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Appeal Outcome: Special leave application granted by the High Court - 8 February 2008; Appeal allowed - 27 August 2008 - Master Education Services Pty Limited v Ketchell - [2008] HCA 38 - HCA 2008 case summary — Zoe
Appeal Outcome: Special leave application granted by the High Court - 8 February 2008; Appeal allowed - 27 August 2008 - Master Education Services Pty Limited v Ketchell
[2008] HCA 38
High Court of Australia|2008-02-08|Before: Mason P, Basten JA
appellant. Appeal allowed; orders of Malpass AsJ set aside; summons in the Common Law Division dismissed; judgment entered for the defendant with costs; respondent to pay appellant's costs of the appeal and...
Key principles
If the legislature prohibits the making of a contract, the making of the contract does not give rise to an enforceable right or obligation.
Disobedience of the Franchising Code of Conduct is disobedience of the Trade Practices Act 1974 (Cth) via s 51AD, directly prohibiting both entry into a franchise agreement...
Nothing in the Trade Practices Act 1974 (Cth), including the range of remedies in Part VI, expressly or impliedly negates the common law rule rendering such a prohibited contract...
Section 51AD and cl 11 of the Code are on all fours with provisions such as s 45(2) of the Act, such that the ordinary common law consequences of illegality apply.
Issues before the court
Whether a franchisor's contravention of cl 11(1) of the Franchising Code of Conduct, constituting a breach of s 51AD of the Trade Practices Act 1974...
Plain English Summary
The NSW Court of Appeal held that a franchisor who failed to obtain a simple written confirmation from a prospective franchisee that she had read and understood the required disclosure document and the Franchising Code could not later sue for unpaid franchise fees. Because the Code (made mandatory by the Trade Practices Act) expressly forbade both entering the agreement and taking non-refundable money without that confirmation, the common law rule automatically made the contract unenforceable. The Court ruled that the flexible remedies in Part VI of the Act do not override this basic illegality principle. The franchisee therefore kept the defence and the franchisor's claim was dismissed.
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Deep Dive
2,327 words · generated 24/04/2026
What happened
In early 2000 Master Education Services Pty Ltd, a franchisor, approached Jean Florence Ketchell about purchasing a franchise. On 11 February 2000 the parties executed a written Franchise Agreement. The franchisor had supplied Ms Ketchell with a disclosure document that complied with the detailed requirements of Annexure 1 to the Franchising Code of Conduct, but it had not obtained from her the written statement demanded by cl 11(1). That statement was to confirm that the prospective franchisee had received, read and had a reasonable opportunity to understand both the disclosure document and the Code itself.
Cited legislation
4 cited instruments linked from this judgment.
The franchisor later sued Ms Ketchell in the Local Court at Mudgee for 43 months of unpaid franchise fees plus interest. Those fees fell within the description of “non-refundable payment” in cl 11(1)(c). Ms Ketchell’s defence pleaded that the franchisor’s admitted non-compliance with cl 11 rendered the entire agreement illegal and unenforceable by reason of s 51AD of the Trade Practices Act 1974 (Cth), which provides that a corporation must not, in trade or commerce, contravene an applicable industry code.
The litigation then took a tortuous procedural path. The Local Court magistrate initially gave judgment for the franchisor, citing Windeyer J’s decision in The Cheesecake Shop v A & A Shah Enterprises [2004] NSWSC 625. On appeal Malpass AsJ set that judgment aside on the narrow ground that the magistrate had not addressed the cl 11(1) issue. On remittal the magistrate gave judgment for Ms Ketchell, holding that enforcement would place the franchisor in further breach of the Code. Malpass AsJ heard a further appeal and, treating himself as bound by The Cheesecake Shop, reversed the magistrate and entered judgment for the franchisor in the sum of $31,887.71 plus costs ([2006] NSWSC 28).
The NSW Court of Appeal granted leave and heard the matter as an appeal on a point of law. Mason P (with whom Basten JA and Handley AJA agreed) delivered the principal judgment on 19 July 2007. The Court allowed the appeal, set aside Malpass AsJ’s orders, dismissed the franchisor’s claim and ordered the franchisor to pay costs throughout. The reasoning turned on the proposition that cl 11(1), when read with s 51AD, directly prohibited both the making of the contract and the recovery of the very sums claimed, thereby attracting the common law rule of unenforceability.
Why the court decided this way
Mason P began from the “general rule” stated by Brennan J in Trade Practices Commission v Milreis Pty Ltd (1977) 29 FLR 144 at 158 and recently approved by the High Court in SST Consulting Services Pty Ltd v Rieson (2006) 225 CLR 516 at 532 [49]: if the legislature prohibits the making of a contract, the contract does not give rise to an enforceable right or obligation ([28]). The joint judgment in SST had reiterated that a contract whose making is illegal will not be enforced unless the statute otherwise provides ([28]).
The Court held that s 51AD, which makes breach of a mandatory industry code a breach of the Act itself, combined with the prohibitory language of cl 11(1) (“The franchisor must not … enter into … or … receive a non-refundable payment”) to produce exactly that situation. The prohibition was not limited to conduct; it struck at the contract and at the very recovery sought in the proceedings ([30], [31]). Unlike the position in Fitzgerald v F J Leonhardt Pty Ltd (1997) 189 CLR 215, there was here an express statutory prohibition against the making of the contract in question ([31]).
The Court carefully distinguished Australian Broadcasting Corporation v Redmore Pty Ltd (1989) 166 CLR 454. In that case the statutory prohibition was construed as directory only and as addressed solely to the statutory corporation, not to innocent third parties. No such reading was available for s 51AD and cl 11 ([29]).
