06 Dec What happens if a Franchisor Breaches the Code?
A breach of the Code constitutes a breach of the Competition and Consumer Act.
Section 51 AD of the Competition and Consumer Act provides that “a corporation must not, in trade or commerce, contravene an applicable industry code”
In a case known as Ketchell’s case the court was asked to look at the consequences of a failure to breach the code.
The facts of the case put simply are that the franchisor brought an action to recover money that the franchisee said was owning under the franchise agreement. Mrs Ketchell was the franchisee. Mrs Ketchell argued that the franchisor had not complied with the code. The code requires that the franchisor obtain a certificate confirming that the franchisee had read and had an opportunity to understand the disclosure document provided by the franchisor.
Mrs Ketchell did not provide the certificate. Mrs Ketchell said that the failure to obtain the certificate signed by her was not only a breach of the code but it also had the effect that the franchisor was not entitled to receive any payments under the franchise agreement. The Supreme Court of NSW agreed with Mrs Ketchell.
This case however had unexpected consequences. In a separate case brought by Hoy Mobile Pty Ltd against Allphones in the Federal Court the Franchisor argued that it had not complied with the disclosure provisions of the code and that as a result the franchise agreement was void. The result the franchisor said, was that the franchisee could not make claims under that franchise agreement for money that the franchisee was owed.
The Federal court said that the NSW Supreme Court was incorrect in Ketchells case. The federal court held that non-complaince with the code could not have been intended to have the draconian consequence of invalidating a franchise agreement.
The High Court looked at Ketchells case and handed down its decision on 27 August 2008 it was a unanimous decision. A breach of the code will not necessarily void the Franchise Agreement.
What then can a franchisee do in the event of a breach of the code. The code does not explicitly stipulate penalties.
1. seek an injunction,
2. seek damages,
3. seek non-punative orders,
4. seek other orders including perhaps variations to contracts.