The decision announced by the Franchise Council of Australia (FCA) to fund the appeal in the High Court of the Ketchell case should come as no surprise to the franchise sector given the amount of publicity the issue has received recently.

The FCA’s position is that without a final determination by the courts, the current precedent established by the Ketchell case creates vast uncertainty for both frachisors and franchisees. At heart is the fundamental issue that a technical breach of the Franchising Code of Conduct can render a franchise agreement illegal, and by doing so, this can negatively impact the value of the businesses of both franchisees and franchisors.

However this case is not without precedent, and similarities between this and a previous case provides reason to believe that franchising as a whole may emerge stronger for the experience, whatever the outcome.

The FCA also states that uncertainty for franchisees can be equally disconcerting if a technical breach of the Code at the time they bought their franchise leaves them without a valid agreement when they later want to sell and extract their capital from the business. The franchisor in the Ketchell case, Master Education Services, has exhausted their ability to fund this case without outside support, and the FCA, in the interests of establishing clarity, are prepared to fund the case up to $200,000 to cover the costs of both sides to the issue.

A hearing is expected as early as next month, so the franchising landscape in Australia as we know it may be cast a little bit more firmly from that point on.

Amid all the noise surrounding the Ketchell case however, I am reminded of a somewhat similar case several years ago where a mobile service franchise was investigated by the ACCC for allegedly  breaching the Code by failing to provide a disclosure document, and also for unconscionable conduct toward the franchsee. In that situation, the franchisor maintained that the disclosure documentation had been provided to the franchisee, and that the alleged unconscionable conduct had not occurred. However, the franchisor could not provide the same type of receipt that is now at the heart of the Ketchell case.

The investigation lasted in excess of 12 months, cost the franchisor more than $120,000 in legal fees (plus the added cost of the lost productivity of its management team as it dealt with the case), and was resolved before it went to court. While both the ACCC and the franchisor felt they had the evidence to back their respective cases, both parties ultimately agreed to a settlement (taking into account the alleged conduct and its impact on the franchisee) which required the franchisor to buy back the business from the franchisee (at a mutually agreeable amount), and this sale price was calculated independently of the initial upfront investment and the royalties paid during the life of the franchise. Furthermore, the franchisor also agreed to a court-enforceable undertaking to comply with the Franchising Code of Conduct, and to undertake a Trade Practices compliance training program.

While the pain for the franchisor in this journey was considerable, it did not result in a queue of other franchisees to also be released from or bought out of their franchise agreements. Nor did it result in a popular uprising of the franchisees against the franchisor, or the ACCC examining the circumstances of every other franchise agreement in the group. Indeed it would be hard to imagine the ACCC reviewing the cirmcumstances of each and every franchise agreement issued by a franchisor based on the complaint of just one disaffected franchisee, or dysfunctional agreement. In this instance, the franchisor was hit by a large acorn, but despite their initial fears, the sky did not fall in. As painful as the investigation was at the time, the business emerged stronger and more successful for the experience. 

While the circumstances of the Ketchell case are different, the underlying issue of a technical breach rendering an agreement illegal are the same, occompanied by the resultant fears of upheaval and chaos across a network. In the case of the franchise system where this happened previously, the world did not come to an end. Once the Ketchell issue is resolved, franchisors and franchisees can get on with the business of making money, which is the reason both parties come together in the first place.

Copyright 2008 Jason Gehrke