This article appeared in Issue 3#5 (July/August 2009) of Business Franchise Australia & New Zealand
In business, as in life, relationships can go through rough patches from time to time.
In franchising, those rough patches can be particularly damaging to a business, due to the nature of the relationship that exists between franchisees and franchisors. One cannot succeed without the other, and disputes left unresolved can damage an entire franchise system.
Most franchisees depend heavily on their franchisors to provide training, marketing, support and guidance. Franchisors in turn have a vested interest in ensuring their franchisees succeed and contribute to the overall success of the system.
That mutual dependence can be a successful formula which has seen franchised businesses succeed in a wide number of industries, from fast food to pet grooming.
But what happens when those strong relationships falter, and franchisees find themselves in conflict with the owners of the system they are part of?
In the vast majority of cases franchisees are able to resolve their concerns directly with their franchisor. This is by far the most effective – and cheapest – way of dealing with problems. Despite occasional press reports of problems within particular franchises, only 2% of all franchisees were estimated to be in dispute in 2008, according to a survey by the Asia-Pacific Centre for Franchising Excellence.
Nevertheless, there are times when direct negotiations fail and the parties may not be able to resolve their differences without help.
Nature of disputes
The cause of disputes within franchises can vary widely, but often they come down to poor communication or failure to meet expectations.
Among the more common disputes that the Australian Competition and Consumer Commission becomes aware of are frustrations from franchisees who are unable to earn what they expected or who have had restrictions placed on their business by their franchisor. Leasing issues are also a common source of complaint, especially since franchisors are often landlords to their franchisees.
Resolving disputes informally
One of the advantages of being part of a franchise is the protection afforded by the mandatory Franchising Code of Conduct. A useful feature of the Code is the procedure it sets out for parties seeking to resolve a dispute.
Every franchise agreement must provide for an internal complaints handling procedure that complies with the Code. This should be the first place those in dispute turn to when seeking to sort out problems.
The Code requires that, when one party requests mediation, the other party must attend and try to resolve the dispute.
In some cases, the simple act of referring back to your franchise or lease agreement can be enough to resolve your concerns.
Keeping correspondence in writing is important in the early stages. Often disputes arise where one side doesn’t fully appreciate the concerns the other side has.
Spelling those concerns out in a polite, clear way and in writing should be the first step.
Correspondence should outline the nature of your concern, what outcome you want to achieve, and what action you think needs to be taken to get there.
The next step – mediation
When matters can’t be resolved in three weeks through direct negotiation, bringing in an impartial third party facilitator can often help break the impasse. This is where mediation can have a role to play.
A mediator is a professional, independent person who holds meetings with both parties to a dispute. Mediation is not like a court, and the mediator’s job is not to judge who is right or wrong. Mediation is an informal meeting around a table that is designed to find a compromise that everyone can live with.
The process can involve having everyone meet together, or it may initially also involve separate interviews with both sides. Whichever way it is conducted, mediation gives each party the chance to tell their side of events and discuss the problem.
The mediator may suggest several meetings until a solution is reached. At that point the details should be put in writing with each side signing an agreement.
Mediation can be a very useful process, but it is no guarantee of success and those going into it need to have realistic expectations about what can and cannot be achieved. You may not be 100% happy with the final resolution that is reached, but the process is designed to find an outcome that each side can live with – a compromise.
Also, mediation cannot enforce a binding solution on the parties concerned.
Preparing for mediation involves thinking about what the problem is, what outcome you would like to achieve, and possible compromises you are willing to make to reach a successful outcome. You also need to think about what further steps you are prepared to take if the mediation is unsuccessful.
It is important that those attending also have the authority to sign a final agreement, to ensure a speedy resolution.
The Office of the Mediation Adviser
Both parties can agree to appoint a mediator of their choice, or either party can seek mediation from the Office of the Mediation Adviser (OMA).
Established in 1998 by the Australian Government Office of Small Business, the role of the OMA is to appoint mediators to help those in franchising disputes resolve their differences without the need to go to court.
OMA mediators are trained professionals with franchising experience and are available in each state and territory. Since the Code of Conduct came into force in 1998, OMA mediators have assisted with more than 1000 disputes.
Preparing for mediation and cost
One of the biggest advantages of mediation is the cost. Unless otherwise agreed, the fees are split equally between both parties involved in the dispute.
At the time of writing, the OMA mediator’s fees were $275 an hour for preparation and mediation with the average mediation through the OMA costing each side around $1400. There may be an additional room hire charge.
In contrast, if matters go to court or are settled well before a judge hears the matter, legal costs can be significantly higher without necessarily leading to a more satisfactory result. More importantly, a court-based outcome generally results in the end of the relationship, while a mediated process outcome encourages a continuing relationship.
Preparation and a genuine desire to find a solution are essential to getting the most out of mediation. If you are not prepared to make any concessions, then the process is less likely to succeed. Likewise, a good understanding of your rights can give you a better idea of what you are entitled to and whether your expectations are reasonable.
The mediation process
Once contacted, the mediator will send both sides a mediator appointment agreement to sign and request an up-front payment to cover expected fees and room hire costs.
They will then discuss when and where mediation is to take place and advise you of any preparation required. This may include preparing a summary of the problem to send to the other party and the mediator before the mediation.
Typically, when the mediation occurs, the mediator will ask everyone to state the problem as they see it. This can take between five minutes and half an hour.
The mediator will ask some questions and then the other side will be given the same opportunity to explain their side of the story. The mediator will ask some further questions, following which there will be a general discussion of the problem.
One meeting might not be enough to deal with all the issues raised, and the mediator may set up additional joint or one-on-one meetings.
Eventually, all going well, agreement will be reached on the best way to resolve the problem and then both sides may be asked to sign an agreement.
There will always be situations where mediation either fails to reach a suitable outcome or is not appropriate, such as when an urgent court order is required to stop damaging conduct by a franchisor or franchisee.
The option of taking legal action remains open to you at all times, but it should usually come at the end of the process, once other attempts have been made to deal with the issue outside court.
Before threatening or resorting to legal action, consult your lawyer about what options you have, how long legal action might take to resolve a problem, and what it might cost you. Bear in mind that legal fees can be high and if you lose you may be liable for not only your own legal costs, but also the other side’s.
That said, the law is there to protect parties from harsh and unreasonable treatment, and you have a right to take action if you believe you have been genuinely wronged.
No one wants to be caught up in a franchising dispute, but sometimes they can be unavoidable. Dealing with a dispute quickly, professionally and appropriately, and having procedures in place ahead of time is important not only for your own piece of mind, but the health of your business.
The ACCC has a large range of information to assist both franchisees and franchisors in understanding their rights and obligations under the Franchising Code and the Trade Practices Act. This is available online at www.accc.gov.au/franchisingcode or by calling the small business helpline on 1300 302 021.