18/08/2008

Last year’s decision by the NSW Court of Appeal in the case of Ketchell v Master of Education Services Pty Ltd [2007] NSWCA 161 (19 July 2007) has made many franchisors and franchisee very worried about the legal status of their franchise agreements. In the Ketchell case the Court found that the franchise agreement between the franchisor and the franchisee was unenforceable for statutory illegality.
The statutory contravention which caused the illegality of the franchise agreement was the fact that the franchisor did not obtain a written statement from the franchisee stating that the franchisee had read and had reasonable opportunity to understand the franchisor’s disclosure document and the Franchising Code of Conduct (the "Code"). Such a written statement is required by clause 11(1) of the Code.
 
The relevant part of clause 11(1) states:
 
“The franchisor must not enter into, renew or extend a franchise agreement unless the franchisor has received from the franchisee or prospective franchisee a written statement that the franchisee or prospective franchisee has received, read and had a reasonable opportunity to understand the disclosure document and this code”.
 
The Code imposes binding legal obligations on both franchisors and franchisees pursuant to the Trade Practices Act 1974. In the Ketchell case the Court found that since the legislature prohibits the making of the contract where the franchisee’s written statement has not been obtained, the fact that the parties entered into the contract does not give rise to an enforceable right or obligation. Therefore, the franchisor was not able to enforce the payment of money owed by the franchisee under the contract.
 
As a result of Ketchell, many franchisors and franchisees are unsure of the legal enforceability of their franchise agreements. Particularly where there has been a minor breach or inadvertent oversight of the technical requirements imposed by the Code.
 
The uncertainty caused by the Ketchell decision is difficult to address at this time for two reasons. Firstly, in Hoy Mobile Pty Ltd v Allphones Retail Pty Ltd (No 2) [2008] FCA 810 (30 May 2008) the Federal Court refused to follow the Ketchell decision stating that the reasoning behind that decision was “plainly wrong”. Secondly, the Ketchell case is on appeal to the High Court of Australia with a decision expected reasonably soon.
 
It is estimated that the legality of as many as 10% (approximately 5,000) of the existing franchise agreements in Australia could be affected by the High Courts decision of the Ketchell appeal. In the meantime it is important for all parties to a franchise agreement to be very diligent in ensuring all commercial and legal records are complete, up to date and secured in an accessible manner.
 
If you would like more information, please do not hesitate to contact Townsends Business & Corporate Lawyers on (02) 8296 6222.