Legal Article

The Decision of the High Court of Australia in Master of Education Services v Ketchell

It is no exaggeration to say that in 2008, the franchise industry in Australia awaited with bated breath the decision of the High Court of Australia in the matter of Master of Education Services v Ketchell [2008] HCA 38.

The case was of such importance because the Court of Appeal of New South Wales, the highest court in that State, had found that what might be described as a minor, technical breach of the Franchising Code of Conduct (“the Code”) by a franchisor made the whole of the franchise agreement illegal and unenforceable, with the result that (among other things) the franchisor could not recover arrears in franchise fees owed by the franchisee for some 3 1/2 years. The franchisor's breach had consisted in a failure by the franchisor to obtain a written statement from the franchisee before the franchise agreement was entered into, to the effect that the franchisee had received, read and had a reasonable opportunity to understand the franchisor's disclosure document and the Code. Although the franchisor had not obtained the written statement, it had, nonetheless, provided a copy of its disclosure document to the franchisee before the franchise agreement was entered into.

If the New South Wales Court of Appeal's decision had been allowed to stand, it may have had the consequence that the validity of a great many franchise agreements in Australia could be challenged, throwing the whole industry into turmoil.

The franchisor appealed the decision to the High Court. For some time, there was uncertainty as to whether the appeal would proceed, because the High Court agreed to entertain the appeal only on condition that the franchisee's legal costs were covered by the franchisor. The Franchise Council of Australia eventually came to the party and gave financial assistance, enabling the appeal to proceed.

The High Court, in a unanimous decision of 5 judges handed down on 27 August 2008, allowed the appeal and reversed the New South Wales Court of Appeal's finding. The High Court held that it was not the Parliament's intention that a breach of the Code would automatically render the franchise agreement illegal and unenforceable.

Although the High Court found there would not be automatic illegality in these circumstances, it did leave open the possibility that in appropriate circumstances, including for breach of the Code, a Court could make an order declaring part or all of a franchise agreement illegal and unenforceable.

Franchisors should therefore still be diligent to ensure that they strictly comply with the requirements of the Code in their dealings with franchisees.