Wednesday 27 August 2008

Illegality doesn't prevent franchisor recovering sums owed under a contract

The latest Allens Arthur Robinson Focus on Franchising carries a note by Andrew Wiseman and Tim Holden on Master of Education Services Pty Ltd v Ketchell, an important decision on illegality and its effect on the ability of the parties to seek or reclaim money from one another.

In short, franchisor Master of Education sued Ketchell, the franchisee, before a local court in order to recover for money due under a franchise agreement. Ketchell claimed that since Master of Education failed to comply with clause 11 of the Australian Franchising Code, the franchise contract became unenforceable for statutory illegality. At trial the court concluded that, while Master of Education did not comply with the Code, its failure to do so did not render the receipt of the non-refundable payment illegal.

The New South Wales Court of Appeal concluded that the franchise agreement was effectively prohibited by the law; accordingly Master of Education could not recover the moneys claimed. The High Court has since unanimously upheld Master of Education's appeal, much to the great relief, presumably, of many a worried franchisor.

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