I’m a Franchisor. What Are the First Steps to Handling a Dispute With a Franchisee?

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Table of Contents

• 1. Clearly Communicate the Franchisee’s Contractual Obligations 
• 2. Be Responsive to Franchisee Feedback
• 3. Understand Your Dispute Resolution Obligations
• 4. Get Legal Advice before Terminating a Franchisee
• Key Takeaways

The ongoing relationship between you and your franchisees will often depend on trust and open communication. Ideally, you would like your franchisees to operate as a partner, providing useful market insight and driving the success of your business from the ground. If a dispute arises with a franchisee, it is essential to quickly and professionally resolve the issue. This will help to avoid greater reputational damage and prevent the relationship with your franchisee from deteriorating. Therefore, this article will explain the first steps you should take when handling a dispute with a franchisee.

1. Clearly Communicate the Franchisee’s Contractual Obligations 

Disputes may arise where your franchisees fail to comply with requirements under your franchise agreement. You should clearly communicate the obligations of franchisees under this contract, to ensure that they fully understand what standards they are required to maintain.

A dispute may arise where the franchisee:

• does not comply with minimum performance criteria;
• misuses your intellectual property; or
• fails to provide you with reports or access to the operations of the franchise.

In these instances, it is crucial to follow the internal dispute resolution process set out in your franchise agreement. You should take the first step and proactively remind the franchisee that they have a responsibility under their contract to act fairly and in good faith while attempting to negotiate and resolve the dispute. 

2. Be Responsive to Franchisee Feedback

Franchisees can offer valuable insights into products or service offerings based on customer feedback. However, disputes can emerge if you ignore franchisee feedback, causing them to lose confidence in management.

You may receive complaints from franchisees regarding several issues, including their dissatisfaction with the:

• lack of initial training; 
• poor communication or explanation accompanying updates; and
• absence of ongoing support.

You should maintain harmony and cooperation by responding to franchisee feedback. In doing so, try to demonstrate that you are committed to supporting their business by providing:

• reasonable notice of initial training; 
• ongoing support; and
• reasonable notice and explanation for potential system changes.

3. Understand Your Dispute Resolution Obligations

You cannot escape your legal obligations under the Franchising Code of Conduct (the Code) by including contrary provisions in your franchise agreement. 

With consideration to the Code, you must give the franchisee:

• reasonable notice in writing that you intend to terminate the agreement for the breach; and
• reasonable time to remedy the breach, which is generally at least 30 days.

4. Get Legal Advice before Terminating a Franchisee

Your franchise agreement will likely require a franchisee to bear the costs involved with resolving a dispute.

For instance, you may receive compsation from the franchisee to cover the expenditure involved in:

• mediation; 
• drafting legal documents to effect the termination; or
• retrieving any equipment from the franchisee.

This can make termination of a franchisee seem like an easy option when disputes arise. However, you must ensure that you follow the proper process for terminating a franchisee or you may face immense financial and reputational loss, even if they breached the agreement first. You should seek independent legal advice regarding this matter.

The Australian Competition and Consumer Commission (ACCC) is responsible for investigating compliance with the Code. The ACCC can assess complaints made by franchisees, including the power to: 

• investigate the franchisor’s operations;
• commence legal proceedings; or 
• issue infringement notices to the franchisor. 

Any of these outcomes can damage your reputation and bring financial penalties. So you must ensure that your legal responsibilities are satisfied before terminating the franchisee.

Key Takeaways

If you are handling a dispute with a franchisee, your priority should be to resolve the matter professionally through a comprehensive dispute resolution process. This will benefit your business’ reputation and also save you costs on expensive litigation. Make sure you: 

• understand your obligations as a franchisor under the Code;
• comply with these processes; and
• seek legal advice before terminating to avoid further damage.

If you are looking for advice on handling a franchise agreement dispute, our experienced franchising lawyers can assist as part of our LegalVision membership. You will have unlimited access to lawyers to answer your questions and draft and review your documents for a low monthly fee. Call us today on 1300 544 755 or visit our membership page.