Ketchell case not without precedent

The last time a Ketchell-like incident occurred, the sky did not fall in. I don’t think it will now either. JASON GEHRKE

Jason Gehrke: Photo by Studio 60

By Jason Gehrke

The decision announced by the Franchise Council of Australia (FCA) to fund the appeal in the High Court of the Ketchell case should come as no surprise to the franchise sector given the amount of publicity the issue has received recently.

The FCA is saying that the precedent established by the Ketchell case would create vast uncertainty for both franchisors and franchisees if it goes unchallenged. 

At its heart is the fundamental issue that a technical breach of the Franchising Code of Conduct can render a franchise agreement illegal, and by doing so, this can negatively affect the value of the businesses of both franchisees and franchisors.

Franchisors could potentially lose royalty income from a franchisee where an agreement has been made void due to a technical breach, and they may be required to refund all money paid under the agreement, including all royalties and up-front fees. There is also a risk that the franchisee could profit from its access to the franchisor’s business know-how, operations manual and trade secrets, without any compensation to the franchisor.

Franchisees risk being left without a valid agreement when they later want to sell and extract their capital from the business.

Amid all the noise surrounding the Ketchell case however, I am reminded of a somewhat similar case several years ago where a mobile service franchise was investigated by the ACCC for allegedly breaching the code by failing to provide a disclosure document, and also for unconscionable conduct toward the franchisee.

In that situation the franchisor maintained that the disclosure documentation had been provided to the franchisee, and that the alleged unconscionable conduct had not occurred. However, the franchisor could not provide the same type of receipt that is now at the heart of the Ketchell case.

The investigation lasted in excess of 12 months, cost the franchisor more than $120,000 in legal fees (plus the added cost of the lost productivity of its management team as it dealt with the case), and was resolved before it went to court.

While both the ACCC and the franchisor felt they had the evidence to back their respective cases, both parties ultimately agreed to a settlement (taking into account the alleged conduct and its impact on the franchisee) which required the franchisor to buy back the business from the franchisee (at a mutually agreeable amount).

This sale price was calculated independently of the initial upfront investment and the royalties paid during the life of the franchise. The franchisor also agreed to a court-enforceable undertaking to comply with the Franchising Code of Conduct, and to undertake a Trade Practices compliance training program.

While the pain for the franchisor in this journey was considerable, it did not result in a queue of other franchisees wanting to also be released from or bought out of their franchise agreements.

Nor did it result in a popular uprising of the franchisees against the franchisor, or the ACCC examining the circumstances of every other franchise agreement in the group. Indeed it would be hard to imagine the ACCC reviewing the circumstances of each and every franchise agreement issued by a franchisor based on the complaint of just one disaffected franchisee, or dysfunctional agreement.

In this instance, the franchisor was hit by a large acorn, but despite their initial fears, the sky did not fall in. As painful as the investigation was at the time, the business emerged stronger and more successful for the experience.

While the circumstances of the Ketchell case are different, the underlying issue of a technical breach rendering an agreement illegal are the same, accompanied by the resultant fears of upheaval and chaos across a network.

In the case of the franchise system where this happened previously, the world did not come to an end. Once the Ketchell issue is resolved, franchisors and franchisees can get on with the business of making money, which is the reason both parties come together in the first place.

 

Jason Gehrke has a passion for franchising. He has been involved in the sector for 17 years as a franchisee, a franchisor, provided PR and marketing services to more than 30 leading Australian franchise systems, and presented to literally thousands of potential franchisees and franchisors over the years. He is a director of the consultancy Franchise Advisory Centre and is the immediate past CEO of automotive paint and plastic repair franchise, Kwik Fix International, a 2004 Australian Franchise System of the Year winner.

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