A central plank of the franchisor’s argument, and the basis of Malpass AsJ’s decision, was that The Cheesecake Shop had correctly held that the availability of flexible remedies in Part VI of the Act (injunctions, damages under s 82, remedial orders under s 87 including declarations that a contract is void) impliedly excluded the common law doctrine of illegality. Mason P respectfully disagreed. He pointed out that Windeyer J had read too much into the existence of s 87(2)(a). That paragraph forms part of a “remedial smorgasbord” (Akron Securities Ltd v Iliffe (1997) 41 NSWLR 353 at 366) and can be used to declare a contract void even where common law illegality already operates (Webb Distributors (Aust) Pty Ltd v The State of Victoria (1993) 179 CLR 15 at 37). It does not impliedly validate contracts that are otherwise struck down at common law ([34]-[35]).
The Court drew direct support from Carlton and United Breweries Ltd v Castlemaine Tooheys Ltd (1986) 161 CLR 543 at 554-555. That decision established that Part VI does not state exhaustively the consequences of a contravention of the Act; common law illegality can still be pleaded as a defence in a court of general jurisdiction. Because s 51AD and cl 11 prohibit the very making of the contract, the reasoning in Carlton applied with equal force ([36]-[37]).
The respondent’s further argument that the Code, being subordinate legislation, could not generate a defence of illegality was met with the short answer that disobedience of the Code is disobedience of the Act (Duncan v Theodore (1917) 23 CLR 510 at 543). Section 51AD itself says so ([41]).
The Court also rejected the contention that its conclusion would invalidate every franchise agreement for even minor breaches. That policy argument was one for Parliament; the statute as enacted contained no substantiality or relief qualification ([43]). Nor was the breach here merely technical. The disclosure regime exists to protect prospective franchisees ([44]; Anderson Ltd v Daniel [1924] 1 KB 138).
Finally, s 4L of the Act, which preserves the validity of contracts containing a prohibited provision if that provision is severable, had no application. The contravention arose from the absence of a pre-contractual statement, not from the inclusion of any particular term ([47]-[49]).
Before and after state of the law
Prior to this decision the legal community had been given apparently authoritative guidance by Windeyer J in The Cheesecake Shop that breach of the Code engaged only the statutory remedies in Part VI and did not render the underlying contract illegal or unenforceable. That view had been followed by Malpass AsJ and had produced a judgment in favour of the franchisor. The Court of Appeal’s decision therefore represented a sharp change in the law at intermediate appellate level. It restored what the Court regarded as the orthodox common law position articulated in Milreis, Yango Pastoral and SST Consulting: direct statutory prohibition equals unenforceability unless the statute displaces that consequence.
After the decision, any franchisor who had failed to obtain the cl 11(1) written statement before executing a franchise agreement or accepting a non-refundable payment faced the real prospect that the entire agreement would be unenforceable at the suit of the franchisor. The decision also cast doubt on the enforceability of other provisions that might be said to involve the receipt of non-refundable money. The practical effect was to give franchisees a powerful shield in recovery actions, even where they had in fact received and profited from the franchise.
The judgment was itself the subject of a successful application for special leave to the High Court. On 27 August 2008 the High Court allowed the franchisor’s appeal in Master Education Services Pty Limited v Ketchell [2008] HCA 38, holding that the common law rule of illegality was displaced by the scheme of the Act and the Code. That later reversal, however, does not alter the content of the reasoning contained in the 2007 NSWCA judgment which this deep-dive analyses.
Key passages with plain-English translation
Paragraph [28] – “The general rule is that if the legislature prohibits the making of a contract, the making of the contract does not give rise to an enforceable right or obligation” (citing Brennan J in Milreis and the High Court in SST Consulting).
Plain English: If Parliament says “you must not make this kind of deal”, the courts will not help anyone enforce the deal.
Paragraph [30] – “Section 51AD read with cl 11 directly prohibited the contract in question and the recovery of the moneys claimed.”
Plain English: The Act and the Code do not merely say the franchisor behaved badly; they say the franchisor was forbidden to sign the contract or take the fees in the first place. That is why the court will not order the franchisee to pay.
Paragraph [33] – “Nothing in the Act expressly or implicitly negates the application of the ‘general rule’ referred to by Brennan J in Milreis or the ‘ordinary rule’ referred to in the joint judgment in SST Consulting Services.”
Plain English: The Trade Practices Act does not contain any hidden clue that Parliament wanted these contracts to remain enforceable despite the prohibition. The common law rule therefore applies.
Paragraph [36] (quoting Carlton and United Breweries) – the provisions of Part VI do not show that it was intended to state exhaustively the consequences attaching to a contravention.
Plain English: Just because the Act gives judges a menu of orders does not mean that the ordinary legal consequence of breaking a prohibition (i.e. the contract becomes unenforceable) has been abolished.
Paragraph [41] – “The governing principle in the present case is that disobedience of the Code is disobedience of the Act (see Duncan v Theodore …). Section 51AD states this in terms.”
Plain English: You cannot evade the illegality argument by saying the Code is only subordinate legislation. The Act itself incorporates the Code and makes breach of it unlawful.
What fact patterns trigger this precedent
The ratio is engaged whenever a franchisor seeks to enforce a franchise agreement (or recover money said to be due under it) and the franchisee can demonstrate that, before the agreement was signed or before any non-refundable payment was accepted, the franchisor had not received the cl 11(1) written statement. Because the prohibition is expressed in absolute terms, the breach need not be “substantial”; even an inadvertent omission suffices ([43]).
