Buying a franchise comes with the security of buying an established product. But buying a franchise is a business decision like any other, which means that problems can still happen.
When a problem does arise, such as a franchise dispute, you want to manage it as quickly and effectively as possible, so you can get back to running your business.
This is a guide for anyone who is going through a franchise dispute. It has the information you need to address a problem, and to resolve it swiftly.
Get comprehensive legal advice about your franchise dispute with AANDI Lawyers.
What is a franchise dispute?
When two parties agree to a franchise, they agree to be bound by the conditions and terms outlined in the franchise agreement.
A franchise dispute happens when either party has an issue with anything related to the franchise. A dispute may arise due to the conduct of one or both parties, money, conditions of operation, or any other number of factors.
Franchise disputes can be difficult and may cost money to resolve. It is important to consider the decision to buy a franchise carefully, because running a franchise can be very restrictive. A franchisee will not have the same level of control they would have if they started a business independently.
To avoid disputes in a franchise, franchisees should be aware of:
- The costs of running a franchise
- Any restrictions on how the business can be run
- Establishment and maintenance of the franchise
- Significant costs or trading fees related to the business
While you cannot avoid disputes entirely, it is far better to know what you are getting into before it becomes an issue later on.
The Franchising Code of Conduct
Every business involved in a franchise agreement is bound to operate in line with the Franchising Code of Conduct. The Code outlines the behaviour which is expected of every franchisor and franchisee, while also providing a framework for dispute resolution.
- Every party to a franchise must act in good faith. What this means is that parties must be honest, and must act as a reasonable person in the same position would act.
- When resolving a dispute, parties must actively try and resolve it in a cooperative and honest manner.
The Code gives parties to a franchise agreement the peace of mind to know that there is a system in place in the event that a dispute happens.
Resolving a franchise dispute in accordance with the Franchising Code of Conduct
As stated above, the Code provides a way for parties to a franchise agreement to manage disputes. One requirement of the Code is that every franchise agreement must outline a procedure for handling disputes. This procedure must meet a minimum standard as set by the Code.
The procedure for resolving disputes should follow the process as outlined below:
Step 1 — Make contact with a notice of dispute
When you are aware that you have a dispute, the first step is to contact the other party with a notice of dispute.
This notice must outline what the dispute is about, what you want as the outcome, and what you think will work to settle your dispute.
If a resolution cannot be reached after three weeks, it is appropriate for the matter to be referred to mediation. Either party may refer the matter to mediation, which is managed by the Australian Small Business and Family Enterprise Ombudsman (ASBFEO).
Step 2 — Attend mediation
When the matter is referred to mediation, it is compulsory for both parties to attend. A penalty may be imposed if a party does not attend mediation.
Mediation is an informal, confidential, and legally binding process. Parties in mediation are given the opportunity to lead the process and find their own solution to a problem.
An impartial mediator will run the process and will assist parties to see both sides of the matter and reach a mutually beneficial outcome.
Mediation is beneficial as it is a cost effective and positive way to manage disputes, where the power remains with the parties.
Step 3 — Legal action
If a matter cannot be resolved through mediation, or if mediation is not appropriate for you matter (say for example, if you require immediate relief) then you may seek legal advice. Any dispute resolution process outlined in the Code does not affect your right to take legal action where necessary.
If you are considering legal action over a matter, you should seek legal advice to ensure your rights and legal position are protected.
Enforcing the Code
All conduct of franchisees and franchisors is enforced under the Code by the Australian Competition and Consumer Commission (ACCC). The ACCC is also responsible for providing parties to a franchise with information about their rights and responsibilities.
Tips on how to avoid a dispute in a franchise
Some things are unavoidable, but it is possible to manage problems before they turn into disputes. It's often the work that is done prior to entering into a franchise that saves trouble down the line.
- Foster a positive working relationship between the parties. The franchisor needs to ensure that the franchisee is a good fit for their business. The franchisor should choose a franchisee who will be able to work with the level of support that will be provided.
- Manage expectations about what type of support and guidance will be offered.
- Be clear about financial commitments and the potential profitability of a franchise. Many franchise disputes happen because buyers are misled about the profits of a franchise, or about the operating costs. This kind of behaviour can form misleading or deceptive conduct which is punishable under Australian Consumer Law.
- Make the decision to buy a franchise carefully. Do not rush into the purchase, and do not be hurried into making a decision. Be sure to seek legal advice when buying a franchise.
- Draft a franchise agreement thoroughly and carefully, and with legal assistance.
- As a franchisor, you must ensure that your proposed business model is strong, with plenty of proof of concept and sufficient support. You should ensure there is sufficient guidance and information to allow a new owner to replicate your success in a franchise.