and harshly - it would allow a non-complying
franchisor to breach the Code and then walk away from its
obligations, while putting franchisees in breach of their
obligations to third parties.
Lessons for franchisors
For franchisors, this is a good decision: their franchising
agreements will not automatically be void simply because of one
breach of their obligations under the Code. It allows both
parties to continue in their arrangements with some degree of
certainty and the courts to deal with any breach in a flexible
Of course, this doesn't mean franchisors can be
casual in complying with the Code. Setting up and maintaining a
good compliance program internally will mean that these sorts
of questions will arise infrequently, if at all, saving you
time and money.
The content of this article is intended to provide a
general guide to the subject matter. Specialist advice should
be sought about your specific circumstances.
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We discuss whether certain clauses commonly found in ordinary commercial contracts could be considered to be penalties.
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