News that the Franchise Council of Australia is seeking financial support to help fund a potentially precedent-setting legal case (SmartCompany Feb 22, 2008 ) has been met with calls for a new federal inquiry into franchising (SmartCompany Feb 25, 2008 ). Meanwhile, state franchise inquiries in South Australia and Western Australia consider the future of franchising in those locations and new disclosure provisions under the national Franchising Code of Conduct come into effect from next week. 

When hit by an acorn, Chicken Little falsely assumed that the sky was falling in, and in its eagerness to save the world created mass hysteria and confusion. Yes, a few acorns are falling in the world of franchising at the moment, but the sky is definitely not falling in.

The latest development in a busy year for franchising is the appeal to the High Court in the case of Ketchell vs Master of Education Services Pty Ltd. Previously the NSW Supreme Court found that the franchise agreement between the two parties was unenforceable because the franchisor had not obtained a written statement from the franchisee under item 11 (1) of the Code to state they had received, read and had reasonable opportunity to understand the disclosure document.

Whatever the outcome of the appeal in the Ketchell case, getting a written statement from a franchisee confirming they have received, read and had time to understand the franchise agreement is not just a requirement of the Code - it is franchising best practice. Without the statement, how can a franchisor adequately prove that they have in fact provided disclosure? 

If the original finding is upheld by the High Court, then those businesses offering "licenses" or "distributorships" will have cause to worry. Most don't consider themselves franchises, and therefore do not provide disclosure or meet the other requirements of the Code. However, a signficant proportion of these businesses are likely to fit the definition of a franchise under Item 4 of the Code, and therefore the Ketchell case has the potential to set a precedent which might void all such licensed or distributorship agreements.

Irrespective of the appeal’s success or otherwise in the High Court, franchising in Australia is far from doomed.  The sky is not falling in. Franchising has proven itself to be a robust and reliable business methodology, though not always practiced by all to the same level of proficiency. Indeed, if the same level of interest in this legal case existed in the need for education of both franchisors and franchisees, we would have an even more effective and harmonious sector.

Copyright 2008, Jason Gehrke, Director, Franchise Advisory Centre