The franchising industry has waited with baited breath for the
outcome of the High Court appeal in Master of Education
Services Pty Limited v Ketchell.
Section 51AD of the Trade Practices Act 1974 (Cth)
provides that a company must not contravene an industry code.
Clause 11(1) of the Franchising Code of Conduct (which governs
franchise agreements) prohibits franchisors from entering into or
receiving any non-refundable money under a franchise agreement
unless the franchisor has received from the franchisee a written
statement notifying that it has received, read and had a reasonable
opportunity to understand the disclosure document and the Code.
In 2003, Master of Education Services Pty Ltd brought
proceedings against Ms Ketchell to recover monthly fees due under a
franchise agreement plus interest. Ms Ketchell claimed that Master
of Education Services Pty Ltd failed to comply with clause 11 of
the Code so that it was unlawful for them to demand the monthly
The NSW Court of Appeal ruled that non-compliance with the Code
rendered the agreement illegal and unenforceable.
The question on appeal to the High Court was whether the
franchise agreement entered into by Master of Education Services
Pty Ltd was void and unenforceable because they had not received
the required disclosure statement from Ms Ketchell.
The unanimous High Court ruling was that a failure to comply
with clause 11(1) of the Code is a breach of section 51AD of the
Act, but does not necessarily bring the contract to an end.
This means that a technical breach of an agreement may not
necessarily render it void.
The case is a welcome result for all those in the franchising
industry as the decision of the NSW Court of Appeal was believed by
many to have set a dangerous precedent, allowing even procedural or
trivial circumstances of non-compliance with the Code to bring the
contract to an end.
While the High Court case removes the opportunity for
disgruntled franchisees to rely on the Court of Appeal decision as
a way of avoiding their contractual obligations, franchisors should
not become complacent.
The Court stressed that section 51AD was aimed at securing
compliance with the Code. The court held that a consequence of
contravention is the grant of remedies under the Trade Practices
Act which may include:
compensation for loss and damage;
varying the terms of the agreement;
termination of the agreement.
What Franchisors should do
To avoid claims for compensation, or variation or termination of
the agreement, franchisors should ensure that they:
implement procedures to ensure compliance with the Code;
obtain legal advice to ensure their franchise documents and
procedures are compliant.
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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