In a recent Queensland Supreme Court case, it was held that a writte notice served on a franchisee did not validly terminate a franchise agreement because it did not comply with the Franchising Code, despite the Code not being referenced in the agreement. Our article explains why.
National Security Training Academy (GC) Ltd v National Security Training Academy Pty Ltd  QSC 245 relates to an agreement between a franchisor and a franchisee to conduct a business (“Agreement”) and the interaction between the Agreement and the Franchising Code.
The case demonstrates the importance for parties, such as franchisors and franchisees, to be aware of any laws, rules, regulations or codes that can impact on an agreement despite not being specifically referenced in the agreement. Further, it highlights the importance of ensuring that any formal notice given to a party complies in all respects with the relevant documents, and any content or form requirements to avoid any issues around its validity.
The Agreement required the franchisee to pay the franchisor a fee as a percentage of the applicant’s gross turnover calculated according to its quarterly Business Activity Statements (“BAS”). The Agreement provided that the franchisee would submit to the franchisor a copy of the franchisee’s BAS with a cheque for a percentage of the gross turnover within 7 days of compiling the BAS.
The Agreement also provided that if the franchisee breached the Agreement, or failed to fix any breach of the Agreement within a reasonable period followign written notice from the franchisor, the franchisor could end the Agreement without further notice.
The Australian Consumer Law states that a corporation must not offend against an applicable industry code. In this case, the Franchising Code (“Code”) was an applicable industry code and applied to the Agreement despite the Agreement making no reference to it.
Clause 21 of the Code provides that if a franchisee breaches a franchise agreement, and a franchisor wants to end the agreement, the franchisor must:
- give the franchisee reasonable notice that the franchisor proposes to end the agreement because of the breach;
- tell the franchisee what the franchisor requires to be done to fix the breach; and
- allow the franchisee a reasonable time to fix the breach.
The relevant BAS quarter ended on 31 December 2012. The Australian Taxation Office (“ATO”) required the BAS to be lodged by 28 February 2013. The BAS was lodged on 19 March 2013.
On 22 March 2013, the franchisor sent a notice to the franchisee claiming:
- the franchisee had failed to comply with the Agreement by failing to provide copies of the BAS to the franchisor;
- the franchisee was in breach of the Agreement; and
- failure to remedy the breach within 30 days would allow the franchisor to end the agreement without further notice (“22 March Notice”).
On 25 March 2013, the franchisee emailed a copy of the BAS to the franchisor and delivered hard copies the next day. No cheque for the percentage of the gross turnover was provided. Based on the BAS, it was calculated that a payment of $7,700 was due to the franchisor.
The franchisee also delivered an invoice to the franchisor for $7,500 for the franchisees staff training.
On 28 March 2013, the franchisor advised the franchisee that the invoice from the franchisee could not be used to offset the amount owing to the franchisor for the percentage of gross turnover. On 9 May 2013, the franchisor terminated the Agreement.
Questions before the Court
1. Had the franchisee breached the Agreement on 22 March 2013?
The franchisee lodged the BAS return with the ATO on 19 March 2013. Under the Agreement, the franchisee had 7 days from compiling the BAS to give it to the franchisor. At the time the Franchisor gave the notice on 22 March 2013, 7 days had not passed since the BAS was compiled. Therefore, the franchisee was not in breach of the Agreement.
2. Did the franchisee’s failure to lodge the BAS on time breach the Agreement?
The Agreement required that the BAS be submitted quarterly to the franchisor. It did not specify the BAS must be lodged with the ATO, or that it must be compiled by a certain time. What it did specify was that the payment of the franchise fee was to coincide the supply of the BAS to the franchisor.
Having considered the question, the Court stated that without a contractual obligation on the franchisee to lodge the BAS in a timely way, the franchisor could suffer because it had no right to payment of the franchise fee unless and until the BAS was compiled. The Court considered it necessary to imply a term requiring the franchisee to lodge the BAS quarterly as required by the ATO. As the franchisee had not done so, the franchisee had breached the Agreement but that breach was remedied when the BAS was lodged with the ATO.
3. What was the required form and content of the notice to terminate
On 26 March 2013, the franchisee breached the contract by not providing the franchisor with a cheque for the franchise fee. That entitled the franchisor to end the Agreement.
On 28 March 2013, the franchisor emailed the franchisee insisting on payment of the franchise fee. In its email, the franchisor identified the breach and required payment within 30 days. The payment was not made within the 30 days specified.
In considering the form and content of the notice, the Court decided that it was not necessary for the 28 March 2013 notice to be in the same form as the 22 March 2013 notice, or any specific form at all. An email that was not in any particular format was sufficient.
However, the Court decided that, although not part of the Agreement, it was necessary for the notice to comply with the requirements of the Code and the interpretation to be given to the Agreement must align with the Code. Consequently, as the notice did not notify the franchisee of the intention of the franchisor to terminate if the breach is not remedied within a reasonable time as required by the Code, the franchisor’s attempted termination of the Agreement was ineffective.
Having determined its findings, the Court declared that the Contract between the parties had not been terminated and was still on foot.