Franchisors Can Now Breathe - High Court Decides Ketchell

The High Court handed down its decision in the Ketchell case on 27 August 2008, overturning the New South Wales Court of Appeal's decision and confirming that a breach of the Franchising Code of Conduct (Code) in failing to obtain a legal sign off, does not mean the contract is dead. But the case is not a green light for franchisor's to ignore the Code.

The New South Wales Court of Appeal said that a breach of the Code rendered a franchise agreement illegal. This gave franchisors and the entire sector cause for serious concern. However, the High Court unanimously held that a breach of a franchise agreement did not necessarily bring a franchise contract to an end as there are other remedies available.

It is the other remedies available when the Code is breached that franchisors need to bear in mind. Though you might have a contract prepared in breach of the Code and this case says you can still sue on it, the breach of the Code can still bring claims for damages, injunctions and specific orders.

History of the case

The proceedings began as a result of unpaid monthly franchise fees which then quickly became a dispute and question concerning the legality of the franchise agreement.

The breach of the Code in the facts of this case concerned clause 11(1) which requires the franchisor to obtain a written statement from the franchisee stating that they have received, read and had reasonable opportunity to understand the disclosure document and the Code.

The High Court agreed that a failure to comply with clause 11(1) was a contravention of section 51AD of the TPA, however this did not mean that the contract was void and unenforceable. Remedies under the TPA include:

• compensation for loss and damage;

• varying the terms of an agreement entered into in breach of the Code; or

• termination of an agreement.

Therefore the High Court held that there was not an intention within the legislation that the common law remedy for illegality was to automatically apply.

Lessons

The High Court case is important as it confirms a contract between parties remains paramount and it requires clear language from legislation to render contracts ineffectual. Importantly, the case also makes it clear that the Code is there to control behaviour and there are consequences for non compliance that a franchisor cannot afford to ignore.

For further advice in relation to franchise agreements, please contact us.

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.