Franchising Law - The Federal Court of Australia declares decision in Ketchell's 'plainly wrong'

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In a decision which will only fuel more uncertainty in the franchising industry, Justice Rares of the Federal Court of Australia has refused to follow the decision of the Court of Appeal in Ketchell's case, declaring that it was 'plainly wrong'. The decision throws doubt over the consequences of a franchisor's failure to comply with the Franchising Code of Conduct (Code). That doubt will not be resolved until the High Court delivers its judgment on appeal in Ketchell's case which was heard on 10 June 2008.

What the Court of Appeal held in Ketchell's Case

In Ketchell's case, the Court of Appeal ruled that the franchisor's failure to obtain the requisite certificate under clause 11 of the Code (to the effect that the franchisee had read, received and had a reasonable opportunity to understand the disclosure document and the Code) (Certificate) rendered the franchise agreement void for illegality. The Court of Appeal held that a court does not have the power to relieve against the directly prohibited conduct of clause 11 of the Code. According to one of the presiding judges, President Mason, who reviewed the Code and the applicable provisions of the Trade Practices Act (TPA), what is prohibited under clause 11 'is not just conduct but the contract itself and the recovery of money under it'. The decision sent shockwaves through the franchise industry, with many franchisors concerned about the status of their franchise agreements (and their ability to recover monies under them) after failing to obtain the Certificate from franchisees.

What Justice Rares of the Federal Court of Australia held

In the recent judgment, delivered on 30 May 2008, Justice Rares rejected an argument which was unusually raised by the franchisor (and not the franchisee) that its failure to obtain the Certificate rendered the franchise agreement void, in line with Ketchell's case. In reviewing the decision in Ketchell's, Justice Rares acknowledged that he should not depart from the ruling of an intermediate appellant court in another jurisdiction on the interpretation of Commonwealth legislation, unless he was convinced that the interpretation was 'plainly wrong'.

Justice Rares had no hesitation in making such a finding in relation to Ketchell's.

His Honour criticised the approach to statutory construction (of the Code and the Trade Practices Act (TPA)) adopted by President Mason in Ketchell's case in which he stated that there was 'no need to seek guidance from implications in the statutory framework'. Justice Rares also noted that the Court of Appeal in Ketchell's had not had the benefit of the later High Court case of Baxter Healthcare which he said demonstrated that the approach to statutory construction adopted in Ketchell's was wrong. In Baxter Healthcare, the High Court held that when a statute contains a unilateral prohibition on entry into a particular agreement, it does not necessarily mean that the agreement is void – this depends on 'the mischief which the statute is designed to protect … and the consequences for the innocent party'.

In keeping with the High Court's approach, Justice Rares then turned to clause 6A of the Code (which was introduced after the franchise agreement - the subject of Ketchell's case) which he said made it clear that the purpose of the disclosure document is to protect franchisees. He also found that the purpose of clause 11 of the Code was to provide franchisees with the opportunity to be informed by independent advice if they wish to obtain it. Having regard to the purpose of the Code, Justice Rares held that non-compliance with the Code 'could not have been intended to have the draconian consequence of invalidating' a franchise agreement.

In considering 'the consequences for the innocent party' if an agreement was held to be void for failure to comply with the Code, Justice Rares noted that in most cases, this would be detrimental to franchisees. For instance, franchisees may be in breach of their lease if the franchise agreement was held not to have come into existence. His Honour stated: 'It would be an unusual result if beneficial legislation, intended to protect persons … were to destroy the legal validity of a franchisee's bargain'.

His Honour also relied on clause 5(1) of the Code which states that the Code applies to a franchise agreement 'entered into' after 1 October 1998. He held that such wording implied validity rather than invalidity, despite non-compliance with the Code. He pointed out that remedies are available to the franchisee under the TPA. This would include a ruling that the franchise agreement is voidable or should be varied.

Whilst franchisors may applaud this decision, until the High Court has handed down its decision in Ketchell's case, the effect of non-compliance with the Code is unclear and they should continue to be vigilant in their compliance with the Code.

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