Managing franchising disputes – Corporate/Commercial Law

Franchising disputes may arise throughout the term of your franchise relationship. Therefore, understanding how to manage these disputes is an important aspect of being a franchisee or a franchisor. The simple fact is, given the length of time and commitment involved in a typical franchise relationship, disputes do arise. It is important for all franchise parties to be prepared to handle disputes efficiently and practically. This article will explain ways to resolve franchising disputes.

Complaint Handling and Dispute Resolution

Within the franchisor and franchisee relationship, complaints and disputes may arise for a number of reasons. Some common reasons include: 

• an allegation of lack of support; 
• contractual issues (often to do with the interpretation of the franchise agreement); or 
• claims of misleading and deceptive conduct, typically by way of pre-contract warranties.  

The Franchising Code of Conduct (Code) sets out how both the franchisee and the franchisor should deal with complaints and disputes. Your franchise agreement should similarly reflect this process.

In handling complaints and disputes in accordance with the Code, there should first be a notification of the franchising dispute. Additionally, the parties should attempt to resolve the matter internally. If this fails, the parties may refer the matter to a third party via alternative dispute resolution (ADR). Alternatively, the parties have recourse to arbitration and litigation in response to a dispute at any stage. 

It is important to note that the Code complaint handling and dispute resolution process requires the parties to act in good faith. Also, the intention is for it to act as an inexpensive and efficient way to resolve franchising disputes between the parties who require a positive ongoing relationship.

Dispute Resolution Steps

When a dispute arises, the Code requires that the parties first attempt to resolve the dispute internally (via a notice of dispute). Then if the parties cannot resolve the matter internally, the parties may involve a third party to assist (via ADR). We discuss the mandatory process in further detail below.

Step One: Internal Dispute Resolution Via a Notice of Dispute

In accordance with the Code, a party initiates the dispute resolution process by sending a notice of dispute to the other party. 

Either the franchisee or the franchisor may send the notice of dispute concerning any dispute in connection with the franchise agreement. Note that the Code only requires this dispute resolution process for franchising disputes between the parties to a franchise agreement. For example, where a dispute is with an external supplier, consultant, landlord or business partner, this process does not need to be followed by the parties.

The notice of dispute must contain:

1.   an outline of the nature of the dispute;
2.   the desired outcome; and
3.   what action the author of the notice believes will settle the dispute. 

We will consider each of the above requirements (1)-(3) in more detail below.

1. Outline the Nature of the Dispute 

To outline the nature of the dispute, you must detail what the dispute is about. This should involve a clear explanation of the dispute, without any assumption of the other party’s knowledge of the dispute.

For example, a timeline of the dispute and the events that led to the dispute is a helpful way to ensure that: 

• the other party has all of the relevant information; and
• this requirement is met within your notice of dispute.

It is also a good idea to annex or properly refer to key documents.

2. The Desired Outcome

As the complainant, this requirement in a notice of dispute is your opportunity to clearly specify what solution you consider is the desired outcome to the dispute identified. This desired outcome could go beyond what is required to resolve the dispute at hand. It should also aim to prevent this dispute or a similar dispute from arising again.

For example, suppose the dispute is in relation to the franchisor’s failure to provide you with supplies on time. In that case, beyond the franchisor providing the outstanding supplies to you now, your desired outcome may be that the franchisor provides you with three days’ notice where it reasonably considers that there may be a delay in supply delivery.

3. What Action Will Settle the Dispute 

In this section, you should clearly specify whether the parties should negotiate to discuss a suitable outcome or whether you require any particular action. The action required must be very clear.

For example, the action may be the payment of money by a particular date.

What Happens After the Notice of Dispute?

Upon receipt of a notice of dispute, the Code requires the parties to seek to resolve the dispute in good faith over a 21-day period. It does not prescribe how this occurs, but typically disputing parties will either: 

• exchange offers or written communications; or 
• use this timeframe to meet and discuss the issues and potential ways forward (either in person or via lawyers). 

