Court of Appeal clarifies “franchising” under the Estate Agents Act

As anticipated in our previous update, the Supreme Court’s decision in Secretary to the Department of Justice & Regulation v Century 21 Australia Pty Ltd, affecting franchisors’ liability under the Estate Agents Act 1980 (the Act) was appealed by the government.

Success in that appeal means the concept of “franchising agreement” for Victorian estate agents has been broadened to align with common expectations of the effect of section 43 of the Act. Franchisors of estate agency systems will need to continue to remain conscious of their exposure under the Act for franchisees’ defalcations, negligence and penalties arising therefrom.

The initial decision

At the first instance, the Supreme Court took a narrow approach when applying the definition of “franchising agreement” in the Act. Section 43(5) defines “franchising agreement” as:

“an agreement whereby an estate agent is authorised 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.”

The trial judge found that the franchisor, Century 21 Australia Pty Ltd (Century 21 Australia), was not entitled by its franchise agreement to carry on a business under a name other than “Century 21 Australasia Pty Ltd” and therefore was not entitled to carry on a business under the name, “Century 21 Complete Properties”, which was the name used by the franchisee, Victorian Realty Group Pty Ltd (VRG). Therefore, no “franchising agreement” existed because Century 21 Australia and the franchisee. This strict application of the definition meant that Century 21 Australia was not liable as a franchisor for the defalcations of VRG under section 43(3) of the Act.

The appeal

As suggested in our earlier update, the Court of Appeal looked at Parliament’s intent and concluded that a requirement for complete synchronicity of names would undermine the intent of section 43. The Court instead focused on the parties’ rights to use “Century 21” trade marks and concluded that Century 21 was the relevant name for the purpose of section 43(5).

The Court of Appeal held that the franchisee was authorised to carry on business under the name “Century 21” as it was permitted to use the “Century 21” trade marks, as was the franchisor under the agreement with its master franchisor. In doing so, the Court of Appeal referred to the legislative history, and intent, of the definition of “franchising agreement”, and the overall terms of the franchise agreement in question.

Therefore, a “franchising agreement” did exist and Century 21 Australia as franchisor would be liable to compensate the Victorian Property Fund for the defalcations of its franchisee.

Implications

The Court of Appeal’s decision means that the definition of “franchising agreement” in the Act can now be interpreted in a more traditional sense. Franchisors will therefore need to be mindful of their exposure under the Act in connection with franchisees’ defalcation and negligence.