Franchisors raising money to fight franchisees in High Court

The Franchise Council of Australia is attempting to raise money from franchisor members to fund a High Court appeal against a significant court decision in favour of franchisees’ rights.

The Court of Appeal in Ketchell v Master Education Services held that where a franchisor does not have a written acknowledgement that a franchisee has received, read and had an opportunity to understand the disclosure document, the franchise agreement is unlawful and unenforceable.

When the decision was handed down last July, franchisors realised its significance and the Franchise Council of Australia, the peak industry body, made a submission in support of the application for leave to appeal.

“We did that because we don’t agree with the Supreme Court finding that a technical breach of the type in question should necessarily invalidate the whole agreement,” says Steve Wright, chief executive of the Franchise Council of Australia.

“Because if you take that to the nth degree it doesn’t matter what has happened during course of whole agreement, the whole agreement will be invalidated if there is trouble in producing a signed document.”

The High Court granted special leave to appeal the decision on 8 February 2008.

Wright could not say how many agreements in the franchising industry could be vulnerable to unenforceability because of this decision. But the fact that the High Court decided to hear the application is a recognition of the significance of the law to the $125 billion franchising industry.

Wright says the importance of the case goes well beyond this specific case between the two parties. Notionally it could create a whole lot of unnecessary work in validating what are normally functioning agreements… as a risk mitigation measure that until this court decision no one would have considered undertaking.

“It does potentially raise a question of opportunistic actions. This is a systemic issue.”

Bryan Belling, a franchise litigator at legal firm Home Wilkinson Lowry who represents franchisees, says franchisors are likely to be very worried about the decision because it has come from a court of record and casts a heavy burden on franchisors to give proper disclosure.

“It is a court of record decision that requires franchisors to give very full disclosure. It is no more than a statement of law under the Franchising Code, but when a court of record says it, it puts gravity to it.”

He argues in favour of the decision. “If you are going to be fair dinkum about disclosure obligations then you need to make sure that non-disclosure has consequences, and rendering an agreement void or voidable is certainly ensuring non-disclosure has consequences.”

He says the decision reinforces franchisees’ rights.

The fact that the Franchise Council of Australia is now trying to raise money to have the decision overturned through the courts, and is lobbying government and the Australian Consumer and Competition Commission to intervene to change the law, is likely to raise eyebrows with franchisees.

The Franchise Council has long been perceived as representing only franchisors, not franchisees, and its strong action in support of the franchisors in this case will not assist in breaking down that perception.

But the FCA’s Steve Wright rejects the implication that it is acting only in the interests of franchisors.

“We are not contesting the validity of or the importance of disclosure acknowledgement. What we think the court needs to consider is the assertion that the absence of that renders the entire agreement illegal –regardless of whether or not the agreement has been operating successfully in every way and in compliance with the code.”

He says this is an issue that will be less of a problem in the future. “The new disclosure requirements are very clear cut. There is a new vigour to the pro-disclosure requirements from 1 March when the amendments to the code come into effect. This is for the good of the sector.”

Before the High Court appeal can proceed the franchisor must agree to pay the franchisee’s costs of the appeal, irrespective of the outcome. The cost could mount into hundreds of thousands of dollars.

Wright says that several members of the Franchise Council of Australia have indicated they will financially support the High Court appeal.

The FCA has to elect whether to proceed by 8 March. If it does, a High Court decision could be made as early as mid this year.