Dibbs Abbott Stillman on mediation between franchisees and franchisors

According to Dibbs Abbott Stillman , the Trade Practices (Industry Codes – Franchising) regulations 1998 (the Code) provide for a dispute resolution mechanism for franchisors and franchisees, encouraging parties to a franchise agreement to engage in mediation.

Mediation, as it is contemplated by the Code, is a process by which a franchisor and franchisee, together with the assistance of a neutral third person (called a mediator), identify issues in dispute in order to develop options and alternatives for resolving those issues. In this process the mediator does not give advice or impose an agreement on the parties, but rather guides the parties by helping them to test the validity of the issues in dispute and the way in which those issues can be resolved.

Why mediate?

American President and lawyer, Abraham Lincoln, advised his fellow lawyers to: “Discourage litigation. Persuade your neighbours to compromise whenever you can. Point out to them how the nominal winner is often a real loser: in fees, expenses and waste of time.”

These words equally apply in the context of a franchising dispute. In such disputes often your principal commercial objective is to maintain the existing commercial relationship you have with the other party, and to require them to comply with their contractual obligations in good faith. If that cannot be achieved, the secondary objective is to prevent the recovery of money already paid to you, recover money the party owes to you, or both.

Litigation can be a very blunt instrument for achieving these objectives. This is because litigation can lead to the determination of the parties’ ‘rights’. Litigation, by its very nature, tends to destroy relationships between parties.

Mediation, however, is not exclusively concerned with ‘rights’. A mediation can consider ‘interests and needs’ independently, or against the backdrop of ‘rights’. The focus on interests and needs rather than on legal rights or legal power is one of the main strengths of the process. By having this focus, mediation can help to maintain the existing commercial relationship you have with the other party.

Legalities

A franchise agreement entered on or after 1 October 1998 must provide for a complaint handling procedure that complies with the mediation processes under the Code. Failure to include this procedure will be a contravention of the Code, which is illegal under the Trade Practices Act 1974 (TPA) and will expose the contravening party to a range of potential sanctions, including injunctive relief and damages.

If a party fails to comply with the Code they also risk being investigated by the Australian Competition and Consumer Commission ( ACCC). The ACCC has an overseeing role and may also take legal action against a party it considers has contravened the TPA.

The Code requirements for mediation do not affect the right of a party to a franchise agreement to take legal proceedings in relation to the franchise agreement. Even if parties agree to mediate in accordance with the Code, at the same time they may commence litigation.

How to seek mediation

A party to a franchise agreement that has a dispute with another party to the franchise agreement may start the following procedure.

The first step is that the complainant must tell the respondent in writing:

a) The nature of the dispute

b) What outcome the complainant wants

c) What action the complainant thinks will settle the dispute.

The parties should then try to agree about how to resolve the dispute.

If they cannot agree on a resolution within three weeks, either party may refer the matter to a mediator. If the parties cannot agree about who should be the mediator, either party may ask the Mediation Adviser to appoint a mediator.

The Mediation Adviser (also called the ‘Office of the Mediation Adviser’ or OMA) is a body appointed by the Commonwealth Government to administer the appointment of mediators. The OMA has established a panel of mediators who specialise in assisting the resolution of franchising disputes. The Mediation Adviser must, within 14 days after referral under this procedure, appoint a mediator for the dispute.

The mediator may decide the time and place for mediation. Mediation under the Code must be conducted in Australia.

Mediation process

After being appointed, the mediator will contact the parties and discuss the dispute to gain a better understanding of each party’s position. The mediator may suggest a preliminary conference, either with both parties or with each alone. At this time, the mediator will discuss logistical arrangements for the mediation such as venue and costs.

Usually, position papers summarising each party’s position will be exchanged. A position paper need not be lengthy or detailed. Its objective is simply to give advance notice to each party of the legal and commercial position each wishes to assert at the start of mediation.

The OMA asks mediators to use the standard OMA mediation agreement. Mediators provide a copy of the agreement to each party and ask them to sign it. The mediator will also request payment in advance of estimated fees and expenses. The mediator must look to the parties for their fees. No fee is charged by the OMA.

Mediators may charge whatever fee they wish. However, the OMA requires mediators to charge no more than $220 per hour inclusive of GST per hour of mediation and up to a maximum of three hours preparation time at $220 per hour, inclusive of GST.

Generally, no fees are payable to the mediator if the mediation does not proceed. However mediators and parties may negotiate different arrangements depending on the situation.

Pre-mediation preparation

The key to a successful negotiation at mediation is good preparation. Listed below is a checklist of steps to take to prepare for mediation:

1. Master the facts – make sure you know what happened and when. A chronology of events can assist.

2. Master the documents – reread the franchise agreement and associated documentation, such as licenses or leases. Ensure that you take copies of these to the mediation so you can refer to them if necessary.

3. Consider your legal and commercial position. Seek legal advice about your rights, strengths and weaknesses. Make sure you consider the tax implications of the situation and of any possible resolution to the dispute.

