Franchise Disputes

Franchisee vs Franchisor Legal Disputes

The relationship between a franchisor and a franchisee can be complicated, especially if a dispute has arisen between the parties.

There are a variety of factors that can add pressure to the franchisee/franchisor relationship, such as lack of communication, differing expectations, or financial disagreements.

To reach a positive outcome, it is important to address the issue as soon as possible.

Prompt action can help prevent the dispute from escalating, leading to a more favourable resolution for all parties involved.

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.

By following these guidelines and working together to address the issue, a franchise dispute may be resolved efficiently and effectively.

Some of the most common areas of franchise dispute include misleading or unconscionable conduct, franchise termination, marketing, the terms of the franchise agreement, and restraint of trade.

We look at some of these areas in more detail below.

First we consider how franchise dispute resolution works under the Franchising Code of Conduct.

Franchise Dispute Resolution

Misleading or Deceptive Conduct

Unconscionable Conduct

Franchise Termination

Restraint of Trade

Franchising Code Breaches

Good Faith

Franchise Litigation

1. Franchise Dispute Resolution

Franchise dispute resolution involves finding ways to address conflicts between franchisees and franchisors and reach a resolution that is satisfactory to both parties.

Often disputes can be resolved through direct negotiation between the franchisor and the franchisee, either independently or with the assistance of a franchise lawyer. If the parties are unable to resolve the franchise dispute through negotiation, the parties may use the dispute resolution procedures set out in the Franchising Code.

The Franchising Code provides that a party to a franchise agreement (the complainant) who has a dispute with another party to the franchise agreement (the respondent) may either take action under the dispute resolution procedure set out in the Franchise Agreement, or may take action in accordance with the dispute resolution procedure set out in the Franchising Code.

Under the franchise 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 franchise dispute, but if they cannot agree within 3 weeks either party may refer the matter to mediation or conciliation. 

Mediation involves parties negotiating a solution to their conflict, with the help of an impartial mediator. The mediator does not take sides or make decisions, but instead facilitates the discussion. [Franchise Mediation Process]

On the other hand, conciliation is similar to mediation, but with a more active role for the impartial conciliator. The conciliator may offer advice and recommendations in the dispute topic, but they still do not make decisions for the parties.

When multiple parties are involved, they may opt for multiple party dispute resolution, where they can try mediation or conciliation together.

If the parties cannot agree on who should be the mediator, either party may ask the Ombudsman to appoint a mediator or conciliator.

In addition to mediation or conciliation, if the parties agree to do so, the franchise dispute can be referred to arbitration under the Franchising Code. Arbitration is a more formal process where an independent arbitrator hears both sides of the dispute and makes a decision on how to resolve it. The decision of the arbitrator is final.

Voluntary arbitration is only available as an option if both parties have agreed in writing to use this method of resolution. 

2.  Misleading Conduct

Misleading or deceptive conduct is the most commonly reported complaint by small business to the ACCC and a very common area of franchise dispute. [What is misleading or deceptive 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.

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.

Franchisors who make representations about future mattes, like the potential profitability of a business, must have reasonable grounds for doing so. If they cannot demonstrate that they had reasonable grounds, their representations may be considered misleading or deceptive.

3.  Unconscionable Conduct

Most ACCC investigations and franchise disputes involving "unconscionable conduct" arise out of the conduct of franchisors towards franchisees. [What is Unconscionable Conduct?]

The Australian Consumer Law provides that 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.

4.  Franchise Termination

A franchise termination notice is a legal document that ends the contractual relationship between a franchisor and a franchisee. Termination notices are generally issued in cases where the franchisee has breached the terms of the franchise agreement or has ceased operating the franchise business. 

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.

The franchise termination notice typically stipulates the reasons for the termination, and the effective date of the termination.

5.  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.

6.  Franchising Code Breaches

The Franchising Code is a comprehensive set of guidelines and regulations that govern the relationship between franchisors and franchisees. 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.

We have set out more about the good faith obligation contained in the Franchising Code below.

One of the most common areas of franchisee dispute is disclosure. The Franchising Code sets out the mandatory information that franchisors must provide to potential franchisees before they enter into a franchise agreement. This information includes details about the franchisor's business history, the current franchisees in the system, fees and expenses, the marketing fund and any restrictions on how the franchisee can operate the business.

Additionally, the Franchising Code sets out specific requirements for marketing funds. Franchisors are required to provide franchisees with a marketing fund statement each year, detailing all of the fund's receipts and expenses for the previous financial year.

While penalties may imposed on either a franchisor or a franchisee for a failure to comply with certain provisions of the Franchising Code, disputes can also arise between franchisors and franchisees about a parties alleged failure to comply with the Code.

Depending on the type of breach of the Franchising Code, damages may be payable by a party for its failure to comply.

7.  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:

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.

8. Franchise Litigation

While franchise litigation is a complex process that can involve both significant financial costs and business risks, sometimes litigation is unavoidable.

Litigation usually starts with the filing of a complaint or summons, and may involve court hearings, discovery requests and expert evidence.

Depending on the complexity of the dispute, litigation can take anywhere from one year to many years to resolve.

The conduct of any franchise litigation should take into account the specific interests of each client and any short-term and long-term implications of litigation, while protecting the client's interests throughout the process.

Even if dispute resolution has not been successful before the litigation process has started, the parties may still resolve a matter through other methods once the litigation process has started and the parties are better able to assess their business and financial risks.

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