Franchise disputes

The process, step by step

1. Check the agreement's own dispute clause. The Code sets a minimum. If the agreement has its own procedure that meets or exceeds it, either party may choose to use that procedure or the Code's.
2. Give written notice. It must state the nature of the dispute, the outcome you want, and what action you think will settle it. Draft it carefully: it frames the dispute and it will be read by the mediator and, later, by a court.
3. Twenty-one days to agree. The parties then have 21 days to try to agree on an outcome. Most disputes that are going to settle cheaply settle here.
4. Refer it to ADR. If no agreement is reached, either party can require mediation or conciliation. Conciliation differs from mediation in that the conciliator can express views and make recommendations about the substance, which some parties find more useful.
5. Appointment. If the parties cannot agree on a practitioner, the ASBFEO can appoint one.
6. Attend and participate genuinely. Both parties must attend and try to resolve the dispute in good faith. A party who refuses to take part, or withdraws, can now be publicly identified by the ASBFEO.
7. Arbitration, only by agreement. The parties can agree in writing to arbitrate, which produces a binding decision. The ASBFEO can appoint an arbitrator on request. Whether an agreement provides for arbitration is disclosed on the Franchise Disclosure Register.

The rules that protect the franchisee

• Costs are shared. The parties generally pay their own costs of attending and share the costs of the mediator or conciliator equally unless they agree otherwise.
• The franchisor cannot make you pay its legal costs of settling a dispute. A clause attempting to do so is not effective.
• The dispute stays in your state. Mediation must be conducted in the state or territory where the franchisee's business is based, or otherwise within Australia. A clause nominating another state for the mediation does not override that.
• Multiple franchisees can act together. Franchisees with similar disputes against the same franchisor can pursue them in a single multi-party mediation or conciliation, which changes the economics of a systemic problem considerably.
• Good faith applies to the dispute itself. The obligation to act in good faith is not suspended because the parties are in conflict.

Termination while a dispute is on foot

Termination is the sharpest issue in franchising, because a franchisee whose agreement is terminated loses the business, the site and often the ability to pay for the fight.

For an ordinary breach, the franchisor must give notice, identify the breach, and allow a reasonable time to remedy it. If the franchisee fixes the breach, the franchisor cannot terminate on that ground.

For particular grounds, such as abandonment of the business, conviction of a serious offence, or conduct endangering public health or safety, the franchisor may act more quickly. The current position is that the franchisor must give written notice and generally must not terminate for 28 days, during which the franchisee may dispute the proposed termination. There is a narrower category of serious breach where a franchisor may terminate on 7 days notice without the franchisee being able to take the matter to alternative dispute resolution.

If you have received a termination notice, the date on it is the most important fact in your file. Get advice immediately, because the response window is short and an injunction to restrain a termination has to be sought before the business is gone.

When the Code process is not the answer

The Code process handles disagreements about the operation of a franchise. It is not designed for everything.

Where the complaint is that you were misled into buying the franchise, the substantive claim is usually under the misleading conduct provisions of the Australian Consumer Law, and the remedies, including damages and orders unwinding the agreement, come from that Act. Where the complaint is about unfair terms in a standard form agreement, that is also consumer law territory, and since 9 November 2023 civil penalties can attach.

Where the franchisor's conduct is systemic rather than personal to you, the ACCC is worth involving. It enforces the Code, can audit franchisors, and has taken penalty proceedings in the sector.

And where the dispute is really about money owed under a contract, the ordinary commercial route may be faster. See commercial dispute resolution for the courts, limitation periods and costs position.