4. Consider your ‘BATNA’ and “WATNA’. BATNA is an acronym that stands for ‘best alternative to a negotiated agreement’. WATNA is another acronym that stands for ‘worst alternative to a negotiated agreement’. Both terms have been popularised by the famous Harvard Program on Negotiation. By considering your BATNA and WATNA, you can put in place parameters for how you may consider settling the dispute.

5. Think about what your interests are. If it is more important to maintain the commercial relationship, adopt a strategy at mediation that assists, rather than destroys, that relationship.

6. Do a forecast of the costs that you may incur if you do not settle at mediation. These may include legal costs, the extra administrative costs involved in managing the dispute, and even the personal stress involved. Factor these into your WATNA and BATNA.

7. Discuss the roles of participants. Often, more than one person from your company or firm will attend the mediation. Discuss the role and level of involvement that each intends to play in the mediation process.

8. Plan a strategy. Think about what offers you may make and how they can be framed. Discuss how to react if issues are raised or offers are made by the other party.

9. Prepare a draft written settlement agreement. The advantage of doing this is that you control the document – which becomes the settlement agreement – if your draft is used. This shows that you believe in the strength of your position. It is a good practice to confirm at the outset of mediation that there will be no formal agreement until all parties sign a form of written agreement, whichever form is used.

At the mediation

On the day of mediation the parties meet at a specified venue. The mediator may wish to talk to each of the parties separately prior to the commencement of mediation. There is nothing unusual in this and the mediator may be taking this opportunity to discuss procedural issues with the parties and to make them feel comfortable with those issues.

The mediator will then usually call a joint session where the parties and the mediator attend in the same room. The mediator will begin with an opening statement setting out the ground rules for the mediation such as the fact that it is without prejudice, is confidential, and that the parties must respect each other’s position and not interrupt. The mediator will also probably discuss the benefits of mediation and of coming to a resolution that does not involve litigation.

After the mediator’s opening statement it is usual for each party to make an opening statement themselves where they set out their position and concerns. This is not a debate and usually it is required that the parties address these statements to the mediator rather than to the other party.

After this the mediator may allow the mediation to continue in joint session. The mediator will ask the parties to express their concerns, vent emotions, assert interests, define issues and generate options. If it seems to the mediator that the parties are not able to undertake these tasks in joint session, for whatever reason, the mediator may sometimes ask the parties to move into separate rooms and then the mediator may move between the parties and engage in a form of shuttle diplomacy.

It is important to remember that participation in the mediation is voluntary and that the parties can leave at any time. There are a limited number of procedural rules that will be set out by the mediator, and there are no rules of evidence. It is not a court case and the mediator is not there to impose a decision or advise the parties, but merely to facilitate resolution of the dispute. The mediator’s powers are limited to control of the mediation process.

System-wide disputes

The Code does not make provision for franchise system-wide disputes. If a franchisor refuses to attend a single mediation with more than one franchisee, it will not breach the Code. If, however, multiple parties agree to mediate, the OMA will assist to design a suitable mediation process.

Termination of mediation

The mediation will terminate automatically if the dispute is resolved. Otherwise, after at least 30 days have elapsed from the start of mediation of a dispute and it has not been resolved, if either party asks the mediator to terminate the mediation, the mediator must do so. At this time, it would be very difficult to allege that a failure to continue mediating would constitute a contravention of the Code.

The mediator may terminate the mediation process at any time unless satisfied that a resolution of the dispute is imminent. If the mediator terminates mediation without it resolving, the mediator must issue a certificate stating:

a) The names of the parties

b) The nature of the dispute

c) That the mediation has finished

d) That the dispute had not been resolved.

The mediator must give a copy of the certificate to the Mediation Adviser and each of the parties to the dispute.

Conditions of mediation under the Code

The Code requires that the parties must attend mediation and try to resolve the dispute. A party is taken to attend mediation if the party is represented at the mediation by a person who has the authority to enter an agreement to settle the dispute on behalf of the party.

The parties are equally liable for the costs of mediation under the Code, unless they agree otherwise. Each party must also pay for their own costs of attending the mediation.

Obligation to act in good faith

Parties are required to mediate in good faith. The courts have held that participation in good faith requires parties to adopt a non-obstructive and cooperative attitude. It has also been suggested by some commentators that strict insistence on legal rights may amount to a lack of good faith in the mediation process. However, it is unlikely that a party would lack good faith if they were willing to entertain even the smallest compromise. What is important is the willingness to entertain some disadvantage, however minor, in order to compromise a dispute.

An obligation to mediate in good faith means a party must consider options for resolution of the dispute put forward by the mediator or opposing party. Adoption of a strong position at the beginning of mediation or a reluctance to make significant compromises is clearly contrary to facilitating effective dispute resolution.

Conclusion

Key points to remember are:

1. Mediation could save you money, time and angst. It could also save your relationship with the other party and permit that relationship to continue after resolution of matters currently in dispute.

2. Mediation is compulsory for parties to franchise agreements entered on or after 1 October 1998.

3. The key to achieving the best possible outcome at mediation is to thoroughly prepare.

4. Mediation does not affect the parties’ rights to take court action. However, parties to mediation must act in good faith and not treat it simply as a necessary precursor to litigation.

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