Ideally, the notice of dispute results in the parties resolving the dispute and finalising the dispute. However, suppose this is not the case, and the parties cannot resolve the dispute 21 days from the notice of dispute. In that case, either party may refer the matter to an ADR process, referred to as step two below.

Step Two: Alternative Dispute Resolution: Mediation and Conciliation

If the parties fail to resolve the dispute 21 days from the notice of dispute, either party may refer the dispute to an ADR process. Next, it becomes mandatory for both parties to genuinely attempt to resolve the dispute in good faith using that process. Per the Code, an ADR process means either mediation or conciliation.

ADR is the second step after internal dispute resolution has failed. This is because this step involves a third party, an ADR practitioner, assisting the parties in coming to a resolution. The parties may agree on an ADR practitioner, or the Australian Small Business and Family Enterprise Ombudsman (ASBFEO) may appoint an ADR practitioner within 14 days of the request.

Key Aspects of ADR

Some key aspects of the ADR process, under the Code, are:

• the length of time of the process will depend upon the complexity of the issue;
• parties will share the costs (unless they agree otherwise);
• the ADR practitioner is required to report back to the ASBFEO on whether the ADR process has occurred, if the parties acted in good faith and whether the dispute was resolved or remains unresolved; and
• the ADR practitioner may terminate the process if 30 days have elapsed since it has begun and the parties have not resolved the dispute.

You should consider which option would be more suitable for your dispute prior to referring the dispute to an ADR process.

Multi Franchisee ADR

Importantly, if two or more franchisees have similar disputes with the franchisor, the franchisees may commence the dispute resolution process together to resolve their franchising disputes jointly. Amendments to the Code in 2021 removed the requirement for each franchisee with the same or similar complaint to attend separate mediations.

When deciding whether this would be an appropriate option, the franchisees can discuss their disputes together. They can do so regardless of confidentiality requirements under their respective franchise agreements.

Alternatives to ADR for Resolving Franchising Disputes

There are a number of alternative options to ADR, including:

1. arbitration; and 
2. litigation.

Arbitration

The notice of dispute is a required step in the dispute resolution process per the Code, the ADR process is not. Indeed, arbitration is an alternative to ADR if both parties agree in writing that they are to resolve the dispute by arbitration. The dispute may be referred to arbitration:

• before the matter is referred to an ADR process; 
• during the ADR process; or 
• after the ADR process is complete.

Arbitration is different to the ADR processes of mediation and conciliation as it will involve the parties presenting evidence. Additionally, the arbitrator makes a binding determination on the dispute.

The parties may agree on an arbitrator, or the ASBFEO may appoint an independent arbitrator within 14 days of request. The appointed arbitrator will then manage the arbitration process. Further, they will determine how it is to occur and report back to the ASBFEO when the process is complete. If the parties resolve the dispute, the arbitrator must set out in writing the terms of the resolution and provide it to each party. They will also provide a copy to the ASBFEO.

With the arbitration option being a new inclusion in the Code, precisely how this will occur is somewhat unknown. 

Litigation

An alternative to the dispute resolution procedure in the Code is commencing legal action against the other party. Indeed, in some circumstances, an ADR process may not be appropriate to resolve the dispute between the parties.

Commencing litigation will usually be appropriate where a party requires urgent relief. For example, it may be appropriate where there is a threat to safety or issues involving restraint provisions. However, its appropriateness will ultimately depend upon the facts and circumstances of your dispute. As such, we strongly recommend that prior to commencing litigation, you obtain legal advice in relation to your dispute. Indeed, the dispute resolution process mandated in the Code is in place to assist franchisees and franchisors. This is because the court process can often be expensive and lengthy.

Termination Notices

Both the franchisee and the franchisor have mechanisms for termination within the Code. They should also include these in the franchise agreement. We consider these mechanisms in turn below.

Termination by Franchisee: Cooling-off

A franchisee may terminate a franchise agreement within 14 days after entering into the franchise agreement. 

The franchisee may have further rights concerning termination after entering into the franchise agreement where a lease is involved. This includes the ability to terminate the franchise agreement 14 days after receiving the terms of a proposed lease.