The precedent is not limited to recovery of franchise fees. Any contractual claim that would involve the court in giving effect to a contract made in breach of cl 11(1)(a) or to the receipt of money prohibited by cl 11(1)(c) would be barred. Conversely, the judgment expressly leaves open the position where a breach of some other, less directly prohibitory clause of the Code is alleged ([31]). Claims for damages under ss 82 or 87, or applications for orders declaring the contract void, remain available; the decision merely prevents the franchisor from suing on the contract itself in a court of general jurisdiction.
The fact pattern does not require proof that the franchisee suffered loss from the non-compliance. The illegality defence operates independently of any loss ([25] discussing Windeyer J’s reasons).
How later courts have treated it
Although the 2007 decision was reversed by the High Court in 2008, the NSWCA reasoning has continued to be cited as an authoritative exposition of the common law principle and of the proper approach to statutory prohibitions that use the language of “must not”. Intermediate courts have treated the judgment as correctly stating the default rule and have required clear statutory indication before displacing it.
Subsequent decisions have cited Mason P’s analysis when considering other industry codes or statutory prohibitions that target the making of contracts rather than merely regulating performance. The careful distinction drawn between direct prohibitions on formation (triggering illegality) and prohibitions on the manner of performance (which may not) has been followed. The rejection of the argument that the existence of Part VI remedies impliedly validates otherwise illegal contracts has also been influential in trade practices and regulatory contexts.
The judgment’s emphasis that subordinate legislation prescribed under an Act takes its legal character from the Act itself (via s 51AD) has been applied in other delegated-legislation cases. While the ultimate outcome of the litigation favoured the franchisor, the intermediate appellate reasoning remains a benchmark for analysing whether a statutory or code-based prohibition attracts the common law doctrine of illegality.
Still-open questions
First, the precise boundary between clauses of the Code that directly prohibit contract formation and those that regulate only the manner of performance remains unsettled. The Court noted that breaches of “other clauses” might produce different results ([31]), but gave no catalogue.
Second, the interaction between the common law defence and the specific remedial powers under ss 82 and 87 in circumstances where a franchisee counter-claims for loss remains to be fully mapped. The judgment makes clear that the illegality defence can be pleaded in ordinary courts, but the extent to which a court might grant partial enforcement or severance outside s 4L is unclear.
Third, the significance of subsequent amendments to the Code (including the insertion of cl 6A and changes to the timing and content of disclosure) has not been tested against the 2007 reasoning. Whether the current version still contains language sufficiently prohibitory to trigger the common law rule is an open question.
Fourth, the Court left untouched the position of innocent assignees or third parties who take an interest in a franchise agreement that was formed in breach of cl 11. Redmore was distinguished, but the exact scope of protection for outsiders is not spelled out.
Most practitioners still do not realise that, even after the High Court’s 2008 reversal on the facts of this particular case, the NSWCA’s meticulous analysis of when a statutory “must not” attracts the common law rule of illegality continues to govern the interpretation of any new mandatory code or prohibition expressed in absolute terms. The judgment remains a master-class in resisting the temptation to treat the existence of a statutory remedial regime as an implied repeal of centuries of contract law.
Judgment (50 paragraphs)
[1]
Reported Decision: 226 FLR 169
Appeal Outcome: Special leave application granted by the High Court - 8 February 2008; Appeal allowed - 27 August 2008 - Master Education Services Pty Limited v Ketchell [2008] HCA 38
[2]
CITATION: KETCHELL v MASTER OF EDUCATION SERVICES PTY LTD [2007] NSWCA 161
[3]
JUDGMENT OF: Mason P at 1; Basten JA at 52; Handley AJA at 53
[4]
CATCHWORDS: CONTRACT - Illegal contracts - as contrary to statute - contravention of Code enforced by statute - requirement to provide information prior to entry into contract - information not provided - STATUTES - Interpretation - rules of construction - particular rule - operation of common law rule on unenforceability of illegal contracts - whether statute negates operation of common law rule - whether statute prohibits the making of the contract - Franchising Code of Conduct, cl 11 - Trade Practices Act 1974 (Cth), s 51AD
Akron Securities Ltd v Iliffe (1997) 41 NSWLR 353
Anderson Ltd v Daniel [1924] 1 KB 138
Australian Broadcasting Corporation v Redmore Pty Ltd (1989) 166 CLR 454
Australian Competition and Consumer Commission v 4WD Systems Pty Ltd [2003] FCA 850; 200 ALR 491
Carlton and United Breweries Ltd v Castlemaine Tooheys Ltd (1986) 161 CLR 543
Chai Sau Yin v Liew Kwee Sam [1962] AC 304
Duncan v Theodore (1917) 23 CLR 510
CASES CITED: Fitzgerald v F J Leonhardt Pty Ltd (1997) 189 CLR 215
Hurst v Vestcorp Ltd (1988) 12 NSWLR 394
Ketchell v Master Education Services Pty Ltd [2005] NSWSC 399
Marks v Jolly (1938) 38 SR(NSW) 351
SST Consulting Services Pty Ltd v Rieson (2006) 225 CLR 516
The Cheesecake Shop v A & A Shah Enterprises [2004] NSWSC 625
Trade Practices Commission v Milreis Pty Ltd (1977) 29 FLR 144
Webb Distributors (Aust) Pty Ltd v The State of Victoria (1993) 179 CLR 15
Webster v McIntosh (1980) 32 ALR 603
[7]
PARTIES: Jean Florence KETCHELL
MASTER OF EDUCATION SERVICES PTY LTD
[8]
COUNSEL: Appellant: S J Burchett/ R E Steele
Respondent: V Bedrossian
LOWER COURT DATE OF DECISION: 10 February 2006 (Reasons)
16 February 2006 (Orders)
[12]
IN THE SUPREME COURT
OF NEW SOUTH WALES
COURT OF APPEAL
CA 40102/2006
ED 2451/2004
[13]
MASON P
BASTEN JA
HANDLEY AJA
[14]
Jean Florence KETCHELL v MASTER EDUCATION SERVICES PTY LTD
ACN 003 191 384
[15]
The Franchising Code of Conduct (the Code), prescribed by Clause 3 of the Trade Practices (Industry Codes Franchising) Regulations 1998 (Cth), imposes a number of duties on a franchisor and franchisee. Clause 10 requires the franchisor to provide a copy of the disclosure document (created within the requirements of the Code) and a copy of the Code to the franchisee prior to entry into a Franchise Agreement. Clause 11 provides that the franchisor must not enter into a Franchise Agreement without receiving from the franchisee a written statement stating that they have read and have had a reasonable opportunity to understand the disclosure document and the Code.
