The Franchise Council of Australia’s decision to fund the Ketchell case was vindicated yesterday when the High Court overturned a legal precedent that had created uncertainty across the sector.
The High Court ruled that a failure by a franchisor to receive a statement from the franchisee as required by clause 11 of the Franchising Code does not automatically render their agreement void.
That had been the status quo following a 2007 NSW Court of Appeal in which the Master Education Services franchise was told its franchise agreement with Jean Ketchell was invalid because they had not received the required written statement from her.
The decision caused alarm because it suggested any disgruntled franchisor or franchisee could rely on any technical breach of the Franchise Code to avoid their obligations under a franchise agreement.
Recognising the uncertainty that had been created, the FCA raised $250,000 from its members to fund both sides of a High Court appeal in the hope of having the decision overturned.
FCA chief executive Steve Wright says the Ketchell case resolves the biggest legal issue the franchise sector has faced in the last 30 years.
“We asked for contributions from members and were lucky enough to get a good voluntary contribution from members because they recognised what a huge issue this is for the industry,” he says.
Wright rejects any suggestion that the decision represents a win for franchisors over franchisees.
“The NSW decision opened up the potential for opportunistic litigation on either side and could have made it quite a bit more difficult for a franchisee to sell his or her business where there was a question of anything less than 100% compliance.”
Stephen Giles, a partner with Deacons and the FCA’s point-man on the case, says the court carefully considered the consequences of the issue for franchisees and the industry more generally.
“The bottom line is that the NSW Ketchell decision had deprived franchisees of a number of remedies and that problem has now been resolved,” he says.
And, he points out, it will not mean that flagrant franchisor breaches of the code can’t still be punished with the cancellation of a franchise agreement where appropriate.
“In my opinion a failure to provide a disclosure document or one that is misleading could well result in a court ordering cancellation of a franchise agreement or damages, but a mere technical or inadvertent breach with no serious consequences won’t have that result,” Giles says.
But the decision will have some positive flow on for franchisors, with several cases bought by disgruntled franchisees in NSW now likely to fall over following the ruling.
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