Termination by Franchisee: Franchisee Proposal

A franchisee may propose termination of their franchise agreement at any time by giving the franchisor a written proposal setting out the terms on which it wishes to terminate its franchise agreement. When the franchisor receives a proposal of termination from a franchisee, the franchisor must provide a ‘substantive written response’ to the franchisor within 28 days.

Where a franchisor does not agree to the proposed termination, it must provide reasons for doing so. A franchisee would then have recourse to the dispute resolution process provided by the Code, as referred to above. 

Alternatively, if the franchisor agrees, the franchise agreement may be mutually terminated. Usually, the franchisor would provide the franchisee with a deed of release and settlement in this scenario. We strongly suggest that a franchisee obtains legal advice on the deed of release and settlement before signing.

Termination by Franchisor: Breach by Franchisee and No Breach by Franchisee

The franchisor may propose termination where the franchisee has breached the franchise agreement and the franchisor has (typically by the issuance of a breach notice): 

• advised the franchisee what needs to be done to remedy the breach; and
• allowed the franchisee a reasonable time to remedy the breach, which period has since lapsed. 

The dispute resolution process referred to above will apply in this circumstance where a franchisee does not accept the breach has occurred or disputes the required rectification action.

The franchisor may propose termination where the franchisee has not breached the franchise agreement, but it is: 

• in accordance with the franchise agreement;
• without the franchisee’s consent; and 
• before the franchise agreement has expired. 

Prior to termination, the franchisor must give reasonable written notice of the proposed reason for termination and its reasons. The dispute resolution process referred to above will also apply in this circumstance.

Termination by Franchisor: Based on Particular Grounds

A franchisor does not have any right to immediately terminate a franchisee under the franchise agreement. This is true even in the case of particular grounds specified in the Code, which include among others: 

• fraud; 
• insolvency; and 
• endangering public safety.

Where a particular ground has occurred, and the franchisor seeks to terminate the franchise on this basis, the franchisor must provide the franchisee with seven days written notice of the proposed termination. The franchisee will then have the opportunity to dispute this notice within the 7-day period, and if disputed the:

1. franchisor must not terminate the franchise agreement for 28 days after the termination notice is given; and 
2. franchisee may refer the dispute to a mediator or conciliator or refer it to the Australian Small Business and Family Enterprise Ombudsman to appoint a mediator or conciliator. 

Legal Action: Enforcement of Restraint Provisions

When a franchise agreement has been terminated, it does not mean that the obligations between the parties have completely ended. Indeed, while the franchise relationship no longer exists, it is likely that there are continuing obligations. These obligations are subject to your franchise agreement and any deed of release and settlement that is signed between the parties.

However, note that only a reasonable restraint of trade clause is enforceable. Unreasonable restraint clauses are considered void and will not be enforceable by the courts. As such, where a franchisee has breached a restraint of trade, the franchisor must take the franchisee to court to demonstrate that the restraint of trade is reasonable and enforceable against the franchisee.

To determine whether a restraint of trade is reasonable, the courts will first examine whether the franchisor has a legitimate interest that warrants the restraint. For example, a court may look at the area that the restraint covers. If the franchise only operates in one state, but the restraint geographically extends to all of Australia, the court will likely reject the restraint.

Breach of Restraint of Trade

Suppose that you are in breach of your restraint of trade clause. In that case, the franchisee may seek an injunction to stop you from continuing to breach your restraint of trade clause. Failure to comply with an injunction order can have very serious consequences, including gaol time. Further note that you may have to pay damages for any financial loss the franchisor may have suffered as a result of your breach.

Key Takeaways 

To ensure that your franchising disputes are resolved efficiently and in a manner satisfactory to you, you must resolve your franchising disputes in accordance with the Code and your franchise agreement. However, unfortunately, this is not always an easy process to navigate. If you are a franchisor or franchisee and need guidance in managing your dispute and ensuring the Code and the franchise agreement is complied with, our experienced franchise lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents.