How to resolve franchising disputes: A step-by-step guide

Disagreements between a franchisee and franchisor are never a welcome development; they can be a distraction for both parties, who each have businesses to run. Here, deputy chair of the Australian Competition and Consumer Commission, Mick Keogh sheds some light on how to resolve disagreements between a franchisee and franchisor.

Where issues do arise, a dispute can sometimes follow. In cases like this, knowing what steps you can take to resolve the issue is very important, and can save both parties time and money.

First steps for disagreements

When it comes to disagreements and disputes the old saying holds true: prevention is better than cure. Regular communication between franchisors and franchisees provides the opportunity to raise issues before they become major concerns.

If you have an established relationship with your franchisor or their staff, it will be much easier to raise issues with them and they will be much more likely to respond in a way that suits both parties. You might find your issue is something that can be easily fixed, and you will not know until you try.

If you’ve tried this and the problem still isn’t fixed, the next step is to look at your franchise agreement to understand the formal dispute resolution process for your franchise system. This should set out what both parties are required to do if there is a disagreement.

If you’ve read your agreement but can’t find this process, the Franchising Code of Conduct (the Code) outlines the steps you can take.

An equally important step at an early stage is to make written notes, including any details of relevant telephone calls or other communications, and to make sure you retain copies of any documents that are likely to be important

What happens if the problem can’t be fixed?

If the two parties cannot resolve the dispute informally, then mediation is the primary way that franchisees and franchisors should attempt to resolve disagreements under the Code.

Key steps for dealing with a disagreement under the Code include:

  • Provide your franchisor with written details of the problem, the outcome you are seeking, and how you think the outcome can be met.
  • Try to agree with your franchisor about how to resolve the dispute.
  • If you cannot agree within 21 days, you can refer the matter to a mediator.
  • If you cannot agree on a mediator, you or the franchisor can ask the Office of the Franchising Mediation Adviser (OFMA) to appoint a mediator.
  • If mediation is initiated, you and your franchisor must attend mediation and try to resolve the dispute. The mediator may decide the time and place for mediation (although it must be conducted in Australia).

There is a general obligation imposed on both franchising parties to act in good faith when operating a franchise, and this requirement applies to the entire dispute resolution process as well.

Although the Code does not define good faith, it does state that the obligation is reflective of common law. Under common law, good faith requires parties to an agreement to exercise their powers reasonably and not arbitrarily or for some irrelevant purpose. Whether bad faith exists depends on all of the surrounding circumstances.

Common areas of disagreement or dispute

There are some common issues that can cause tension and disagreements between a franchisor and franchisee that may lead to disputes. These can range from the franchisor not providing adequate support to their franchisees – such as training – to a breakdown in communication, or potential breaches of the Code.

Under the Code, dispute resolution procedures must be followed for termination (or attempted termination) of a franchise agreement. It's important that franchisees understand what their franchise agreement says about dispute resolution.

In special circumstances outlined in the Code, the franchisor has a right to terminate and isn’t required to follow the termination procedures – if this has been agreed in the franchise agreement. These special circumstances include where a franchisee no longer holds a licence that is required, has been convicted of a serious offence or fraudulent in the operation of their franchised business.

The dispute resolution procedure in the Code doesn’t affect a party’s right to take legal action over a franchising dispute.

Tips for mediation

The mediation process can be daunting. It is worth remembering that that mediators don’t make binding decisions like judges do. Instead, mediators are there to facilitate a structured discussion and work towards a result that is acceptable to both parties.

An acceptable resolution doesn’t mean that both parties always get everything they want. Mediation often involves negotiation and compromise. But mediation does have a number of benefits over court litigation, including that it is likely to be cheaper and faster.

OFMA offers services prior to the mediation to explain how to prepare and what to expect in the mediation. The Australian Small Business Family Enterprise Ombudsman or Small Business Commissioners are also able to assist with appointing a mediator. Any costs for mediation must be shared equally between the franchisor and franchisee.

Some tips for resolving disputes include:

  1. Talk to the other party as a first step and then formally communicate the problem. Record any resolution in writing. 
  2. Be well prepared when entering mediation. This includes having all the necessary evidence and records to substantiate any claims.
  3. Understand any obligations you have when undertaking mediation, such as any confidentiality obligations that apply during or after the process.
  4. Both parties must approach the resolution in a reconciliatory manner (e.g. attending and participating in meetings at reasonable times) and ensure they do not take any action that would damage the reputation of the franchise system (e.g. providing inferior goods or services).
  5. Keep an open mind and be willing to make adjustments that can help achieve a timely solution. Remember that an ongoing dispute can be costly, time-consuming and disruptive to business.

What else can I do?

The ACCC has a range of online resources and guides including “The franchisee manual” which contains more information about dispute resolution. While we don’t provide dispute resolution services or resolve individual disputes, if you are concerned that a business is not complying with the Code or the Competition and Consumer Act, you can contact the ACCC.

While it is not possible for the ACCC to pursue all matters reported to it, priority is given to those that have broad impact in terms of persons harmed, commerce affected or conduct that suggests problems across a system.

We also encourage you to sign up to our Franchising Information Network to keep up with the latest news and events relevant to the small business and franchising sectors.