As with any commercial situation, parties to a legal relationship may not always agree. For the franchise relationship, a dispute may arise as to how the business operates or because one of the parties believes that the other has not reached a standard that was expected or required. If you are a franchisor, two important legal documents will prescribe how you are to resolve disputes with franchisees including:

1. Your franchise agreement with the individual franchisees; and

2. The Franchising Code of Conduct (“Code”).

This article will run through your obligations in resolving disputes with franchisees.

The Application of the Franchising Code of Conduct

The Australian Competition and Consumer Commission (“ACCC”) issues the Code – a prescriptive document meaning its clauses apply to all franchise businesses in Australia. Franchisors cannot contract out of the Code by implementing contradictory provisions in their franchise agreement. Effectively, your franchise agreement will also need to mirror the dispute resolution processes outlined in the Code as the minimum standard for effectively resolving any disputes that may arise.

When Can Disputes Arise?

For franchisors, disputes may arise as a result of a franchisee’s failure to comply with the standards you set out in the franchise agreement and can include:

  • Franchisee’s non-compliance with minimum performance criteria as established by you; or
  • Failure to provide you with reports or access to the operations and management of the franchise.

Breaches of the Franchise Agreement or Code will typically form the grounds for a legal claim. As an important step in setting up and smoothly running your franchise business, it’s important to draft clear and comprehensive terms into your franchise agreement.

The Dispute Resolution Process in the Franchising Code of Conduct

The Code clearly states that every franchise agreement needs to have an internal complaint handling procedure. If you have a dispute with a franchisee, you will need to follow these steps:

  • Provide notice of the dispute to the franchisee in writing. The notice will need to include details of the issues and how you would like to resolve the issue including timeframe and action required; 
  • Both parties need to make a genuine attempt to resolve the dispute;
  • If the parties are unable to resolve the dispute, the dispute must be referred to an external mediator;
  • If the matter appears in mediation, both parties will need to make a genuine attempt to resolve the dispute at mediation; and
  • If neither party can reach a resolution, the mediator may terminate the mediation and provide a certificate that the dispute has not been resolved.

Additional Obligations

The Code also outlines other obligations that you need to be aware of to ensure that you are compliant. Some of these obligations include:

  • The obligation to act in good faith. Of course, your own commercial interests may conflict with the franchisee, but ensure that you correspond and interact with the franchisee in a manner that aims to resolve the issue. 
  • If you don’t already have an internal complaint handling procedure in your franchise agreement, Division 3, Part 4 of the Code outlines the dispute resolution process;
  • You have an obligation to attempt to reach a resolution. This includes corresponding to the franchisee promptly, attending meetings or not doing anything that breaches your obligations under the franchise agreement; and 
  • Each party must bear their own costs regarding mediation. However, you may wish to consider including a clause in your franchise agreement to require the franchisee bears the costs. 

Key Takeaways

If you have a dispute with a potential franchisee, it’s not only beneficial to attempt to resolve the matter amicably through a comprehensive dispute resolution process, but this will also assist in saving your costs on expensive litigation. Make sure you understand your obligations as a franchisor, ensure you read the Code and keep your legal documents in compliance. If you have any questions about your obligations, get in touch with our franchise lawyers on 1300 544 755. 

About LegalVision: LegalVision is a tech-driven, full-service commercial law firm that uses technology to deliver a faster, better quality and more cost-effective client experience.
Kristine Biason

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