Franchisors’ joint and several liability for the negligence and defalcations of their franchisee estate agents has been cast into doubt by a recent decision of the Supreme Court of Victoria. In Secretary to the Department of Justice & Regulation v Century 21 Australia Pty Ltd , the court narrowly read the definition of “franchising agreement” in the Estate Agents Act 1980 so that certain franchise arrangements may not meet the definition. In which case, franchisors will not be liable under section 43 of the Act.

Given that the Act is currently under a comprehensive review, the impact of the decision may well be addressed in the Options Paper expected to be released soon by Consumer Affairs Victoria, despite not being flagged as an issue in question in the initial Issues Paper.

The case

The defendant, Century 21 Australia Pty Ltd (Century 21 Australia), holds the master franchise for Australia from the master franchisor, Century 21 Real Estate Corporation (Century 21 International), which is located in the USA. Under the head franchise agreement, Century 21 Australia was permitted to subfranchise to licensed estate agents the right to use the “CENTURY 21 System” and certain “Century 21 Marks".

Century 21 Australia had granted a subfranchise to Victorian Realty Group Pty Ltd (VRG). VRG defalcated on clients’ money between 2011 and 2012. Clients were recompensed from the Victorian Property Fund, established under Part VII of the Act, in the amount of $109,150.66. The Fund is administered by the plaintiff (the Secretary). The Secretary contended that he was entitled to recover from Century 21 Australia the amount paid from the Fund on the basis of section 43(3) of the Act, which reads:

If an estate agent carries on business pursuant to a franchising agreement—

(a) each party to the agreement is jointly and severally liable for any defalcation by the estate agent…

While the Secretary and Century 21 Australia agreed that Century 21 Australia and VRG were parties to a franchise agreement at the relevant time, the case ultimately turned on whether the arrangement amounted to a “franchising agreement” as defined in the Act. Relevantly, “franchising agreement” is defined in section 43(5) as:

an agreement whereby an estate agent is authorized to carry on business under any name in consideration of any other person entitled to carry on business under that name receiving any consideration whether by way of a share in the profits of the estate agent's business or otherwise

Importantly:

  • Century 21 Australia was not a licensed estate agent, acting only as a franchisor, licensing rights to licensed estate agents to use the “CENTURY 21 System” and certain “Century 21 Marks";
  • VRG traded as “CENTURY 21 Complete Properties”, which was the trading name authorised under the franchise agreement;
  • the franchise agreement prohibited VRG from using any other name in connection with any operations conducted at or from its approved location at Craigieburn Shopping Centre without the prior written approval of Century 21 Australia; and
  • under the head franchise agreement, Century 21 Australia was only authorised to trade as “Century 21 Australasia Pty Ltd” or by such other trade name as approved by Century 21 International.

The decision

The court held that Century 21 Australia and VRG were not parties to a franchising agreement for the purpose of the Act. The court held that any ambiguity found in the definition of “franchising agreement” had to be resolved in the defendant’s favour due to section 43 (particularly subsection 43(4)) being a penal provision. In that regard, the court found that:

  • In effect, in considering the definition of “name” in the context of the definition of “franchising agreement”, the court focused on the specific trading name authorised under the agreement.
  • VRG was not entitled to carry on business under the name, “Century 21”. It was only permitted to trade as “Century 21 Complete Properties”. Though it could use certain Century 21 trade marks, this was different from the “name” it was authorised to use.
  • Notably, the head franchise agreement also did not permit Century 21 Australia to trade as “Century 21”. Century 21 Australia was only authorised under the head franchise agreement to trade as “Century 21 Australasia Pty Ltd" or by such other trade name as may be approved by Century 21 International. It was certainly not authorised to trade as “Century 21 Complete Properties”.

The court therefore concluded that Century 21 Australia was not authorised to carry on business under the name, “Century 21 Complete Properties”, and therefore was not a relevant person for the purpose of the definition of “franchising agreement”.

Implications

Given the apparent policy behind section 43 that the franchisor be jointly and severally liable for certain conduct of its franchisees, the decision in this case is significant.

It is worth noting that the original definition of “franchising agreement” was introduced into estate agency legislation in 1980 and revised twice in 1983 and 1994. It may be that, rather than the definition referring to an authority for the agent to conduct business under a “name”, it should instead refer to a right to use a trade mark. Indeed, having regard to the second reading speech quoted by the court in the judgment, it appears that the legislature in 1980 may have intended to capture those authorised to use a franchisor’s trade mark but misapplied “name” to that concept. Alternatively, a definition of “franchising agreement” that aligns with the definition of “franchise agreement” in the Franchising Code of Conduct may also achieve the intended policy outcome.

If section 43 were to remain in its present form and if this judgment were to stand, franchisors may try to restructure their businesses so as to establish a master franchisor or trade mark licensor who sits at the top of the franchise structure. That entity would then be able to limit the franchisor, by way of the relevant franchise agreement or licence agreement, from using any trading names that would otherwise be used by a franchisee. If this were to occur, then franchisors who were seemingly intended to be caught by subsection 43(3) would be able to extract themselves from these provisions. It would also follow that the franchisee would no longer be under an obligation to give notice to the Business Licensing Authority under subsection 43(1) on entering into a franchise agreement.

It will therefore not be surprising if, as part of Consumer Affairs Victoria’s review of the Act, the issue of franchising will now be canvassed as part of the foreshadowed Options Paper. The prospect of an appeal should also not be ruled out.