Contract; illegality; contravention of industry code; effect of illegality on the enforceability of a franchise agreement.
Facts: Master Education Services Pty Ltd (MES), a franchisor, entered into a franchise agreement with Jean Ketchell, the franchisee. Under the provisions of the Trade Practices Act 1974 (Cth) the franchise industry was subject to a mandatory (compulsory) Code of Conduct. This code imposed various requirements on participants in the franchise industry, one of which was that a franchisor must not enter into a franchise agreement without first providing the franchisee with a disclosure document and a copy of the code, and obtaining from the franchisee a written statement that they have read and understood these materials. MES had provided Ketchell with the documents before entering into the franchise agreement, but had not obtained the required statement from her. When MES claimed franchise payments from Ketchell, she claimed that the failure to comply with the code made the franchise illegal and the contract was therefore unenforceable.
Issue. Was the franchise contract made unenforceable at law because of the failure to comply with the provisions of the code of conduct?
Decision: In light of s 51AD of the Trade Practices Act, (which is now s 51AD of the Competition and Consumer Act 2010 (Cth)) taken together with the provisions of the code, the breach of the code that had occurred did not make the franchise agreement unenforceable.
Reason: Although the code prohibited entering into a franchise agreement unless the required statements were obtained, it should not necessarily be inferred that a failure to comply with the requirements made the agreement unenforceable. The legislation provided a wide range of remedies for such situations, which indicated that the consequences of non-compliance need not be restricted to vitiating the entire agreement. A court could instead vary the terms of the agreement, terminate it, or provide compensation for loss or damage caused by the contravention, as appears suitable in the circumstances.