High Court provides certainty for franchise contracts

Written on the 27 August 2008 by Franchise Association

Today’s decision by the HighCourt of Australia in the ‘Ketchell’ case provides a welcome return to contract stability in the $128 billion franchising sector, according to the sector’s peak representative body, the Franchise Council of Australia.

FCA chairman John O’Brien said the court ruling had eliminated a doubt which had hung over the sector since an unexpected ruling by the NSW Court of Appeal earlier this year in the Ketchell v Master Education Services case.

“This decision means we can return to confidence in the pivotal contract which underpins franchising across Australia and all over the world – the agreement between franchisor and franchisee about how they will conduct business to their mutual benefit,” Mr O’Brien said.

The NSW Court of Appeal ruled that a breach of the Franchising Code of Conduct (which governs franchising agreements) rendered the agreement illegal, potentially opening the way for opportunistic litigation by a franchisor or franchisee.  The High Court ruling effectively overturns that Court of Appeal ruling and restores the contract stability the sector has enjoyed over the past 30 years.

The High Court ruled that a breach did not necessarily bring a franchise contract to an end, as other remedies were available – a position put by the FCA in its submission to the High Court ahead of it agreeing to hear the case.

FCA Executive Director Steve Wright said clarification provided by the High Court was exactly what the FCA had been seeking on behalf of the whole franchising community – franchisors, franchisees and advisers.

"The five - nil judgement by the Full Court judges meant there was no room for ambiguity or ambit claims by any party seeking to exploit uncertainty," Mr Wright said.

The High Court heard the case in June.  It was a timely hearing because the Federal Court had added to uncertainty by rejecting the Ketchell case determination by the NSW Court of Appeal.  In the case Hoy Mobile Pty Ltd v Allphones Retail Pty Ltd, his Honour Justice Rares said that the NSW Court of Appeal was “plainly wrong” in its reasoning in the Ketchell case and that the judgement should not be followed.

Mr Wright said the FCA took the decision to fund the appeal after exhaustive consultation across the sector – in all state divisions and with the help of the FCA legal committee Chaired by Stephen Giles, a Partner at Law firm Deacons and the leading author on franchise law in Australia.  Mr Giles managed the High Court appeal process to ensure that the costs of both franchisor and franchisee were met by the FCA.

“The professionalism of the FCA submission and the fact that the High Court recognised this in agreeing to hear the case was testament to the thorough work which went into both the preparation for the case and ensuring a comprehensive summary of the facts and issues involved was presented to the High Court.” Mr Wright said.

“The decision also will help clear up a number of cases in courts around the country - especially in NSW - where applicants have been waiting for a High Court ruling.”