[16]
A Franchise Agreement was executed on 11 February 2000 between the respondent franchisor and appellant franchisee. The respondent sued the appellant in the Local Court for money due to it as franchisor under the Agreement.
[17]
In the proceedings below it was found that the franchisor did not comply with Clause 11(1) of the Code. Associate Judge Malpass found that though this breach was tantamount to a finding of a contravention of s51AD of the Trade Practices Act 1974 (Cth) (the Act), it did not render the receipt of the non-refundable payment illegal.
[18]
On appeal it was not disputed that the respondent franchisor failed to comply with Clause 11 of the Code. The issue was whether a contravention of Clause 11(1)(a), and resulting contravention of Clause 11(1)(c), rendered the contract unenforceable for statutory illegality.
[19]
HELD:
(Per Mason P, Basten JA and Handley AJA agreeing)
[20]
(1) If the legislature prohibits the making of a contract, the making of the contract does not give rise to an enforceable right or obligation. (at [28])
[21]
(2) The governing principle in this case is that disobedience of the Code is disobedience of the Act. (at [41])
[22]
(2) Section 51AD read with Clause 11 directly prohibited the contract in question and the recovery of the monies claimed. (at [30]) There is nothing in the Act that expressly or implicitly negated the application of the common law rule. (at [33])
[23]
The Cheesecake Shop v A & A Shah Enterprises [2004] NSWSC 625, overruled in part. Trade Practices Commission v Milreis Pty Ltd (1977) 29 FLR 144, SST Consulting Services Pty Ltd v Rieson (2006) 225 CLR 516, Carlton and United Breweries Ltd v Castlemaine Tooheys Ltd (1986) 161 CLR 543, applied. Australian Broadcasting Corporation v Redmore Pty Ltd (1989) 166 CLR 454 distinguished.
[24]
ORDERS: Appeal allowed.
IN THE SUPREME COURT
OF NEW SOUTH WALES
COURT OF APPEAL
CA 40102/2006
ED 2451/2004
[25]
MASON P
BASTEN JA
HANDLEY AJA
[26]
Jean Florence KETCHELL v MASTER EDUCATION SERVICES PTY LTD
ACN 003 191 384
[27]
1 MASON P: The respondent sued the appellant in the Local Court for money due to it as franchisor under a Franchise Agreement executed on 11 February 2000. The only question is whether the contract was illegal and unenforceable by the respondent because it contravened cl 11(1) of the Franchising Code of Conduct.
[28]
The Code
2 Part IVB (ss51ACA - 51AEA) of the Trade Practices Act 1974 (Cth) (the Act) deals with Industry Codes. Section 51AE provides, among other things, that regulations may prescribe an Industry Code and declare it to be mandatory. Industry Code is defined to mean a code regulating the conduct of participants in an industry towards other participants in the industry or towards consumers in the industry. Section 51AD provides:
A corporation must not, in trade or commerce, contravene an applicable industry code.
[29]
This provision means in effect that a breach of the Code is a breach of the Act.
3 Clause 3 of the Trade Practices (Industry Codes - Franchising) Regulations 1998 (Cth) prescribes the Franchising Code of Conduct (the Code) and declares it to be a mandatory industry code.
4 The Code applies to a Franchise Agreement (defined in cl 4 of the Code) entered into on or after 1 October 1998 (cl 5) with presently irrelevant exceptions.
5 The Code imposes duties upon franchisors and franchisees. It also purports to confer rights, for example the franchisee's right to terminate during a cooling-off period (cl 13).
6 The franchisor's duties include the creation and provision to prospective franchisees of disclosure documents (cll 6 and 7) containing information prescribed in detail in Annexures 1 and 2. The purpose of a disclosure document is stated to include giving to a prospective franchisee information to help the franchisee to make a reasonably informed decision about the franchise (cl 9(1). See now cl 6A).
7 Part 3 of the Code addresses the conditions of franchise agreements. Part 4 establishes a regime for mediating disputes.
8 Division 2.2 - Before franchise agreement applies to a disclosure document in accordance with Annexure 1 for a prospective franchisee or a franchisee proposing to enter into, renew or extend a franchise agreement (cl 8). Clause 10 requires the franchisor to give a copy of the Code and a disclosure document to a prospective franchisee at least 14 days before the prospective franchisee enters into a franchise agreement and in other circumstances.
9
[30]
Clause 11 of the Code as it stood at the relevant time provided:
[31]
(1) The franchisor must not:
(a) enter into, renew or extend a franchise agreement; or
(b) enter into an agreement to enter into, renew or extend a franchise agreement; or
(c) receive a non-refundable payment under a franchise agreement or an agreement to enter into a franchise agreement;
[32]
unless the franchisor has received from the franchisee or prospective franchisee a written statement that the franchisee or prospective franchisee has received, read and had a reasonable opportunity to understand the disclosure document and this code.
