Common Franchise Disputes

Hong-An King, Assistant Mediation Adviser, Office of the Franchising Mediation Adviser

The Office of the Franchising Mediation Adviser (OFMA) is an independent office, appointed by the Federal Minister for Small Business since 1998 to provide mediation and other supportive services for disputes arising under the Franchising Code of Conduct.

Since 2011 alone, the OFMA has received over 1900 franchise dispute enquiries and appointed mediators to approximately 500 matters from its national panel of mediators.

The natures of disputes managed by the OFMA are very diverse but the most common are:

Support, training, assistance

This is a very common cause of complaint. Franchisees can expect a higher level of support than they receive. Sometimes this expectation can be even higher when they are new to running their own business and do not understand what managing their own business entails.

Maybe the franchisor’s franchisee selection process could be improved to ensure that only franchisees that have the skill and experience to manage their own business in a particular sector are offered a franchise. The franchisor may not want to recruit a franchisee that is ‘high maintenance’ and can cause complications once the franchise starts.

Sometimes a franchisor has created unrealistic expectations of the assistance to be provided or the franchisees have otherwise developed their own unrealistic expectations. A statement from a franchisor such as “We are here for you” may be misinterpreted as a promise of unlimited support.

Failure of the franchisee to pay amounts due

This may be a reflection of the fact that the franchise is just not proving financially viable for the franchisee.

Alternatively, it may also be due to some other dispute as a result of which the franchisee withholds payment of royalties or other amounts.

It is highly unusual for the OFMA to be contacted where there is no question about the amount due and a straight debt collection is required. There are almost always other issues involved.

Failure to comply with the Operations Manual

Usually these disputes are initiated by the franchisor when the franchisee fails to comply with a certain area or aspect of the franchise system’s Operations Manual. It can be something basic like failure to order or purchase its products or services from a particular supplier, which meets standards required by the franchisor, because the franchisee may argue that better products or services are available elsewhere. Sometimes the franchisees prefer to do business their own way and start operating differently even though they are still branded as being part of the franchise system.

Alleged misrepresentations, misleading conduct or unconscionable conduct by the franchisor

Often these allegations are raised as an expression of the frustration of franchisees in a dispute situation.

Disputes involve different perceptions by the parties as to what has happened and what has been said.

Ultimately, whether there has been misrepresentation, misleading conduct or unconscionable conduct is a legal question to be decided by a Court.

Usually, the dispute is about something else and these allegations are raised as a supplementary item.

Mediation gives the parties the opportunity to address what the dispute is really about and to focus on finding a solution that meets the parties’ needs and objectives, rather than redress their perceived rights. Usually claims of a legal nature turn into commercial settlements that are more practical than what a Court can order. A mediator assists people to listen to each other, understand each other’s needs and find solutions that they can live with.

Mediation provides a confidential opportunity for you to talk about a problem seriously, with an attempt to resolve it. That prevents the franchise system getting a poor reputation. If one party requests mediation the other party is legally required to attend.

Other disputes

The other main areas of dispute are:

• Disputes about the franchised territory;
• Termination of the franchise agreement;
• Franchisor advertising;
• Lack of communication;
• Rent or lease obligations;
• Initial franchisor disclosure;
• Not providing Operations Manuals or other information; and
• Amount of the franchise royalties.

How to resolve disputes

Under the Franchising Code of Conduct, the first step to raising a dispute or issue with another party to the Franchise Agreement is to write a Notice of Dispute. This involves a written letter or email that outlines three things:

1. What the issue is about;

2. What outcome the complainant wants; and

3. What action the complainant thinks will resolve the dispute.

The parties should then try to agree about how to resolve the dispute. If the dispute is not resolved within three weeks, then either party may refer the matter to mediation. Anyone with a franchise dispute can ask the OFMA to appoint a mediator. The OFMA has a panel of 95  independent mediators around Australia who are experienced in franchise issues.

Once mediation is requested, it is mandatory for both parties to attend. Failure to attend can attract a penalty of up to $51,000 (February 2015).

Mediation is a process whereby parties are assisted by a third neutral party (the mediator) in their negotiations. In the mediation, the mediator assists the parties in the process of identifying the issues in dispute, generate options around these issues, consider alternatives and to  attempt to reach an agreement that will meet the underlying needs and interests of both or all parties to the dispute.

Mediators do not make decisions about who is right or wrong or what the best outcome should be. A key advantage to mediation is that the parties have significant control over the process and the outcome. The parties hold the decision-making power and the mediator helps bring the parties together by establishing a framework for the negotiation within which all parties agree to participate. Mediation can achieve a binding settlement agreement at a fraction of the cost of court action. Approximately 75 per cent of OFMA mediations reach settlement.

If you would like to seek further information or would like to have a free and confidential conversation about a problem with your franchisor or franchisee, you can contact the OFMA on:

T: 1800 150 667