The future of dispute resolution in franchising in Australia

By Philip Colman, Principal, MST Lawyers 

In March 2019, the Parliamentary Joint Committee on Corporations and Financial Services published its report entitled “Fairness in Franchising”, following an inquiry into the operation and effectiveness of the Franchising Code of Conduct.  Thereafter a Franchising Taskforce was set up to further consider some of the recommendations in the Fairness in Franchising Report.

In August 2020, the Australia Government released its response to the Fairness in Franchising Report outlining, in general terms, the Australia Government’s intentions in relation to amending the Franchising Code of Conduct.

In this article I will outline and comment on proposed regulatory changes affecting dispute resolution in the franchising sector and ultimately conclude that the underlying problem will not be solved by those proposed changes.

Current dispute resolution provisions

The current position is as follows:

  • Franchise agreements must provide for a complaint handling procedure that complies with the Franchising Code of Conduct.
  • There is no prohibition on a party to a dispute from issuing legal proceedings (unless the franchise agreement so provides).
  • The formal dispute resolution process is started by the complainant serving on the respondent a notice of dispute which must outline the nature of the dispute, state what the complainant wants and state what the complainant thinks will resolve the dispute.
  • There is then an obligation on the parties to try and agree how to resolve the dispute, but if they cannot agree within 3 weeks, either party can refer the dispute to mediation.
  • If the parties cannot agree on who should be appointed as a mediator, either party may ask the mediation adviser to appoint a mediator.
  • The mediation must take place in Australia and thereafter the mediator will essentially control the mediation processes and conduct the mediation.

Fortunately a large proportion of disputes are resolved at or prior to mediation.  But if the dispute remains unresolved, three alternative scenarios can occur:

  • The dispute can simply remain unresolved with no further action being taken;
  • One party can commence legal proceedings; or
  • Further attempts at resolution can be made.

The problem

Where there is a power/financial imbalance between franchisors and franchisees, an unsuccessful mediation can be totally unacceptable for the weaker party because they generally cannot afford to take the matter any further.  That means that the stronger party may elect not to substantially compromise, knowing that the weaker party probably cannot take the matter any further.

The proposed solution

The authors of the Fairness in Franchising Report thought that this problem could be solved by mandating:

  • Conciliation; and/or
  • Arbitration.

The Australian Government’s response supports:

  • The introduction of conciliation to complement existing dispute resolution provisions;
  • The introduction of a voluntary binding arbitration model similar to that in the Dairy Industry Code[1]; and
  • Compelling franchisors to participate in multi-party dispute resolution processes where the person conducting the process so determines.

What is the difference between mediation, conciliation and arbitration?

Mediation is a facilitative process where mediator provides assistance in managing a process which supports the participants to make decisions about future actions and outcomes.  Mediators do not advise upon, evaluate or determine disputes.

Conciliation is very similar to mediation, except that the conciliator is permitted to use his or her expert knowledge and express views or opinions as to the subject matter of the dispute. 

Arbitration is an adversarial process involving the giving of evidence and making submissions with the arbitrator adjudicating the dispute and imposing his or her decision on the parties.

Will the proposed solutions work?

Conciliation

The proposal relating to conciliation is a good one.  A conciliator’s opinion in relation to the dispute can often reality check the views of the disputants and their advisers and increase the chances of resolution of the dispute.

Arbitration

The proposal relating to voluntary binding arbitration lacks merit and is, in any event, hollow.

There are only 2 ways a dispute can be referred to arbitration:

  • If there is an arbitration clause in the franchise agreement; or
  • If the parties later agree in writing to refer the dispute to arbitration.

A franchisor who wants to avoid arbitration simply won’t put an arbitration clause in its franchise agreement.  If no such clause exists and the franchisor is later asked by a franchisee to agree to the arbitration of a dispute, the franchisor can simply say no. 

Our politicians seem to think that voluntary binding arbitration will solve the problem that arises when mediation is unsuccessful by providing a cost effective means to obtain a binding adjudication.  With respect, they are wrong, for two reasons:

  • As set out above, there can be no arbitration unless all parties agree and you cannot force parties to agree; and
  • Arbitrations are not cost effective – similar documents to those required in court proceedings are required, disclosure of relevant documents is required, a hearing must take place and, unlike court proceedings, the parties have to pay the arbitrator’s fees (there are not many qualified arbitrators who charge less than $5,000 per day).

The only real advantages of arbitration are that the outcome is confidential and there are limited rights of appeal.

To date, I have not advised Australian franchisors to include arbitration clauses in their franchise agreements (unless the agreements are with foreign parties relating to foreign franchised businesses).  My views have not changed since the Australian Government’s response was published.

It is unclear from the Australian Government’s response whether it is intended that some truncated or minimalist form of arbitration model will be introduced.  The only hint they have given is the reference to the Dairy Industry Code.  But, the provisions of the Dairy Industry Code do not specify the procedural rules or processes under which arbitration will be conducted.  Instead, it leaves this to the arbitrator to decide. 

It is unclear whether rules of evidence will apply, nor is it clear whether rights will exist to cross-examine witnesses. 

In my opinion, in circumstances where you are leaving it to a third party (the arbitrator) to decide your fate, you should be afforded the opportunity to test the veracity and truthfulness of opposition witnesses.  Otherwise, a very good liar might be believed!

As a general rule, both franchisors and franchisees in Australia do not have deep pockets and do not wish to be involved in expensive time consuming litigation that diverts them from their businesses.  All parties welcome more cost effective dispute resolution, but arbitration is not, in my opinion, the solution.

Multi-party dispute resolution processes

The Australia Government proposes to compel franchisors to participate in multi-party dispute resolution processes where the person conducting the process so determines.  This is likely to arise where multiple franchisees have claims where there are common questions of law or fact. 

This is a good idea which will prevent the “divide and conquer” strategy adopted by some franchisors and may allow some cost sharing between affected franchisees. 

The real problem

As I submitted to the Franchising Taskforce, the underlying problem is one of access to justice.  There are many worthy parties to disputes who spend their last dollars to try a resolve a dispute through mediation and it is devastating for them if the other party is unwilling to make any substantial compromise knowing that the poorer party cannot afford to take the dispute any further.

This situation exists in all facets of business relationships and is not confined to franchising. 

Many disputes require findings of fact to be made in circumstances where the evidence given by the parties is diametrically opposed.  They are, therefore, high risk cases to run and hence are not cases where lawyers might act on a “no win no fee” basis or where a litigation funder may get involved. 

Access to justice can be provided if the Government funds it via the legal aid system.  But this has not been a priority of successive Governments from both sides of politics, certainly since I started practicing in 1980.

Our team of talented lawyers at MST have scrutinised the Australia Government’s response to the Fairness in Franchising Report and we are already providing advice to our clients within the sector.  Some things can be done now, but other things will need to wait until we see the draft or final amending regulatory instrument. 

Although this article is focused on proposed regulatory changes affecting dispute resolution in the franchising sector, there are many other aspects of the Australian Government’s response that require attention including disclosure and the provision of information to prospective franchisees, supply arrangements and rebates, cooling off periods and termination rights, exit arrangements, capital expenditure, marketing and other cooperative funds and compliance and enforcement.

If you require any advice on these proposed reforms speak to a member of our Franchising or Dispute Resolution and Litigation teams.

For franchising advice, please email the Franchising Team at MST Lawyers.

 

 


[1] Of interest, a private members Bill introduced into the Australian Parliament by ALP Senator O’Neill on 2 September 2020 also provides for voluntary binding arbitration.  There appears to be political consensus on this point.