Franchise agreements are commonplace in the modern era of branding and cost-effective business arrangements. Large and small companies alike have identified the benefit of branding a product or service, manufacturing or sourcing its commodity, and marketing (the franchisor) and then selling the right to provide the service or product to another party (the franchisee).
One good example is the McDonald’s Australia corporation, where 85% of McDonald’s restaurants in Australia are owned by a franchisee. These franchisees exclusively sell McDonald’s products, and are run under very strict controls and standards set by McDonalds.
Franchise disputes often arise, but rarely end up in court. For franchisees, they often have an ongoing dependence on the franchisor, but for franchisors, bad publicity may have significant impact on future sales of franchises. As such, the circumstances of a franchise dispute typically foster a resolution to the issues the parties are facing.
Whilst many franchise disputes never make it to court, and can be resolved amicably, it is important for franchisors to enforce franchise agreements to protect their systems and reputation, and for franchisees to ensure that they have not been misled into the franchise agreement, and are otherwise receiving the support they expected.
This article examines the legal relationship of franchisor and franchisee and remedies available in the event of a dispute.
Estimated reading time: 9 minutes
Table of contents
- Statutory regulations regarding franchise agreements
- What is a franchise agreement?
- What is a franchise dispute?
- Most common legal claims in franchise disputes
- Franchise dispute resolution: mediation or litigation?
- Remedies available in franchise disputes
- For when you need assistance
Statutory regulations regarding franchise agreements
The main statutory regulations that apply to franchise agreements are:
- The Franchising Code of Conduct (the Franchising Code); and
- The Australian Consumer Law (ACL).
These regulations create a form of framework and complement each other, with the ACL acting to protect consumers in general by placing prohibitions on certain conduct in relation to the provision of goods and services in trade or commerce (e.g. such as misleading and deceptive conduct), and the Franchising Code placing further specific obligations and requirements on participants particularly involved in the franchising industry.
The Australian Consumer Law is very wide ranging and powerful, whilst the Franchising Code very focused.
In addition, as franchisee agreements are, in reality, common law contracts, they are also subject to various basic common law contract rules and principles. Various contract requirements existing under common law that will often be of particular relevance to franchising matters include provisions regarding:
- The impact of pre-contract representations;
- Validity of zone restrictions; and
- Validity of restriction of trade clauses.
What is a franchise agreement?
A franchise is agreement is defined very broadly under the Franchising Code as an agreement in any form, whether written, oral or implied, under which:
- The franchisor grants the franchisee the right to carry on the business of offering, supplying or distributing goods or services within Australia;
- A system or marketing plan partially or substantially associated with the franchisors trademark, advertising or commercial symbol in incorporated; and
- Before starting the business and/or during the continuation of the business, the franchisee pays the franchisor or its associate a specified amount, such as, by way of example, an initial capital investment fee, payment for goods or services (such as a fee based on a certain percentage of gross income derived), etc.
The Franchising Code’s has a very broad definition of what constitutes a ‘franchise agreement’ that will unavoidably appear to encompass a number of different relationships that traditionally have fallen outside the usual concept of a franchise arrangement. Because the definition is broad and could unwittingly or unwillingly include arrangements it as not designed to regulate, to avoid any ambiguity regarding this, the Franchising Code specifies certain relationships that will not, in themselves, constitute an actual franchise agreement. These include:
- Employer and employee relationships;
- Partnership relationships;
- Landlord and tenant relationships;
- Mortgagor and mortgagee;
- Lender and borrower relationships; and
- The relationship between members of a co-operative founded under an applicable act.
What is a franchise dispute?
Disputes between franchisors and franchisees are not uncommon.
It is in the franchisors interest to protect their business activities, charging structures, exclusivity, and reputation as supplier and/or service provider to impose many wide-ranging restrictions and terms of contract. Such contracts can be extraordinarily demanding, sometimes arguably, unnecessarily so. It is in the franchisee’s interest to enter an agreement that is not overly prohibitive or mandatory or oppressive that wil allow them to run the business as pragmatically as possible.
These competing interests, and other issues can give rise to disputes.
Franchising disputes can arise for a wide range of different reasons, and without proper legal advice, it can be extremely difficult to navigate the complex area of law relating to franchising regulations in order to determine what each party’s rights and obligations are in relation to the dispute and the franchise agreement generally.
Examples of common causes of franchise disputes include, but is not limited to:
- Abandonment of the franchise during the franchise period;
- Franchisees misusing customer information;
- Franchisees misusing the franchisor’s confidential information;
- Non-Compliance by the Franchisor in regard to disclosure requirements;
- Franchisees not following the Franchise’s Standard Operating Procedures;
- Franchisees not following specific provisions of the Franchising Code;
- Franchisors not following specific provisions of the Franchising Code;
- Franchisees not meeting minimum levels of performance set by the Franchisor;
- Franchisors taking extensive cuts from the Franchisee’s profits;
- Franchisors manipulating profits;
- Franchisees manipulating profits;
- Franchisees creating a competing business during the franchise period;
- Unauthorised use by the franchisee of the franchisor’s intellectual property;
- Non-payment of fees to franchisors;
- Franchises not logging sales information correctly;
- Franchisees not reporting sales information correctly;
- Misleading and deceptive conduct; and
- False misrepresentations prior to entering into the franchise agreement.
