In an important test case for the franchise industry, Master Education Services Pty Limited v Ketchell [2008] HCA 38, the High Court of Australia has decided that a breach of clause 11(1) of the Franchising Code of Conduct did not automatically make the franchise agreement void and unenforceable.
Section 51AD, in Pt IVB of the Trade Practices Act 1974 (Cth) ("the Act"), provides that a corporation must not, in trade or commerce, contravene an applicable industry code. Clause 11(1) of the Franchising Code of Conduct provides that a franchisor must not enter into a franchise agreement or receive non-refundable money under a franchise agreement unless the franchisor has received from a prospective franchisee a written statement that the prospective franchisee has received, read and had a reasonable opportunity to understand the disclosure document and the Code.
Master Education Services Pty Limited, as franchisor, provided a disclosure document and a copy of the Code to Ms Jean Ketchell as required, prior to executing a Franchise Agreement, but it failed to obtain the statement required by cl 11(1).
The question was whether a franchise agreement is unenforceable when it has been entered into by a corporate franchisor which has contravened the Code, by entering into an agreement without receiving the required statement from the franchisee, confirming the receipt of information about the franchise and the franchisor and that the franchisee has had sufficient time to understand that information.
In rejecting that proposition the Court said:
"The detailed provision by the Act for the consequences of non-compliance with an industry code, such as the Franchising Code of Conduct, does not support a conclusion that it was intended that the harsh consequences provided by the common law were to follow upon contravention of s 51AD. The Act provides a more flexible approach. It allows a court to prevent entry into a franchise agreement, to vary the terms of an agreement entered into in breach of the Code, or to terminate such an agreement or provide compensation for loss and damage, if it is shown to have been caused by the contravention.
To render void every franchise agreement entered into where a franchisor had not complied with the Code would be to give the franchisor, the wrong-doer, an opportunity to avoid its obligations , and at the same time to place the franchisee in breach of obligations to third parties. A preferable result, and one for which the Act provides, is to permit a franchisee to seek such relief as is appropriate to the circumstances of the case. Some cases of non-compliance with cl 11 might involve substantial non-disclosure; others may only involve a failure to obtain the written statement, confirming that the franchisee has read and understood the disclosure document and the Code. This is such a case.
Section 51AD does not in its terms prohibit the making of a franchise agreement where a franchisor has not complied with the Code. That section and the Code are concerned with the regulation of the conduct of participants in the franchising industry; in particular the conduct of franchisors. It is not to be inferred from a purpose which promotes or prescribes better and fairer business practices that contractual relations between parties will be affected."
