My franchisee won’t pay my fees. What do I do?

Fighting with a franchisee? Legal action can cost millions, but there are other options, ALAN WEIN says.

 “I am a franchisor with 20 franchisees. One of them has decided not to pay their fees. Should I launch legal action as this franchisee is very hostile and does not seem to be open to any kind of discussion/mediation?”

Alan Wein answers: The legal position regarding franchise relationships is regulated through the Franchise Code of Conduct provisions in the Trade Practices Act. The code covers most aspects of the relationship and the pre-contractual disclosure and ongoing obligations required under it.

The code also provides for a mandatory dispute resolution process in the event of a “dispute” between the parties, and the process for augmentation of the mediation. The franchise agreement entered into between the parties (assuming a written agreement has been signed) will also provide the rights duties and obligations of the parties in the relationship. The agreement, cannot override any of the provisions in the code or in any act.

In addition to the franchise code, a “dispute” between the parties in a franchise situation can also be determined under the fair trading legislation of the various states and any state Small Business Commission Act legislation.

Know your rights

In the event that the parties cannot agree on the appointment of an independent mediator, the Federal Government have appointed the Office of Mediation Adviser (OMA) to make the appointment of an experienced and accredited mediator in franchise disputes, where the parties cannot agree on a mediator.

In the current question, the failure to pay fees payable under the agreement would constitute a prima facie breach and default under the agreement and unless the breach was remedied by the payment of the fees then the default by the franchisee could lead to the termination of the franchise by the franchisor that would leave the franchisee in a poor position and open to substantial financial loss.

Examine why the franchisee is failing

Before termination I would suggest that the parties go to mediation and try and resolve the “dispute”. The mere fact that a franchisee is performing poorly does not necessarily mean that the franchisor is to blame. Trading and economic conditions may be tough or the lease terms may be financially onerous. It could also be that the franchisee is incompetent or not complying with reasonable directions of the franchisor. The situation puts both the franchisee and the franchisor in a position of concern, as both have different interests to protect, despite having a common interest in the brand and goodwill of the franchise. The issues that would need examined at mediation would include:

Is the franchisee in default due to poor trading?

Has the franchisor done something wrong or not complied with its obligations under the agreement or code?

Are there other operational issues that have affected the franchisees ability to pay?

A competent mediator will be able to assist the parties in examining the issues and interests in the “dispute” and ascertain the reasons for the dispute arising. The next task will be for the mediator to assist the parties in examining and identifying options for resolution of the dispute in a sustainable way. A competent mediator will try to have the franchisee hostility expressed in actual issues, rather than emotions. The options could include some short term relief to the franchisee by way of fee abatement. The franchisee may want or need to sell their franchise. The franchisor may also recognise the need to provide additional services to the franchisee by way of marketing or operational support and training.

Engaging in a meaningful mediation with a competent experienced mediator should avert a costly litigation and also enable the parties to both maintain control over many (if not all) the aspects of the dispute and provide the best opportunity of a commercial settlement that they negotiate.

Alan Wein, a lawyer by profession, was founder, managing director and 50% owner in the homeware chain House. Since 2003, Alan started The Mediator Group, a mediation practice for commercial disputes in business, retail leasing, franchising, contractual and owner drivers disputes. Alan is a senior panel mediator with the Office of the Victorian Small Business Commissioner and Adjunct Professor in Business Entrepreneurship at RMIT University School of Business and Management