Relationships are key in franchising. By its nature, franchising involves an ongoing business relationship that in some cases can span decades.
Issues will inevitably arise in a franchise relationship. Sometimes, those issues can be dealt with quickly and in a way that allows both parties to carry on their business in a positive manner. Other times, an issue has become too big, or a series of smaller issues linger, and some type of third party intervention is required.
The Franchise Code of Conduct (Code) contains a dispute resolution procedure. While it is not compulsory (subject to a couple of exceptions), it can be a helpful way of resolving disputes effectively and is often used.
In very simple terms, the process is started by either party issuing a ‘notice of dispute’. That notice must set out the nature of the dispute, the outcome the person wants and what action the person believes will resolve the dispute.
After that notice is served, there is a 21 day period in which the parties must try to agree on how to resolve the dispute. This can be either a complete resolution, or the resolution process, for example, either mediation or arbitration.
If there is no resolution within those 21 days, either party can refer the dispute to an ‘ADR Process’, which is either mediation or conciliation (though mediation has traditionally been the more utilised approach and will be referred to below). Alternatively, the parties can agree to resolve the matter through arbitration.
Once the dispute has been referred to an ADR Process, there is a person appointed to handle how that process will take place (that is, the mediator). That includes when and where the mediation will be held, whether any documents will be exchanged and how any other procedural issues will be handled. Importantly, each party to the dispute must attend the ADR Process. If they do not, they will be in breach of clause 41A(3) of the Code.
If the parties opt for mediation or conciliation, the mediator/conciliator’s role is to facilitate a negotiated outcome of the dispute. A good mediator will help the parties identify the root cause of the issue and how that can be best resolved moving forward, especially given that in many cases the franchise relationship will continue. However, they cannot force the parties to accept an outcome or make any determinations on the issues in dispute. The mediation and all information exchanged under it are confidential. Further information about mediation, conciliation and arbitration can be viewed in our article What does Alternative Dispute Resolution mean.
There are other important things to note about a franchise dispute under the Code:
- The parties have to try to resolve the dispute, or they will be in breach of clause 41A(5) of the Code. What this means will depend on the circumstances, but the Code gives examples including attending meetings at reasonable times, making the party’s intentions clear, honouring confidentiality obligations, and not doing anything to damage the reputation of the franchise system. In addition, the parties must always act in good faith towards each other – this obligation applies to all aspects of the franchise relationship, not just the dispute resolution process.
- Clause 37 of the Code says that the dispute resolution process does not affect a party’s right to start proceedings in Court. There may be times when an issue is so urgent that the Code process is not appropriate. However, there can also be restrictions in a franchise agreement about starting proceedings – parties should take advice before deciding the best approach.
- Unless there is an agreement otherwise, each party has to pay their own costs of the ADR Process and are equally responsible for the other costs (for example, the mediator’s fees and room hire)
- The ADR Process is generally conducted in the State or Territory in which the franchised business is located (and there are restrictions in the Code on this issue)
- If two or more franchisees have ‘similar’ disputes with a franchisor, it is possible for those separate disputes to be the subject of a single ADR Process
- Franchisors should be aware that it is now a requirement, in the franchisor disclosure document, to identify the percentage of franchisees in the system who were party to an ADR process
The dispute resolution process under the Code can lead to a positive outcome for both sides of a franchise relationship. However, it is important to remember that in many cases the parties will continue in a relationship with each other after the process plays out. For that reason, it is always better to prevent issues from escalating if possible. For franchisees, that means raising issues with the franchisor before they become too big and understanding their obligations to the network. For franchisors, that means listening to the franchisee’s concerns and taking meaningful steps to address them where possible. In both cases, open and transparent communication is critical.
If you have any questions about this article or need assistance with a dispute resolution process, please do not hesitate to contact Daniel Jepson, Tal Williams or speak with a member of the Business, Corporate & Commercial Team.