Saturday, 25 October 2008

High Court clarifies remedies under Franchising Code

Case note: Master Education Services Pty Limited v Ketchell [2008] HCA 38

Issue: Whether a breach of the Franchising Code would result in the franchise agreement being unenforceable due to illegality at common law?

Context: The factual background to this case was that Master Education Services Pty Limited (franchisor) provided a disclosure document and copy of the Code to Mrs Ketchell (franchisee) but it did not obtain the statement from her as required under clause 11(1) of the Code prior to entering into the Franchise Agreement. Clause 11(1) relevantly provides that a franchisor must not enter into a franchise agreement unless they have received a written statement from the franchisee that they have read and had a reasonable opportunity to understand the disclosure document and the Code.

In this case, the NSW Court of Appeal held that the contravention of the Code and section 51AD led to illegality at common law and the consequent unenforceability of the franchise agreement.

Decision: In a unanimous decision, the High Court held the detailed remedial provisions of the TPA spelled out the consequences of non-compliance with an industry Code, such as the Franchising Code. Parliament did not intend that the harsh consequences of the common law were to be available to remedy a contravention of section 51AD.

Significance: The High Court has provided welcome clarification of an important area of the operation of Part IVB and the Code. The case clarifies that the remedies for a breach of section 51AD are to be found in the relevant provisions of the TPA and not in the common law. The Court noted that the TPA provides a more flexible approach in terms of the appropriate remedies to be applied in particular circumstances.

The Court also noted that the purpose of the scheme of Part IVB and the Code is to regulate the conduct of persons in the franchising industry in order to improve business practices, to provide some protection for franchisees proposing to enter into franchise agreements and to decrease litigation. Therefore, the purpose of Part IVB and the Code could not be to provide franchisors (and franchisees) with a simple way to avoid their obligations under the Franchise Agreement by claiming that the agreement was unenforceable due to a minor breach of the Code.

The correct approach is to carefully consider the circumstances of the non-compliance with the Code and determine which remedies will most appropriately address the damage created by the non-compliance. In extreme cases of non-disclosure, it may be appropriate to prevent entry into a franchise agreement or to terminate the franchise agreement, but where the breach is more technical other, less extreme, remedies would be appropriate.

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