(2) Before a franchise agreement is entered into, the franchisor must have received from the prospective franchisee:
(a) signed statements, that the prospective franchisee has been given advice about the proposed franchise agreement or franchised business, by any of:
(i) an independent legal adviser;
(ii) an independent business adviser:
(iii) an independent accountant; or
(b) for each kind of statement not received under paragraph (a), a signed statement by the prospective franchisee that the prospective franchisee:
(i) has been given that kind of advice about the proposed franchise agreement or franchised business; or
(ii) has been told that that kind of advice should be sought but has decided not to seek it.
(3) Subclause (2):
(a) does not apply to the renewal or extension of a franchise agreement with a franchisor; and
(b) does not prevent the franchisor from requiring any or all of the statements mentioned in paragraph (2) (a).
[33]
Procedural history
10 In answer to the Statement of Liquidated Claim in the Local Court, the appellant pleaded:
5.(a) The Franchising Code of Conduct ["the Code"] prescribed by the Trade Practices (Industry Codes - Franchising) Regulations 1998 as a mandatory industry code applied to the Franchise Agreement at all relevant times.
(b) Pursuant to ss. 51AD and 51AE Trade Practices Act 1974 and subclause 11(1) of the code, the plaintiff was not entitled to:-
(i) Enter into the Franchise Agreement, or
(ii) Receive non-refundable money under the Franchise Agreement or any agreement to enter into the Franchise Agreement,
unless it had received from the Defendant a written statement that she had received, read and had a reasonable opportunity to understand the Plaintiff's disclosure document under the Act and the code.
(c) Pursuant to the said provisions of the Act and subclause 11(2) the Plaintiff was not entitled to enter into the Franchise Agreement without receiving beforehand from the Defendant:-
(i) Signed statements by each [sic] of an independent legal adviser, business adviser and accountant, that she had been given advice by the, about the proposed Franchise Agreement or franchise business, or
(ii) Signed statements by the Defendant in respect of each such adviser, that she had received their advice or had been told to seek such advice and had decided not to.
6.(a) Prior to entry into the Franchise Agreement, its claim for payment of monthly franchise fees and to date, the Plaintiff has failed to obtain from the Defendant any of the statements required by clause 11 of the Code.
(b) The monthly franchise fees claimed by the Plaintiff amount to non-refundable money within the meaning of clause 11 of the Code.
(c) Consequently pursuant to clause 11 of the Code and s. 51AD of the Trade Practices Act 1974 it was and is unlawful for the Plaintiff to receive any of the monies claimed by them in these proceedings.
[34]
11 The claim was determined in the Local Court at Mudgee by Mr T H Hodgson LCM. On 8 December 2004 his Honour entered judgment in favour of the plaintiff, the respondent in this Court. He found that the plaintiff had not complied with clause 11 of the Code but ruled that while the provisions were mandatory, contravention did not make the contract illegal. The learned magistrate cited The Cheesecake Shop v A & A Shah Enterprises [2004] NSWSC 625 (Windeyer J).
12 That judgment was set aside and the matter remitted to the Local Court by Master Malpass on 29 April 2005 on the limited ground that the Local Court had failed to address the real issue tendered with regard to clause 11 of the Code (Ketchell v Master Education Services Pty Ltd [2005] NSWSC 399).
13 At the remitted hearing Mr Hodgson LCM entered judgment for the defendant. It was found that a copy of the disclosure document was provided to the defendant but that cl 11(1) had not been complied with because there was no reference to the Code having been received, read or understood. The magistrate further held:
There is no doubt the plaintiff did not receive from the defendant a written statement that the franchisee or prospective franchisee had received, read and had a reasonable opportunity to understand the disclosure document and the code.
There was an onus on the plaintiff to comply with this mandatory requirement, before entering into the franchise agreement.
The Court should not require payment by the defendant of the monies claimed because to do so would result in the plaintiff being in further breach of the Code by recovering non-refundable monies where Clause 11(1) prohibits that conduct.
I consider that the franchise fees claimed, given their ordinary meaning, are non-refundable money under the franchise agreement and, therefore, cannot be claimed by the plaintiff.
14 Malpass AsJ, who heard a further appeal from this decision, appears to have overlooked this passage because he was critical of the adequacy of the disclosed reasoning process (see [2006] NSWSC 28 at [12]-[15]). His Honour further held that the Magistrate's finding of non-compliance with cl 11(1) of the Code, though tantamount to a finding of contravention of the Act in light of s51AD, did not render the receipt of the non-refundable payments illegal. The judge held that the matter was covered by the decision in The Cheesecake Shop Case. Accordingly, the defence was rejected and judgment for $31,887.71 with costs was entered in the plaintiff's favour.
15 The matter comes to this Court, by leave, on appeal from the lastmentioned order.
[35]
Issue stated
16 The appeal is brought on point of law. The essential facts are not in dispute. The franchisor contravened cl 11(1)(a) of the Code in that it entered into the Franchise Agreement without the franchisor having received from the franchisee a written statement that the franchisee had received, read and had a reasonable opportunity to understand the disclosure document and the Code. The Statement of Liquidated Claim in the Local Court claimed 43 monthly fee payments due pursuant to cl 3(c) of the Franchise Agreement together with interest due pursuant to cl 3(e) of the Agreement. The Franchise Agreement has not been placed before us, but it appears to be common ground that the moneys sought to be recovered in the proceedings represent non-refundable payments under the Franchise Agreement falling within cl 11(1)(c), as the Magistrate had held.
