As a franchisee, you are a business owner but also part of a system that requires you to operate in a particular way. It’s not surprising if you feel at odds with the franchisor from time to time as your interests may not always align. However, your business has a much better chance of succeeding when you address issues that arise early. We set out some steps that franchisees can take to manage franchise disputes.
Research the Opportunity
The prospect of joining a network with a proven business model brings with it a sense of guaranteed success for the new franchisee. But when profits don’t match expectations, you can sometimes feel like the franchisor oversold the opportunity. Some franchisors may gently hint that you can expect the business to do well. Others may even explicitly guarantee a minimum income for a set period. If you are surprised by any aspect of the franchise that doesn’t meet your expectations, a dispute can arise.
In overselling the opportunity, the franchisor may have engaged in misleading or deceptive conduct. For example, providing statements about the franchise’s future or expected growth/profits when there are no reasonable grounds for making the statement.
If you feel like the franchisor encouraged you to buy the franchise using misleading statements, you can either:
- issue a notice of dispute and seek compensation from the franchisor;
- apply to the court for a remedy addressing the conduct; or
- terminate the franchise agreement. When considering this action, you should seek legal advice.
Speak With the Franchisor About Support
If a franchisor doesn’t provide adequate support, you would understandably feel frustrated. Although this issue can arise at any stage of the relationship, it’s a common pain point within the first 6 to 12 months of trading. The franchise agreement should set out the franchisor’s obligations relating to your induction training in the business’ systems and processes. It may also provide for ongoing or additional training for your staff.
- If you believe your franchisor is breaching their obligations under the franchise agreement, you can apply for a remedy for breach of contract. It’s important to speak with a franchise lawyer to determine whether this is a suitable path to follow.
- Consider franchise mediation as a flexible dispute resolution process. Mediation allows both parties to communicate their positions and interests in their owns words and work on a solution.
Review the Terms of the Franchise Agreement
The franchise agreement typically includes a clause that allows the franchisor to issue the ‘then current’ version of the franchise agreement in the event of a renewal or assignment (i.e. sale). Substantial amendments to commercial terms such as rebates, fees or royalties is a common source of disputes.
If you are concerned about the franchisor’s discretion to change the terms of renewal or assignment, negotiate reasonable restrictions before signing the Agreement. For instance, the franchise agreement should include a provision that says the ‘commercial terms shall remain the same’.
Unfair contract terms protections may also apply to some franchise agreements. A clause is unfair if it:
- causes a significant imbalance in the parties’ rights and obligations; and
- is not reasonably necessary to protect the franchisor’s legitimate interests; and
- would cause the franchisee detriment.
- Don’t sign a franchise agreement without knowing precisely how the franchisor can vary the Agreement upon renewal or assignment.
- Before signing the franchise agreement, negotiate openly and explicitly to alter the Agreement and ensure the same commercial terms on renewal. It’s too late to raise this just before renewal.
- If the franchisor has proposed or implemented a variation of the franchise agreement that will harm your franchise, you can take legal action for breach of the Franchising Code of Conduct (the Code) or the Australian Consumer Law. Again, speak with a franchise lawyer to determine whether your claim is worth pursuing.
Act in Good Faith When Dealing With the Franchisor
Good faith is a general obligation to act fairly in all aspects of the franchisee/franchisor relationship. The Code since 2015 also includes a requirement for parties to act in good faith. By explicitly introducing this requirement, the Code acknowledges the need for both the franchisee and franchisor to act honestly and cooperate. A failure to act in good faith is a common catalyst for many franchise disputes.
- If a franchisor fails to act in good faith, they may breach the Franchising Code of Conduct. A civil penalty of 300 units (or $54,000) will apply. The Australian Competition and Consumer Commission (ACCC) seeks to have these penalties imposed.
- A franchisee can make a complaint with the ACCC directly, or you may wish to get legal advice on your options and prospects in your particular situation.
Understand Your Rights and Obligations When Leaving the Franchise Network
Disputes sometimes arise when you are looking to sell the franchise. As with any sale, you should familiarise yourself with the sale process — including the franchisor interviewing and approving the buyer. Franchisors cannot unreasonably withhold consent to the transfer of a franchise agreement when you are selling the franchise.
Other ways to exit the franchise network include:
- the franchisor terminating the agreement for breach; or
- the franchisee terminating the agreement because of a franchisor’s breach; or
- expiry of the franchise agreement.
If either party are on the cusp of terminating the agreement, the relationship is likely to be significantly damaged, and here disputes typically arise. For instance, parties may not agree on the terms of the exiting arrangements.
- If you have received a breach notice, do not ignore it — seek advice and respond promptly if you dispute any facts in the notice. A franchisor must notify a franchisee of a breach and provide a reasonable time for you to correct the breach before terminating the agreement.
- Take a close look at your franchise agreement and Division 4 of the Franchising Code to understand your rights and obligations.
- Try to negotiate directly with the franchisor as quickly as possible — neither of you benefits from a lengthy exit dispute!
When disputes arise in a franchise relationship, you may feel that the franchisor enjoys significantly greater bargaining power. But franchisees can take steps to avoid disputes and manage them successfully when they arise. If you have any questions or need assistance resolving a dispute with your franchisor, get in touch with LegalVision’s specialist franchise team on 1300 544 755.
Was this article helpful?
We appreciate your feedback – your submission has been successfully received.