Franchising Disputes

Most disputes between franchisors and franchisees involved allegations by the franchisee that they were misled by the disclosure document, or by other representations by the franchisor. These claims can involve breaches of the Franchising Code of Conduct (Sch 1, Competition and Consumer (Industry Codes-Franchising) Regulation 2014 (Cth)) and the Australian Consumer Law.

See Franchising disputes.

Breaches of the Code

Section 51AD of the Competition and Consumer Act 2010 (Cth) provides that any breach of the Code constitutes a breach of the Act. This enables the courts to apply the very wide remedies under Pt IV of the Act. This includes damages, injunctions, and has been held even to extend to inserting a new provision into a franchise agreement.

Australian Consumer Law

A large proportion of disputes between franchisors and franchisees include an allegation that the franchisor engaged in deceptive conduct in breach of s 18 of the Australian Consumer Law. This section, and s 52 of the Trade Practices Act 1974 (Cth), which it replaced have generated much litigation. The authorities show that the section is interpreted widely. The defendant can be found guilty of misleading and deceptive conduct even if they are silent about a relevant matter, and even if they are not aware that their conduct is deceptive. A franchisor can be sued for inaccurate representations about future matters, if they cannot show that they had a reasonable basis for making such representations.

Common sources of disputes

Many disputes between franchisor and franchisee involve allegations that the franchisor misled the franchisee as follows:

• • failure to provide a disclosure as required by the Code;
• • inaccurate projection of earnings;
• • understated cost of establishing the franchise; and
• • withholding relevant information.

Claims by franchisors against franchisees

These are generally simpler disputes where a franchisor is claiming a failure to pay money, such as franchise fees or payment for products.

Franchise agreements generally give franchisors wide powers to terminate the franchise agreement if the franchisee defaults. Franchisors occasionally need to take proceedings against franchisees to prevent them from continuing to carry on the franchised business, or a similar business in competition with the franchisor.

Dispute Resolution

Disputes can be resolved by direct negotiation, mediation, arbitration or litigation.

Competition and Consumer (Industry Codes-Franchising) Regulation 2014 (Cth)

Part 4 of the Code is headed "Resolving disputes". Clause 34 prescribes that a franchise agreement must provide for a complaint handling procedure as set out in cll 38 and 39 of the Code. However, this provision is unnecessary, as cll 40 and 41 of the Code, which are in identical terms to cll 38 and 39 apply regardless of the provisions of any franchise agreement. These contain a requirement to serve a notice of dispute under cll 38(1) and 40(1). They set out a procedure for mediation, but cl 42(3) gives either party the right to terminate the mediation process at any time after 30 days from the beginning of the mediation. Clause 37 also gives either party the right to commence proceedings, regardless of the mediation, at any time they wish. Part 4 says nothing about resolving disputes in any other way. Accordingly, the Code gives very little assistance as to how to resolve disputes.

The decision as to whether to mediate

Mediation is almost always faster and cheaper than litigation, and allows the parties to negotiate a resolution they can live with, rather than having a solution imposed on them by a court or an arbitrator. From a franchisor’s point of view, mediations also have the advantage that they do not require disclosure to current and prospective franchisees, whereas virtually every form of litigation, including arbitration does.

This gives an indirect benefit to franchisees, as it makes franchisors more willing to be reasonable at mediation, to avoid having to give disclosure if the matter is not settled, and proceeds to litigation.

Arbitration

Arbitration gives virtually none of the benefits of mediation. It is quicker than litigation, but slower than mediation and is no cheaper than litigation.

Litigation

This is often one-sided, with a well-resourced franchisor seeking to protect its franchising network, against a franchisee whose resources have been depleted by the subject matter of the dispute. However, otherwise, there is nothing about litigating a franchising dispute that is different from litigating any other dispute.

Mediation

Mediation is as much an exercise in psychology as legal practice. It involves each party having the opportunity to ventilate their feelings, by the lawyers and often the parties themselves saying whatever they wish to say. Even though the mediator makes no determinations as to who is right or wrong, this process makes the parties more willing to put their feelings aside and negotiate a commercial resolution than if they were negotiating directly without a mediator.

Notice of dispute

Clauses 38(4) and 40(4) of the Code require a complainant to give written notice to the other of the dispute in a prescribed form, and states that the parties must then try to resolve the dispute and not refer it to a mediator for three weeks after commencing this process.

Appointment of a mediator

Clauses 38 and 40 allow either party to ask the mediation advisor to appoint a mediator. Clause 45 of the Code provides that the Mediation Advisor shall appoint a mediator, if the parties cannot agree themselves. The Mediation Advisor is a federal public servant, who can be contacted on the Internet.

Small business Commissioners

The federal government and the governments of Western Australia, Victoria, New South Wales and South Australia have each appointed Small Business Commissioners whose roles include assisting small businesses to resolve disputes. The Small Business Commissioners in New South Wales, Victoria and South Australia provide inexpensive mediation services.

See Mediation.