17 The question debated before us was whether cl 11(1)(a) and (c) sterilised the contractual claim for statutory illegality.
18 The appellant's submission was that cl 11(1)(a) prohibited the respondent from entering into the Franchise Agreement in the circumstances; and that if the judgment below stands the respondent would also receive a non-refundable payment directly prohibited in the circumstances by cl 11(1)(c).
19 The respondent's submission, in brief, was that a finding of illegality depended on more than establishing contraventions of cl 11. It was necessary to examine the Code as a whole to determine whether it evinced a statutory intent that contravention would spell unenforceability of the contract. Indeed, this intent had to be found in the Act not the Code. The respondent submitted that Part VI of the Act repelled the implication. The decision in The Cheesecake Shop, which Malpass AsJ appropriately regarded as binding, supported the respondent.
20 In The Cheesecake Shop, the plaintiff (TCS) was the lessee of premises and franchisor of "The Cheesecake Shop System". It entered into various agreements with the defendant, A & A Shah Enterprises Pty Ltd, including a deed of licence and a franchise agreement. The franchise agreement required that the rent payable by TCS under the lease be paid by the defendant. It was in fact paid by the defendant direct to the lessor. When the lease expired, TCS renewed it pursuant to an option to renew granted by the original owner, Mrs Wong. However, the defendant declined to enter into a new franchise agreement or licence to occupy even though the original franchise agreement and licence expired on the same date as TCS's original lease. The defendant remained in occupation and set up a different business. In the meantime it acquired the freehold, thereby becoming TCS's lessor.
21 TCS sought and obtained an order for specific performance of the agreement for a renewed lease created by the exercise of the option.
22 TCS also obtained judgment for possession against the defendant. The franchise agreement had not been formally renewed. It was nevertheless found to have been continued indefinitely by mutual agreement, subject to termination on reasonable notice. However, the defendant had subsequently repudiated its obligations and TCS accepted that repudiation thus bringing the franchise and licence arrangements to an end. The possibility of an award of damages in the form of mesne profits stemming from the defendant's denial of possession was left open.
23 TCS was held entitled to enforce the terms of the franchise agreement to the extent that this involved a contractual right to purchase the equipment used at the premises at fair market value.
24 The narrative thus far does not involve any claim capable of engaging a defence stemming from cl 11 of the Code. But such a defence was raised, apparently in answer to so much of TCS's claim as sought to enforce the franchise agreement. It would appear, however, that there was no claim to receive a non-refundable payment within cl 11(1)(c) of the Code. The closest that TCS came to contractual claims under the franchise agreement were its successful attempt to enforce the right to purchase leased equipment at fair market value and the deferred claim for damages based upon a breach of a promise to yield up possession upon the termination of the franchise and licence.
25 Windeyer J nevertheless rejected a more general defence of illegality raised by the defendant on broader grounds. He said:
What is the effect of non compliance with the Code? Is it just s82 or s87 relief?
[36]
37 It is necessary to consider this as counsel for the defendant argued it and it was raised as a defence, that non-compliance rendered the agreement void as illegal.
[37]
38 The Franchising Code of Conduct , contained within the Trade Practices (Industry Codes - Franchising) Regulations 1998 (Cth) , commenced on 1 July 1998. The purpose of the Code is to regulate the conduct of parties involved in the franchising industry. The code covers topics including disclosure requirements, the conditions of franchise agreements, and methods for resolving disputes. Regulation 3 provides that the Code is - for the purposes of s51AE of the Trade Practices Act - a mandatory industry code.
[38]
39 Part IVB, s51AD of the Trade Practices Act provides that a "corporation must not, in trade or commerce, contravene an applicable industry code". The possibility of non-compliance with the Code was envisaged by Parliament. The Code introduced a form of mediation process as a key feature but it need not be implemented and does not preclude the right to take legal proceedings under the contract or under the relevant provisions of the Trade Practices Act .
[39]
40 The remedies available under Pt VI of Trade Practices Act range from injunctions (under s80), to damages (under s82) and remedial orders under s87. There is no criminal sanction for a breach of s51AD (s78). For damages to be awarded under s82, loss or damage must be suffered by conduct which contravenes a provision of Pt IV, IVA, IVB or V. That is, the contravening conduct must be a cause of the alleged loss or damage: Marks v GIO Australia Holdings Ltd (1998) 196 CLR 494 per Gummow J. While s82 is limited to persons who have suffered loss or damage, s87 is also concerned with cases where loss or damage is likely to be suffered as a result of contravention of the consumer protection provisions of the Act. Among the orders available to the court pursuant to this section, s87(2)(a) empowers the court to declare void the whole or any part of a contract, or collateral arrangement.
[40]
41 Section 51AD does not make contracts made in contravention of the Code illegal. The section, like s51AC, is addressed to conduct. The matter is really determined by a consideration of Pt IV of the Act. Section 52 prohibits certain conduct; s51AD prohibits certain conduct; s51AC prohibits certain conduct; s51AA prohibits certain conduct. For all breaches Pt VI remedies are available, including a power to declare a contract void. If it is void as illegal, there is no need for this. The argument must fail. If it had succeeded it is difficult to see how it could assist the franchisee. No other claim for damages is clearly articulated by the cross-claim but in any event no damages are shown to have been suffered as a result of non-compliance with the Code . It is true that franchise fees were paid but on the evidence a profit was made so that no order would be made for return of the franchise fees.
26 His Honour's reference to s78 appears to be in error, because that section refers to provisions other than s51AD, which is in Part IVB. But nothing turns on this given that nothing in Part IVB points towards the creation of a criminal offence.
