Think before you breach
By Marianne Marchesi, Lawyer, MST Lawyers
The recent case of National Security Training Academy (GC) Pty Ltd v National Security Training Academy Pty Ltd  QSC 245 (“National Security Training”) is a practical example of the need for franchisors to comply with the Franchising Code of Conduct (“the Code”) when issuing breach notices on franchisees and subsequently terminating franchise agreements.
The Code provides that a franchisor cannot terminate a franchise agreement unless the franchisee is first given:
a) reasonable notice that the franchisor proposes to terminate the franchise agreement because of the breach;
b) details of what the franchisor requires to be done to remedy the breach; and
c) a reasonable time to remedy the breach.
If the breach is remedied by the franchisee, the franchisor is not permitted under the Code to terminate the franchise agreement because of that breach.
In National Security Training, the franchisee was required to make payment of the franchise fee and provide a copy of its Business Activity Statement to the franchisor each quarter. Upon failing to do so, the franchisor issued the franchisee with a breach notice, stating that the franchisee was required to provide a copy of its Business Activity Statement within 30 days of the date of the breach notice.
A few days after the breach notice was issued, the franchisee provided the franchisor with a copy of its Business Activity Statement and a document entitled “franchisee return”, which calculated the franchise fee to be $7,700, but did not provide a cheque for this amount.
The franchisor reminded the franchisee by email that payment of the franchise fee was also required, and requested such payment as soon as possible.
The franchisor purported to terminate the franchise agreement for the franchisee’s failure to remedy the breach. The franchisee contended that the breach notice did not comply with the Code, in that it did not tell the franchisee what the franchisor required to be done to remedy the breach. It also pointed to the fact that it had since provided the franchisor with a copy of its Business Activity Statement.
The judge held that the franchisee had remedied the breach outlined in the breach notice (being the requirement to provide a copy of the Business Activity Statement), therefore the franchisor could not terminate the franchise agreement on these grounds. In relation to payment of the franchise fee, the judge intimated that the franchisor’s email could be considered ‘notice of a breach’ for the purposes of the Code, however it did not meet the Code’s requirement that the franchisee be advised that failure to remedy the breach would allow the franchisor to terminate the franchise agreement. Therefore, as the Code was not complied with, the franchise agreement was not validly terminated.
This case is a solid reminder to franchisors to take care when providing franchisees with a breach notice. In the first instance, the franchisor should have clear grounds for a breach, in that the franchisee’s conduct is a direct breach of the franchise agreement, at the time of issuing the breach notice. Secondly, any notice of breach must comply with the provisions of the Code. Lastly, the breach must be unremedied before the franchisor takes any action to terminate the franchise agreement.
The consequences of terminating a franchise agreement without complying with the Code can be significant. Whilst in the case of National Security Training, the judge simply held that the franchise agreement was not validly terminated and gave judgment as to costs, franchisors could otherwise risk opening themselves up to claims of wrongful termination, which may result in a liability to pay damages to the franchisee.
For advice on breaches and/or terminations of a franchise agreement or assistance in preparing breach or termination notices, please contact MST Lawyers’ Franchising team on (03) 8540 0200 or email firstname.lastname@example.org.