HOW TO AVOID DISPUTES
Just as in any business, franchises can be subject to disputes and disagreements, but there are clearly defined pathways to reach an answer.
Follow the clearly defined pathways to settling disagreements.
Disputes and disagreements are all part and parcel of franchising. The latest survey from Griffith University’s Centre for Franchising Excellence shows that a quarter of franchisors have been involved in a dispute over the past 12 months with a median of two of their franchisees.
These disputes involved engaging an external advisor, however many more disputes and disagreements likely did not involve engaging a third party.
How should those in the franchise industry manage disagreements and avoid disputes?
As is the case with any relationship, communication is key. In franchising relationships, it is critical that franchisors and franchisees communicate effectively with each other to ensure disagreements and disputes either don’t happen or are resolved quickly.
Regular contact from all levels of franchisor management ensures the lines of communication are open between the parties and that any issues can be discussed and addressed at the earliest opportunity. This should happen throughout the term of the franchise.
Communication before the franchise starts is equally important. A franchisor must ensure that it clearly communicates the franchise opportunity to a
prospective franchisee and not make misleading statements. Likewise, prospective franchisees must be truthful in their franchise applications so the franchisor can properly assess their suitability for the franchise.
Franchisors should be accessible and respond to franchisees’ requests promptly and professionally. Franchisees should similarly respond to franchisors’ requests. All communications by all parties should be respectful and courteous.
Wherever possible, franchisors should be collaborative and seek input from franchisees about proposed changes or other actions that could impact their business. Franchisors should ensure they give franchisees enough notice of proposed changes or events (especially if costs are involved) and also provide a sound business case in support of the proposed change or event.
Communication among franchisees can also help manage disagreements and resolve disputes. For example, a franchisee may be able to resolve their issue by seeking advice from other franchisees (or their franchisee advisory council, if there is one).
2. Professional advice
Often disagreements and disputes can be avoided or resolved if the parties seek professional advice from external advisors. For example, if there is a disagreement or dispute about the interpretation of a clause of the franchise agreement, a lawyer can often quickly resolve the dispute by clarifying the correct interpretation of the clause. Lawyers can also represent parties in a dispute by corresponding with the other party.
Franchisees should also obtain professional advice from experienced legal, accounting and business advisors before entering into a franchise agreement, to ensure they fully understand all the rights and obligations under the franchise agreement and what to expect in regard to running a franchise.
The 2008 Federal Government Franchising Inquiry noted that conflicts in franchising are often caused by franchisees’ expectations being mismatched. That is, if a franchisee has not sought professional advice before entering into a franchise agreement, there is a gap between what that franchisee expects owning a franchise to be and the reality. This can often lead to a dispute between the franchisor and franchisee.
3. Research and due diligence
Franchisees can also find their expectations about a franchise are mismatched if they have not done adequate research
If franchisors and franchisees collaborate to ensure they are both complying with their respective obligations, the number of disputes will be significantly reduced.
and due diligence before acquiring a franchise.
As well as obtaining professional advice from legal, accounting and business advisors, prospective franchisees should also ensure they do their own research and due diligence. This includes (but is not limited to) carefully reading the franchisor’s disclosure document and contacting current and former franchisees to ask them about their experiences with their franchises. It also includes carefully considering any proposed site and/or territory for the business and independently assessing whether it is suitable and/or adequate for the business. Understanding the financial model for the business is also critical.
Franchisors must also ensure the prospective franchisee has the requisite skills and attributes essential for the franchise.
Research is also needed in respect of any disagreement or dispute that arises during a franchise relationship. That is, both parties should ensure they have researched their position and are sure their view is objectively fair and reasonable.
Many disagreements and disputes arise because parties are not complying with their obligations. This applies to obligations in the franchise agreement and/or legal obligations.
Griffith University’s Centre for Franchising Excellence latest survey quotes franchisors as saying that 63 per cent of disputes are associated with system compliance issues.
Disputes also often arise because franchisors have not complied with their obligations and/or engaged in unlawful conduct such as misleading, deceptive or unconscionable conduct.
Disagreements and disputes can be avoided by parties complying with their obligations. In the case of franchisees, this means following the system and seeking advice and help from the franchisor if they think there is a reason not to comply.
In the case of franchisors, this means providing a system that enables franchisees to run a profitable business and supporting their franchisees to do so. If franchisors and franchisees collaborate to ensure they are both complying with their respective obligations, the number of disputes will be significantly reduced.
5. The code’s steps for dispute resolution
The Franchising Code of Conduct requires that franchise agreements include a dispute resolution procedure that complies with the code.
The first step in the dispute resolution procedure specified in the code is that the complainant must advise the other party in writing: the nature of the dispute; what outcome the complainant wants; and what action the complainant thinks will resolve the dispute
This is often referred to as a notice of dispute.
The next step is that the parties must then try to agree on how to resolve the dispute. If the parties cannot agree within three weeks, the next step is that either party may refer the matter to a mediator for mediation.
At the mediation, the parties must try to resolve the dispute. A party will be in breach if they attend mediation but do not try to contribute answers.
Tamra is a business and commercial lawyer who specialises in franchising, competition and consumer and intellectual property law.