RELIEF HAS surged through the franchise industry following the High Court’s unanimous reversal of the controversial decision in Master Education Services Pty Limited v Ketchell .
The franchising industry has been anxiously watching the progress of the case, with the appeal funded by the Franchise Council of Australia. In the judgment handed down on 27 Augus, the High Court overturned the decision of the Appeal Court — an exceptional result, according to Deacons partner Stephen Giles.
“It’s hard to get special leave to appeal to the High Court. It’s even harder to then be successful on appeal. It’s almost unheard of to have a unanimous decision of the High Court,” he said. “I think the reality is that, as the Allphones case showed, the Court of Appeal got it completely wrong.”
Giles said his first reaction on hearing the decision was to breathe a sigh of relief. He said the decision would create greater certainty for clients and reinforce the availability of flexible remedies under the existing Trade Practices regime.
“I’m relieved that the whole thing is over and that everybody’s now got the certainty and the clarity that they need,” he said.
The High Court held that a failure to comply with clause 11(1) of the Franchising Code of Conduct did not automatically result in the illegality and unenforceability of the franchise agreement made between the franchisor and the franchisee.
“It puts the regulatory environment back to where everybody thought it was, one which had some strong remedies, but it was also very flexible and could be tailor-made to suit the purposes,” Giles said.
However, Giles warned that franchisers who did not take compliance with the Code seriously would still face serious consequences. “The High Court appeared to indicate that only ‘inconsequential’ breaches would avoid serious consequences,” he said.
The court’s reasoning also indicated a more prominent role for unconscionable conduct in franchising. In particular, the court focused on the parliamentary Second Reading Speech of the Trade Practices Amendment (Fair Trading) Bill 1997, highlighting the Parliament’s intention to address the issues of inequality of bargaining power and poor disclosure of information.
“I wouldn’t be surprised if the current law on unconscionable conduct is a bit broader than what people think it is at the moment,” Giles said. “From a franchisor’s perspective, they need to be very careful about disclosure. They also need to be careful about unconscionable conduct.
“The court made it pretty clear that the code is there to protect franchisees. If there are problems with disclosure, the court will regard that as a serious breach, because the Parliament has given a clear legislative intention as to what it wants to do. So it [Ketchell] isn’t carte blanche for franchisors by any means.”