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 [2008] 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 statement

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 Act 1974).

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 monthly fees.

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 automatically.
  • 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 terminating it.
  • 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 fashion.

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.