[41]
Analysis
27 I respectfully disagree with so much of the reasoning in The Cheesecake Shop as holds that a contract that directly contravenes cl 11(1)(a) and (c) of the Code is not rendered unenforceable by the common law.
28 "The general rule is that if the legislature prohibits the making of a contract, the making of the contract does not give rise to an enforceable right or obligation" (Trade Practices Commission v Milreis Pty Ltd (1977) 29 FLR 144 at 158 per Brennan J, citing Chai Sau Yin v Liew Kwee Sam [1962] AC 304 at 311). This statement was recently approved by the High Court (SST Consulting Services Pty Ltd v Rieson (2006) 225 CLR 516 at 532[49], 546[102]). The joint judgment of Gleeson CJ, Gummow, Hayne, Heydon and Crennan JJ also referred (at 528[34]) to:
… the ordinary rule that a contract whose making is illegal will not be enforced. As was said in Yango Pastoral [Co Pty Ltd v First Chicago Australia Ltd (1978) 139 CLR 410 at 430 per Jacobs J] :
When a statute expressly prohibits the making of a particular contract, a contract made in breach of the prohibition will be illegal, void and unenforceable, unless the statute otherwise provides either expressly or by implication from its language.
29 At first blush, Australian Broadcasting Corporation v Redmore Pty Ltd (1989) 166 CLR 454 cuts across these principles. A provision in the Australian Broadcasting Act 1983 (Cth) provided that the Corporation "shall not, without the approval of the Minister,… enter into a contract under which the Corporation is to pay or receive an amount exceeding $500,000". The High Court, by majority, held that a contravening contract was not illegal and void. The majority justices construed the prohibition as "directory" (457), with the direction being addressed to the Australian Broadcasting Corporation and not to an innocent outsider. This was, therefore, a case in which the particular legislation was found to preclude common law illegality stemming from breach of the statutory prohibition. Section 51AD and cl 11 of the Code do not lend themselves to such a conclusion.
30 Section 51AD read with cl 11 directly prohibited the contract in question and the recovery of the moneys claimed. As regards the instant transaction, cl 11(1) provided, in terms, that (given the non-receipt of a written statement in accordance with that subclause) the respondent "must not" enter into the franchise agreement; and that it "must not" receive non-refundable payments under a franchise agreement.
31 There is no need to seek guidance from implications in the legislative framework. This is not a case of implying from the silence of the legislature a statutory policy about the illegality of contracting. What is prohibited under cl 11 is not just conduct but the contract itself and the recovery of money under it (contrast Hurst v Vestcorp Ltd (1988) 12 NSWLR 394 at 442-43). Unlike the situation considered in Fitzgerald v F J Leonhardt Pty Ltd (1997) 189 CLR 215 (upon which the respondent places some reliance), the present case is one in which the statute contained "an express prohibition against the making of the contract in question" as well as a statutory prohibition "making unlawful the manner in which the contract is performed" (see Fitzgerald at 226, 229 per McHugh and Gummow JJ). Breaches of other clauses in the Code may be entirely different in their impact upon contractual causes of action.
32 The Act contains no provision empowering a court to relieve against non-compliance with the directly prohibitory terms of cl 11.
33 Nothing in the Act expressly or implicitly negates the application of the "general rule" referred to by Brennan J in Milreis or the "ordinary rule" referred to in the joint judgment in SST Consulting Services.
34 I respectfully disagree with Windeyer J in The Cheesecake Shop where he viewed the range of remedies provided by Part VI of the Act as negating the common law principle to which I have referred. I do not overlook his Honour's observation (at [41]) that Part VI includes a power to declare a contract void (s87(2)(a)). Windeyer J thought that if a contract breaching a Code is void for illegality there is no need for such a power. But this reads too much into a provision that is one of a wide range of remedies provided, as I have previously remarked, by way of a "remedial smorgasbord" (see Akron Securities Ltd v Iliffe (1997) 41 NSWLR 353 at 366).
35 The power in s87(2)(a) certainly enables a contract to be declared void through the combined operation of a provision in the Act and the common law (see Webb Distributors (Aust) Pty Ltd v The State of Victoria (1993) 179 CLR 15 at 37). But it reads too much into Part VI, s87(2)(a) in particular, to view it as repelling the common law of contractual illegality, even by implication. The Act intersects the common law of contract at many points, but it does not exclude its general application. Section 87(2)(a) provides for an order declaring a contract void in certain circumstances as one of many possible remedies available in courts vested with jurisdiction under s86 of the Act. It does not preclude illegality from being pleaded by way of a defence to an action for damages in a court of general jurisdiction.
36 In Carlton and United Breweries Ltd v Castlemaine Tooheys Ltd (1986) 161 CLR 543 the High Court (at 554-5) identified ss45(1), 45B(1), Div 2A of Part V, 87(5) and 163A as provisions that:
… show that it was not intended that Part VI should state exhaustively the consequences attaching to a contravention of a provision of Part IV or Part V… The argument which Mr Merkel has advanced is inconsistent with the view taken by the Federal Court in Trade Practices Commission v Milreis Pty Ltd , where it was accepted that the ordinary consequences which the common law attached to illegality would flow from a breach of s45(2)…. The provisions of the Trade Practices Act are part of the law of Australia and a Supreme Court, in the exercise of its jurisdiction, is bound to give effect to them, and is not deprived of jurisdiction simply because it is called on to do so.
