The recent decision by the NSW Court of Appeal in
Ketchell v Master of Education Services Pty Ltd [2007] NSWCA 161 (
Ketchell’s Case) highlights the importance for franchisors to strictly comply with the Franchising Code of Conduct (
the Code).
The court held that the franchise agreement was unenforceable because the franchisor did not have a signed acknowledgement of disclosure from the franchisee (required under clause 11 of the Code). This is a case of form over substance as the franchisor had adequately disclosed all necessary information to enable a prospective franchisee to make an informed decision.
This decision demonstrates that Courts are unwilling to enforce franchise agreements that do not comply with all aspects of the Code.
As the franchise agreement was unenforceable, the franchisor was prevented from recovering monies allegedly owed by the franchisee under the franchise agreement.
Franchisor to appeal
- On 8 February 2008, the High Court granted special leave to appeal the decision on the condition that the franchisor pay the franchisee’s costs irrespective of the outcome.
- On 28 March 2008, the franchisor filed a notice of appeal.
- The case is set to be heard by the High Court in June 2008.
Keeping up-to-date with new developments in the Code
On 1 March 2008, a number of amendments to the Code came into effect.
To avoid any risk of your franchise agreements being unenforceable, we recommend that franchisors ensure the following changes have been made to their disclosure documents:
- the first page of a franchise agreement must specify that the franchisor may deduct reasonable expenses from pre-payments if prospective franchisees end the agreement during the cooling off period;
- the name, position, qualifications and business experience of each officer and director must be stated in the business experience section;
- any proceedings against directors and the contents of any order or undertaking should be specified in the litigation section;
- all parties that give rebates and financial benefits should be named in the payments to agents section;
- the contact details of all franchisees who have exited the system in the preceding three years (subject to their consent) should be included under the existing franchisees section;
- the history and details of the site are to be provided in a new section;
- audited financial reports for the consolidated group (if applicable) must be provided upon request; and
- specific conditions in the franchise agreement must be referred to in the franchisor, franchisee and other obligations section.
The Ketchell’s Case highlights that the Courts will hold franchisors liable for technical breaches of the Code or at least prevent them from enforcing their rights under franchise agreements.
Complying with the new changes
The requirements set out above only cover some of the new amendments to the Code. While it is important that franchisors amend their disclosure documents to comply with the Code, franchisors must also make themselves aware of all other obligations under the Code.
Franchise advice
Hall & Wilcox has a specialist
Franchising team who are happy to advise on amendments to the Code, establishing a franchise and compliance with the Code.
If you need more information, have a franchising question or would just like to know the outcome of Ketchell’s case in the High Court, please feel free to contact us.
For further information, please contact: