Resolving Franchise Disputes
This article appears in the March/April 2014 issue of Business Franchise Australia & New Zealand
Franchise Disputes are often caused by:
1. Poor communication, for example where there are a number of franchisees in a system and a franchisor is unable to spend more than a short amount of time with each, or where a franchisee does not feel comfortable raising an issue with their franchisor.
2. Unrealistic expectations, both of the business and of what the franchisor can provide.
3. Feelings of inadequate support and training, particularly where a franchisee’s background may not be in business, or in the franchise area.
4. Poor franchisee selection processes.
Franchise disputes often concern:
• Quality, price or delivery of products or services, recommended or required by the franchisor.
• Failure of the franchisee to pay amounts due or a dispute over royalties.
• Alleged misrepresentations, misleading conduct or unconscionable conduct by the franchisor.
• Contributions to an advertising fund or the use of these funds.
• Rent or lease obligations.
• Issues with following the franchise system.
• Financial viability.
Negotiating Solutions to Franchise Problems
Communication or negotiation is the main way we deal with problems. Ninety nine per cent of our problems are resolved this way. We need to confront problems as soon as they arise and express them to the other person as soon as possible. Sitting on them can only make them worse or lead to resentment or suspicion.
Negotiation skills can be learned. Each culture or context in which they may be applied might be different, for example, negotiating on a building site is different from negotiating with a superior in an office environment.
Negotiation skills also need to be applied differently according to the personality type you are dealing with.
Here is a list of steps to take when negotiating to find a solution to problems, between franchisors and franchisees:
• Negotiate with someone who has authority to do something about the problem.
• Research and prepare your facts before negotiating. See ‘Getting to Yes’ by Fisher and Ury.
• Look for what you value about the franchise, franchisor or franchisee. Do not be negative about everything. Focus on what is positive about the situation and about the other person. Tell the other person what you find good about them.
• Briefly state the problem from your point of view – use neutral, non-blaming language – example: “We are losing money because…” not “You lied about how well this franchise would go for us”.
• Listen carefully to what the other person says – ask them to disclose all the reasons for their point of view – restate them back to them to be sure you have it right.
• Keep your cool – keep concentrating on the problem rather than blame the other person.
• Take time out if necessary – have a break – come back another time.
• Acknowledge what the other person says – they will listen to you when they feel you understand.
• Assert in non-blaming language the problem from your point of view – give reasons and details.
• Focus on your needs and objectives, rather than your rights – for example, it may be important for a franchisee to cut their losses and leave the system rather than fight in court to try and recover their ‘entitlement’.
• Try to understand the other person’s needs and objectives – for example, a franchisor may be prepared to agree to something only if it does not create a precedent involving other franchisees.
• Try to identify realistic solutions that meet your needs and objectives and the other person’s needs and objectives.
• Be prepared to consider more than one alternative.
• Agree on a solution you can at least live with bearing in mind what your other alternatives are.
If negotiation does not work the first time try again – when negotiating with a franchisor try someone further up the line.
Office of the Franchising Mediation Adviser (OFMA)
The Office of the Franchising Mediation Adviser is a national, federally funded office which was established by the Australian Government in 1998 under the Franchising Code of Conduct. The Code is a Regulation under the federal Competition and Consumer Act.
OFMA has a panel of experienced mediators across Australia and its role is to appoint mediators from that panel when requested to do so by any party to a franchise dispute. OFMA has no regulatory or enforcement role.
Mediation is like a structured negotiation where an independent third party, called the mediator, helps the parties work together to reach an agreement. The mediator facilitates the negotiation and creates a safe environment for the parties to address the problem.
The mediator does not act as a judge or arbitrator. The mediator will not decide who is right or wrong. The mediator does not decide the case but may make suggestions for resolving the dispute.
Mediation is a very effective way to resolve franchise disputes:
• It may be able to repair or even save a business relationship and improve the communication between the parties for the future.
• It provides an opportunity for the parties to better understand each other’s side of the dispute.
• It also deals with all the issues at hand and helps the parties reach an agreement that best suits their needs.
• The mediation process is a quick one. It reduces the stress resulting from the dispute and enables the parties to move forward sooner than might otherwise be possible.
Another advantage of mediation is that it is considerably cheaper than most other dispute resolution processes such as litigation, arbitration or conciliation. Parties to a franchise dispute are often unable to afford litigation. Though mediation is not a legal process, an agreement signed by the parties at the conclusion of the mediation is legally binding like any contract.
Mediation through the OFMA costs $275 (incl GST) per hour with up to a maximum of three hours of preparation time. These costs are shared equally between the two parties and are generally in the region of $1250 each plus any legal representation costs or room hire costs. This is a small fraction of the cost of court proceedings. You do not need to bring a lawyer to mediation but it is usually helpful to obtain legal advice first.
Part 4 of the Franchising Code of Conduct
The dispute resolution procedures set out in Part 4 of the Franchising Code of Conduct cover disputes between parties to a franchise agreement. In other words, they will cover a dispute between a franchisee and a franchisor, but they will not apply to a dispute between a franchisee and a supplier, for example.
To initiate mediation under the Franchising Code of Conduct a party must first send a letter or Notice of Dispute to the other party. OFMA has prepared a suggested format for this document to help people who want to start the mediation process. Once the Notice of Dispute has been sent to the other party, the Code provides a 21-day period to enable the parties to resolve the dispute themselves prior to mediation. At the end of this time either party is free to contact OFMA in writing to request that a mediator be appointed.
OFMA will appoint a mediator from its national panel of mediators within 14 days of receiving the request to appoint. Before confirming the appointment we check the general availability of the mediator and verify that there is no conflict of interest as the mediator must be neutral and impartial during the mediation process. Mediators are experienced in franchising matters.
OFMA then sends confirmation of the mediator’s appointment to the parties along with the mediator’s contact details and a copy of the mediator’s resumé.
Following appointment, the mediator will contact the parties involved in preparation for the mediation meeting. The mediator will either meet with the parties individually or discuss the dispute with them by telephone in order to gain an understanding of the issues and positions at hand.Mediations are normally held within four weeks of the mediator’s appointment.
The OFMA has now received almost 5500 new dispute enquiries and made in excess of 1600 mediator appointments. The dispute settlement rate is approximately 75 per cent which includes cases where the mediator has assisted the parties to reach settlement prior to the mediation. OFMA also manages disputes between one franchisor and multiple franchisees where the franchisor consents to the matters being joined into the one mediation process.
Early Intervention Services
Since January 2011 OFMA staff have been providing assistance to dispute enquirers giving them the opportunity to resolve the problem prior to the appointment of a mediator where the issues are relatively straightforward. This has taken the form of informing the respondent by telephone that an enquiry has been received and providing the respondent with an opportunity to resolve the matter directly, or with assistance through our office. Parties have found this to be an effective way to resolve these types of disputes. There is no cost for this service.
David Newton has been the Franchising Mediation Adviser under the Franchising Code of Conduct since 1998. He is a solicitor, mediator, conciliator and facilitator of business, government and organisational conflict.
The Office of the Franchising Mediation Adviser (OFMA) is a national office established by the Australian Government in 1998 under the Franchising Code of Conduct to assist to resolve franchise disputes.
For further information:
Phone: 1800 150 667