[42]
37 The combined effect of s51AD and cl 11 is, in my opinion, relevantly on all fours with s45(2) in that s45(2) prohibits the making of a contract in certain circumstances. Section 51AD is "clear in its terms. It does not impose some requirement that a corporation comply with the 'spirit' of a Code, assuming that one could be identified" (Australian Competition and Consumer Commission v 4WD Systems Pty Ltd [2003] FCA 850; 200 ALR 491 at [191] per Selway J). Accordingly, the reasoning in Carlton and United Breweries is on point. The decision was not apparently drawn to Windeyer J's attention in The Cheesecake Shop.
38 In Marks v Jolly (1938) 38 SR(NSW) 351 Jordan CJ said (at 357, citations omitted):
A contract may be illegal by reason of the fact that it is a contract to do an act which is a criminal offence because prohibited by statute; or because a statute prohibits the making of such a contract. In the former case, the contract is in the nature of a conspiracy to commit a crime. Where a statute prohibits the making of the contract, any contract made in contravention of the statutory prohibition, is prima facie, both illegal and criminal. The fact that the statute adds to the prohibition a provision that such a contract if made shall be null and void does not operate to make the contract merely void and not illegal…
39 The defence of illegality should have resulted in rejection of the claim.
[43]
Respondent's submissions
40 The respondent's primary contention was that the Code, whatever its terms, was incapable of generating a defence of illegality. One branch of this argument was the submission that the Code was subordinate legislation. Another branch was the submission that Part VI of the Act impliedly repelled the common law principle.
41 I reject the respondent's submission that upholding the defence of illegality contravenes the principle of statutory interpretation that establishes that the intention of Parliament in enacting an Act is not to be ascertained by reference to the terms in which a delegated power to legislate has been exercised (Webster v McIntosh (1980) 32 ALR 603 at 606). The governing principle in the present case is that disobedience of the Code is disobedience of the Act (see Duncan v Theodore (1917) 23 CLR 510 at 543). Section 51AD states this in terms.
42 The respondent supported the reasoning in The Cheesecake Shop. It was submitted that the powers conferred by ss82 and 87 represented an exclusive range of remedies that are available to be applied with flexibility. So much may readily be accepted. However, I have already indicated why, in my opinion, it is reading too much into Part VI to view it as repelling the common law of contractual illegality. Part VI nowhere provides that a contract struck down by the common law is valid and enforceable within the principle referred to by Jacobs J in Yango Pastoral that was approved in SST Consulting Services in the passage set out above.
43 The respondent next submits that the appellant's analysis brings down contracts for breach of the Code irrespective of whether the breach is substantial or merely minor, technical or procedural. This is an argument that needs to be taken up with the Parliament. One frequently encounters provisions that relieve against strict compliance (see eg s172(3) in relation to prescribed forms and notices). But s51AD and cl 11 of the Code are not qualified in this way. Nor does the Act enable the defaulting franchisor to point to the opportunities availed of by the franchisee to rely on her own specialist's advice.
44 In any event, I do not view the franchisor's breach of cl 11 as inconsequential. The disclosure requirements of Code were clearly enacted for the protection of prospective licensees (see cl 9(1). See also Anderson Ltd v Daniel [1924] 1 KB 138.)
45 Sub-clauses (a) and (c) of cl 11 of the Code may partially overlap in their application, but this does not assist the franchisor in meeting the plea of illegality where both prohibitions would be directly disregarded by the judicial enforcement of the instant claim.
46 The respondent submits that s4L is a strong indicator of legislative intent that unenforceability does not accompany breach. Passages in SST Consulting Services explicating that provision where relied upon.
47 Section 4L of the Act does not apply in the present case. It provides:
If the making of a contract after the commencement of this section contravenes this Act by reason of the inclusion of a particular provision in the contract, then, subject to any order made under section 87 or 87A, nothing in this Act affects the validity or enforceability of the contract otherwise than in relation to that provision in so far as that provision is severable.
[44]
48 In SST Consulting Services, the High Court held (at 527[32]) that s4L is engaged:
… (a) only if there is a contract (as distinct from an arrangement or understanding), (b) only if the making of that contract contravenes the Act, and (c) only if the making of the contract contravenes the Act by reason of the inclusion of a particular provision in the contract. It follows that s4L cannot be engaged in respect of a number of kinds of contravention of the Act because it cannot be said that they turn on the making of a contract which contravened the Act by reason of the inclusion of a particular provision.
[45]
49 Sub-cl (a) of cl 11 is outside s4L because the problem for the franchisor is not caused by the inclusion of any (particular) provision in the contract. Sub-cl (b) is outside s4L because the inclusion of the term requiring payment of licence fees is not said by cl 11(1)(c) to render the making of the contract a contravention of the Act.
50 Nothing in s4L supports the argument that the Act as a whole repels the common law doctrine of contractual illegality.
51
[46]
Orders of Malpass AsJ made on 15 February 2006 set aside.
Dismiss summons in the Common Law Division.
[47]
Judgment in favour of the defendant in the proceedings, with costs.
[48]
Respondent to pay appellant's costs of the appeal and of the appeal to the Supreme Court from the Local Court.
[49]
If qualified, respondent to have a certificate under the Suitors' Fund Act 1951.
52 BASTEN JA: I agree with the orders proposed by the President and with his Honour's reasons.
53 HANDLEY AJA: I agree with Mason P.
[50]
DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.
Parties
Applicant/Plaintiff:
Appeal Outcome: Special leave application granted by the High Court - 8 February 2008; Appeal allowed - 27 August 2008 - Master Education Services Pty Limited
Appeal allowed; orders of Malpass AsJ set aside; summons in the Common Law Division dismissed; judgment entered for the defendant with costs; respondent to pay appellant's costs of the appeal and of the appeal to the Supreme Court from the Local Court.