Franchisors breathe a collective sigh of relief

In the highly anticipated decision of Master Education Services Pty Limited v Ketchell
(Ketchell’s Case)¹, the High Court yesterday delivered widely predicted confirmation that franchise agreements are not automatically invalidated by technical breaches of the Franchising Code of Conduct (Code).

In doing so, the High Court unanimously upheld an appeal from the controversial decision of the Supreme Court of New South Wales (NSWSC).

Ketchell’s Case concerned a breach by the franchisor of clause 11(1) of the Code.  Clause 11(1) requires a franchisor, before executing the franchising agreement or accepting non-refundable payments, to obtain a written acknowledgement from the franchisee that the franchisee had received, read and understood the disclosure document and the Code.  A breach of the Code is breach of the Trade Practices Act 1974 (Cth) (TPA).

According to the NSWSC, entry into the franchise agreement in breach of the TPA rendered the agreement void (ie unenforceable).

The High Court disagreed.  While the franchisor’s conduct was a contravention of the TPA, the agreement was valid.  However, the franchisee did have a right to apply for relief under the TPA. Whether the franchisee would be entitled to an order for an injunction, damages, variation of the agreement or even rescission under the TPA would depend on the consequences of the franchisor’s breach.

The result in Ketchell’s Case is likely to be a great relief for franchisors.

The finding by the High Court may assist in reducing the incidence of litigation resulting from inconsequential and technical breaches of the Code by franchisors.

This is an important protection for franchisors who have otherwise complied with the rigorous franchisee protection provisions of the Code in all material respects.

However, the principles in Ketchell’s Case are no substitute for compliance.

Franchisors should ensure that robust procedures are implemented to ensure that Code requirements are complied with in all respects.  Hall & Wilcox are experienced in assisting franchisors with Code compliance.