Ketchell (Master Education
Services Pty Limited v Ketchell  HCA 38) was recently
subject to a successful appeal to the High Court of Australia.
All Franchisors would be aware of
the significance of the case. The High Court decision is clearly a
correct one and the High Court's decision allows commercial
certainty. The cloud of uncertainty over the validity of franchise
agreements is now removed and Franchisors can now sigh relief.
Despite this, the case should not be
forgotten and it continues to serve as a powerful reminder to
franchisors of the importance of ensuring compliance with the
requirements of the Franchising Code of Conduct (the
In Ketchell, the franchisor had not
received the signed statement required under Clause 11 of the Code
(even though the franchisee had actually received the disclosure
document and presumably understood the disclosure document given)
that she had received independent legal advice.
Many years later, the franchisor
sued the franchisee for monies owed under the franchise agreement.
The franchisee defended the claim relying on the franchisors
failure to comply with the Code, alleging this made the franchise
agreement illegal and unenforceable.
The case went through a series of
hearings and appeals, with the NSW Court of Appeal last year
agreeing with the franchisee that such a breach of the Code made
the franchise agreement illegal. The Court refused to enforce any
of the terms of the agreement and therefore held that the
franchisor could not claim monies due under the agreement.
Concerned as to the effect this
decision could have on the validity of many franchise agreements,
the Franchising Council of Australia supported by the Franchise
industry funded the appeal to the High Court.
The High Court unanimously held that
a breach of the Code does not necessarily invalidate a franchise
In Ketchell, the franchisor's
failure to obtain the required certificate had not caused any loss
or detriment to the franchisee.
However, the Court
explicitly stated that there may be circumstances in which
non-compliance with this or any other provision of the Code might
be serious enough to make it appropriate for a court to find that
the agreement should not be enforceable.
A failure to comply with the Code
provides a Franchisee an opportunity to raise a wide range of
remedies under the Trade Practices Act 1974. A Court may
order the terms of an agreement be varied, an agreement to be
terminated, or that a franchisor provide a franchisee with
compensation for loss and damage, caused by their failure to comply
with the Code.
The Court made it clear that
the individual circumstances of any breach and the impact of a
breach on the franchisee would dictate the appropriate
The High Court's decision in
Ketchell was, in our view, clearly correct! A Franchisor should
continue to ensure they have a system of compliance and training
and monitoring of their paperwork to ensure Code compliance.
Prepared a complete and accurate and up-to-date disclosure
document in accordance with the requirements of the Code;
Given a franchisee a copy of the disclosure document (including
a copy of the Code and the proposed franchise agreement) to the
franchisee at least 14 days before entering into the franchise
Obtained the certificates required by clause 11 of the
Wisewoulds can assist and
support Franchisors compliance, provide inhouse compliance systems
and packaged Franchise Documents at a fixed cost (payable by the
Rigorous compliance with the Code
will give franchisor's confidence in their contractual
arrangements with franchisees, and a stronger bargaining position
in the event of a dispute.
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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