Franchise Disputes

Franchise disputes can be unavoidable

Your approach to the resolution of a franchise dispute will depend on many factors both financial and non-financial

 

Franchise Dispute Services

There are a range of factors that can put pressure on the relationship between a franchisor and a franchisee.

Generally, the earlier that you try to resolve the issue, the better the outcome.

 

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Franchise Dispute Resolution

Disputes can be unavoidable.

Your approach to the resolution of a franchise dispute may depend on many factors, both financial and non-financial.

In any franchise dispute the franchisor and the franchisee must comply with the dispute resolution procedures set out in the Franchising Code of Conduct (the Franchising Code) and the Franchise Agreement.

Under the dispute resolution procedures set out in the Franchising Code, the complainant must tell the respondent in writing:

(a)  the nature of the dispute;

(b)  what outcome the complainant wants; and

(c)  what action the complainant thinks will resolve the dispute.

The parties should then try to agree how to resolve the dispute, but if they cannot agree within 3 weeks either party may refer the matter to mediation.

If the parties cannot agree on who should be the mediator, either party may ask the mediation adviser to appoint a mediator.

While mediation is well suited to franchising, the Federal Government proposes to include conciliation and voluntary arbitration as further dispute resolution processes in the Franchising Code.

 

Misleading Conduct

The Australian Consumer Law provides that a person must not, in trade or commerce, engage in misleading conduct or conduct which is likely to mislead or deceive. 

Conduct is "misleading or deceptive" if it induces or it is capable of inducing error.

Misleading and deceptive conduct is the most commonly reported complaint by small business to the ACCC.

In the franchising sector, misleading or deceptive conduct complaints generally involve the allegation that a misleading or deceptive representation by the franchisor induced the franchisee to enter into the franchise agreement.

Specific areas of complaint include representations about:

  • the current and future turnover of the franchise business;
  • the current and future profitability of the franchise business;
  • the level of current and future expenses of the franchise business;
  • the likelihood of the success of the franchise business.

Representations as to the future (such as the future turnover of the franchise business) are a category of misleading and deceptive conduct.

If a representation is made by a franchisor as to a future matter (such as the future profitability of the business), the franchisor will need to show that there were reasonable grounds for making the representation. If the franchisor cannot show that there were reasonable grounds for making the representation the representation may be deemed to be misleading or deceptive.

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Unconscionable Conduct

 

Most ACCC investigations and franchise disputes involving "unconscionable conduct" arise out of the conduct of franchisors towards franchisees.

A person must not engage in unconscionable conduct in connection with the supply or possible supply of goods or services.

While the Australian Consumer Law does not define unconscionable conduct it provides that the court can take into account matters such as:

  • the relative strengths of the bargaining positions of the parties;
  • whether, as a result of conduct engaged in by the supplier, the customer was required to comply with conditions that were not reasonably necessary for the protection of the legitimate interests of the supplier;
  • whether the customer was able to understand any documents relating to the supply or possible supply of the goods or services;
  • whether any undue influence or pressure was exerted on, or any unfair tactics were used against, the customer or a person acting on behalf of the customer by the supplier or a person acting on behalf of the supplier in relation to the supply or possible supply of the goods or services;
  • the amount for which, and the circumstances under which, the customer could have acquired identical or equivalent goods or services from a person other than the supplier;
  • the extent to which the supplier’s conduct towards the customer was consistent with the supplier’s conduct in similar transactions between the supplier and other like customers;
  • the requirements of any applicable industry code;
  • if there is a contract between the supplier and the customer for the supply of the goods or services the extent to which the supplier was willing to negotiate the terms and conditions of the contract with the customer; 
  • the terms and conditions of the contract; 
  • the conduct of the supplier and the customer in complying with the terms and conditions of the contract; 
  • any conduct that the supplier or the customer engaged in, in connection with their commercial relationship, after they entered into the contract; 
  • whether the supplier has a contractual right to vary unilaterally a term or condition of a contract between the supplier and the customer for the supply of the goods or services; and
  • the extent to which the supplier and the customer acted in good faith.

 

 

Franchise Termination

A franchisor may issue a termination notice to a franchisee, which on its face, terminates the franchise agreement.

Not all franchise termination notices are valid and franchise disputes can arise over the validy of a termination notice.

A franchisor can terminate a franchise agreement in a number of circumstances:

  1. if a franchisee has breached the franchise agreement, the franchisor has complied with the requirements of the franchise agreement and the Franchising Code, and the franchisee has failed to remedy the breach;
  2. in the special circumstances set out in the Franchising Code;
  3. if the franchisee has not breached the franchise agreement, the franchise agreement provides that the franchisor can terminate the franchise agreement in certain circumstances and one of those circumstances has arisen.

If a franchisor has not validly terminated the franchise agreement, a franchisee may take action against the franchisor, including seeking a Court order that the franchise has not been terminated, or alternatively seeking damages for any loss that the franchisee suffers as a result of the invalid termination.

 

Restraint of Trade

Another common area giving rise to franchise disputes is non competition or restraints of trade.

Franchise agreements will nearly always contain a restraint of trade or non-competition clause which operates during the term of the franchise agreement and after the franchise agreement ends.

A restraint of trade clause will not necessarily apply or be enforceable.

Clause 23 of the Franchising Code sets out a series of circumstances in which a restraint of trade clause contained in a franchise agreement has no effect after the franchise agreement expires.

Except for franchise agreements where the New South Wales law is applicable, restraints of trade are contrary to public policy and void unless they can be justified as being reasonable.

"Reasonable" in this context means that the restraint provides no more than adequate protection to the person seeking to enforce the restraint. At the same time, a restraint of trade cannot be against the public interest.

When drafting a restraint of trade clause the particular circumstances of the franchise system must be considered. Standard clauses may not be enforced by a Court.

 

Franchising Code Breaches

Franchisors and franchisees must both comply with the terms of the Franchising Code.

There are a number of areas which are covered by the Franchising Code including:

  • good faith;
  • disclosure;
  • franchise agreements;
  • termination;
  • marketing funds; and
  • dispute resolution.

One of the most common areas of franchisee dispute is disclosure.

The disclosure document includes information such as:

  • details of all the current franchisees in the franchise system,
  • details of the franchisees that have left the system in the last three years,
  • details of any relevant legal action that is being taken against the franchisor, 
  • the financial and business details of the franchisor.
  • marketing fund details, and
  • details of the costs and fees required to commence and operate the franchise.
 

Good Faith

The obligation to act in good faith in franchising is set out in clause 6(1) of the Franchising Code.

"Good faith" is not defined in the Franchising Code.

The Franchising Code provides that "each party to a franchise agreement must act towards each other with good faith, within the meaning of the unwritten law". The "unwritten law" means the law developed in the Australian Courts through case law or common law.

  1. a party acted honestly and not arbitrarily;
  2. a party co-operated to achieve the purpose of the franchise agreement.

We have set out below some elements of the obligation to act in good faith:

  • Honesty
  • Fairness
  • Not acting arbitrarily
  • Co-operating to achieve the purpose of the franchise agreement
  • Reasonableness
  • Having regard to the interests of the other party.

While a party must take into account the interests of the other party, the obligation to act in good faith does not prevent a party from acting in its own legitimate commercial interests.

Consequently, a party is not required to act in the interests of the other party at the expense of its own interests.

 

 

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