This is not an exhaustive list.
On a positive notes more often than not, most franchise disputes are settled informally, either through personal mediation between the disputing parties or through negotiations, often with the help of legal representation. The Franchising Code of Conduct also has additional mechanisms in place to assist in dispute resolution between conflicting parties.
Most common legal claims in franchise disputes
The legal basis of most claims brought by franchisees against franchisors in relation to franchising disputes include the following:
Misleading and deceptive conduct
Representations or claims made in connection with the supply of goods or services that are likely to lead the recipient of that information to gain a false impression about a particular aspect of the good or service in question. This could include false financial information or promises before entering the franchise.
Statements made in connection with the supply of goods or services that are so unreasonable that they ‘defy good conscience’.
False statements made about a material fact concerning a contract before the contract is entered into that directly influences another party’s decision to enter into that contract. Also see misleading and deceptive conduct above.
A fraudulent business model that involves an entity, such as a company, recruiting members by promising payment for the members to enrol other members (“investors”) into the scheme, without actually supplying an actual investment or the sale of products or services.
The act of deceiving (i.e. misleading or ‘conning’) someone else by concealing or distorting the truth.
Unfair contract provisions
A provision in a contract that benefits one party to the contract but does not reasonably protect the rights of another party to the contract to that other party’s detriment.
Franchise dispute resolution: mediation or litigation?
Once a disagreement arises between a franchisee and a franchisor, there are various options available to both parties to the dispute in order to resolve the dispute between them.
Some franchise agreements may contain clauses regarding certain procedures that must be followed if, for example, the parties want to refer the dispute to mediation, or one of the parties wish to commence legal action against the other party. Although there are a number of different avenues available to franchisors and franchisees alike in the event a dispute arises, the two most common avenues are mediation and litigation.
In short, mediation is when two parties formally come together to try to resolve a dispute between them. The process involves an impartial third-party, the mediator, facilitating the negotiations between the disputing parties with the aim for the parties to reach an agreement that benefits both parties. The mediator will rule on the issues in dispute, but a recommendation made by a mediator will not be binding on the parties to the dispute. The mediator’s function is to be a neutral middleman between the parties to assist them in clarifying the issues in dispute and, hopefully, help the parties arrive as a resolution that they can both agree to.
Mediation procedures can be as short as a few hours or last up to a full day, or even several days. How comprehensive the mediation process is will depend on the nature and complexity of each individual issue in dispute, and whether or not the parties to the dispute are willing to cooperate. Mediation is one of the most cost-effective ways to resolve franchising disputes without resorting to complex and costly court proceedings.
The Department of Jobs and Small Business has the responsibility of acting as the Mediation Adviser in relation to franchising disputes under the Franchisee Code. If the parties to the dispute cannot agree on who should be the mediator, either party may ask the Mediation Adviser to appoint an independent mediator. In the event that the mediation is unsuccessful, legal proceedings may be unavoidable, and litigation will likely commence. It is important to note that mediation may not be an appropriate dispute resolution option if you require urgent relief. If you find yourself in this situation, it is crucial at this stage that you get urgent legal advice in order to assess your legal rights and obligations, as well as any prospects of success you might have in the circumstances.
For more information about mediation, see our Arbitration & Mediation page.
The dispute resolution processes outlined in the Franchisee Code do not affect a party’s right to take further legal action in relation to a franchising dispute. If you are considering commencing legal proceedings against another party, it is recommended that you first obtain legal advice in order to assess your legal options as there may be a number of different avenues available to you depending on the particular circumstances of your matter.
Remedies available in franchise disputes
The are several different remedies that might be available to a party that has suffered loss in relation to a franchising dispute. It is important to note that the injured party will be awarded damages according to the specific circumstances of each individual case and the general loss suffered by the injured party.
Some remedies that might be sought in relation to franchising disputes include:
- Equitable Compensation;
- Account of Profits; and
- Specific Performance.
For when you need assistance
At Gibbs Wright Litigation Lawyers, we can assist you with any aspect of your franchise dispute, from initial legal advice to negotiations and all the way up to trial.
Whether you are seeking to commence legal proceedings in relation to a franchising dispute, or you require legal advice in order to defend a legal claim made against you, we can help.
Call Gibbs Wright Litigation Lawyers today for a free and confidential initial consultation about your franchising matter to discuss your legal rights and options.
- Competition and Consumer (Industry Codes – Franchising) Regulation 2014 (Cth). ↩︎
- Competition and Consumer Act 2010 (Cth) Schedule 2 ‘Australian Consumer Law’. ↩︎
- Competition and Consumer (Industry Codes – Franchising) Regulation 2014 (Cth) s 5. ↩︎
- Competition and Consumer (Industry Codes – Franchising) Regulation 2014 (Cth) s 5(3). ↩︎
- Competition and Consumer Act 2010 (Cth) Schedule 2 ‘Australian Consumer Law’ s 18. ↩︎
- Competition and Consumer Act 2010 (Cth) Schedule 2 ‘Australian Consumer Law’ s 21. ↩︎