Master Education Services v Ketchell [2006] NSWSC 28 | Case summary

JUDGMENT 1 His Honour: The parties entered into a franchise agreement (the agreement). A recitation of relevant facts may be found in an earlier judgment I delivered on 29 April 2005. Little of that material needs to be repeated herein. 2 The plaintiff commenced proceedings in the Local Court to recover moneys said to be due pursuant to the agreement (being unpaid franchise fees). The proceedings were defended. 3 One of the defences relied on by the defendant raised an issue founded upon non-compliance by the plaintiff with clause 11 of the Franchising Code of Conduct (the Code) and the contravention of s51AD of the Trade Practices Act 1974 (Cth) (the Act) that followed. 4 The proceedings came before Hodgson LCM. On 8 December 2004, his Honour gave judgment in favour of the plaintiff (this also involved a dismissal of a cross-claim claiming damages for alleged breaches of s51AC of the Act). 5 The defendant brought an appeal from that decision. The appeal was heard by me. On 29 April 2005, I delivered judgment in the appeal. The judgment saw the matter being remitted back to his Honour for determination of one issue. The issue was the defence dependent upon non-compliance by the plaintiff with clause 11(1) of the Code, this being an issue which the Magistrate had not dealt with at first instance (see paragraphs 23 and 24 of the judgment). 6 Subsequently, his Honour dealt with that issue on written submissions. He found for the defendant on it and entered judgment in favour of the defendant. 7 On 2 November 2005, the plaintiff filed a summons in this court. It seeks to challenge the decision of his Honour and have judgment entered in favour of the plaintiff in the sum of $26,043.89, together with interest. 8 The summons alleges three grounds of appeal. They are as follows:- 1. That the Magistrate erred by determining that non-compliance by the Plaintiff with the requirements of sub-clause 11(1) of the Franchising Code of Conduct entitled the Defendant, without more, to resist a claim for the payment of unpaid franchise fees. 2. That the Magistrate erred by failing to apply the binding authority of the judgment of His Honour Justice Windeyer in The Cheesecake Shop -v- A & A Shah Enterprises (2004) NSWSC 625 with respect to the issue of the consequences of a breach of the Franchising Code of Conduct and Section 51AD of the Trade Practices Act 1974 (Commonwealth). 3. That the Magistrate erred by failing to determine that, as a consequence of there being no factual matter giving rise to an entitlement on the part of the Defendant to claim relief under the Trade Practices Act against the claim made by the Plaintiff for unpaid franchise fees, the Plaintiff was entitled to judgment for such claimed amount. 9 The appeal was heard on 3 February 2006. The parties were represented by counsel. The appeal was argued at considerable length. There have been detailed written submissions which were supplemented by oral argument. In approaching the determination of this appeal, it is unnecessary to explore and analyse the many submissions that have been made. 10 The defence relied on contained the following provisions: 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 of an independent legal adviser, business adviser and accountant, that she had been given advice by the, [sic] 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. 11 The defence that was remitted back to the Magistrate for determination is that which is set forth in 5(b). In the conduct of this appeal, counsel for the defendant identified this defence as the matter that was in issue before the Magistrate. At a later stage during his submissions, some reference was also made to paragraph 6 (which was a defence that sought to allege a matter of illegality). 12 The relevant passages of the Magistrate's judgement are as follows:- The plaintiff submits the consequences of breach of Clause 11(1) does not make contracts made in contravention of the code illegal. The plaintiff submits the granting of a remedy apart from damages is discretionary and refers to Cheesecake Shop v A & A Shan Enterprises (2004) NEWS 625 [sic]. The defendant submits Clause 11(1) is mandatory and distinguishes Clause 11(2) which does not state "cannot" or "must not" be entered into. Clause 11(1) states the franchisor "must not" and further, prohibits the conduct which the plaintiff is seeking to enforce, that is, the payment of non-refundable monies. The defendant submits the Court should not make an order which has the effect of breaching the code. The defendant submits this approach is consistent with the approach of the High Court to the enforcement of illegal contracts in Fitzgerald v F J Leonard Pty Ltd 143 ALR 569 . I prefer the defendant's submissions in this regard. 13 The issue sought to be raised by paragraph 5(b) is far from clear. The principle of law that it is dependant upon does not seem to have been either articulated or developed. As a result, the Magistrate was presented with a somewhat confused defence. The consequence is confusion in his judgment. 14 The grounds of appeal do not expressly raise a ground of deficiency in disclosure of reasoning process. Despite that, the observation may still be made that what was said by the Magistrate falls well short of adequately disclosing his reasoning process. It is unclear what led him to prefer the defendant's submissions. As earlier mentioned, there is a lack of identification of the relevant principle relied on and the basis upon which any principle was applied. 15 There was debate as to whether or not the Magistrate proceeded on the basis that contracts made in contravention of the Code were illegal. If he did so, it was inconsistent with what had been said by him in the earlier judgment (see transcript p3 line 35). 16 The defence (if any) raised by paragraph 5(b) is not one that pleads illegality. It is founded on non-compliance with the provisions of (1) of clause 11 of the Code (in respect of the non-receipt of the written statement specified therein). The provisions are in the following terms:- 11. Advice before entering into franchise agreement (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 franchise agreement; or (c) receive a non-refundable payment (whether of money or of other valuable consideration) under a franchise agreement or an agreement to enter into a franchise agreement; 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. 17 The Magistrate found that there had been non-compliance. 18 The defence was also dependent on the operation of provisions of the Act (s51AD), so that the non-compliance with the Code thereby became a contravention of the Act. It is in these circumstances, that the defence pleads that the plaintiff was not entitled to receive non-refundable money under the agreement. 19 Observations made by the Magistrate may suggest that the "approach" of the High Court to the enforcement of illegal contracts in Fitzgerald has in some way have been determinative of his decision. It was a case which concerned public policy illegality. What was said in it had no application to the defence raised by the defendant. Indeed, counsel for the defendant seemed to be content to have it regarded as mere surplusage. 20 There is judicial authority for the proposition that non-compliance with the provisions of clause 11(1) does not render franchise agreements illegal (Cheesecake case). It follows that such non-compliance would not render the receipt of non-refundable payments illegal. 21 The judgment of the Magistrate also contained the following:- 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. 22 How this result came about remains obscure. Repeated questioning of counsel for the defendant during the conduct of the appeal failed to produce clarification. 23 In my view, the alleged defence should fail. It does not give rise to an answer to the plaintiff's claim for franchise fees. I consider that the Magistrate erred in law in reaching the result that he did. 24 The appeal is allowed. The judgment entered and the order made on 5 October 2005 is set aside. In the circumstances of this case, the proceedings can be disposed of without remitting them to the Local Court. The plaintiff is entitled to judgment in the original proceedings and an order for costs of the appeal and of the hearing of the one issue. The plaintiff is to bring in short minutes of order. **********

Master Education Services v Ketchell

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