More than half of Australian franchises face disputes

More than half of Australia’s franchisors have been involved in a formal dispute with a franchisee, according to a new study.

The research, conducted by 10 Thousand Feet, reveals 58% of franchisors reported a formal dispute with a franchisee in the past three years, while 34% were required to go to mediation and 17% were required to go to court.

10 Thousand Feet head of intelligence Ian Krawitz defines a formal dispute as a breach of agreement between the franchisor and franchisee.

“The franchise agreement needs to comply with the Franchising Code of Conduct and so a dispute is where one party feels the other party is not meeting their obligations under that agreement,” Krawitz says.

According to DLA Phillips Fox, one of the study’s legal sponsors, the vast majority of disputes are raised by franchisees.

Krawitz says he’s not surprised given the nature of the franchisor-franchisee relationship.

“[As a franchisee], you’re in a position where you’re looking to be supported… It’s almost a parental relationship,” he says

“So if you’re unhappy in that position as a franchisee, you’re going to seek remedy from your franchisor whereas if you’re in a small business and you’ve got a dispute with a supplier, you might be less likely to make a formal complaint.”

DLA Phillips Fox franchising partner Tony Conaghan says most disputes occur in the first three years of the relationship but the majority are resolved.

Krawitz says recent changes to the Franchising Code of Conduct are designed to improve communication between franchisors and prospective franchisees from the outset.

The changes include an onus on the franchisor to inform incoming franchisees of the agreements to apply at the end of an agreement, and the franchisor’s ability to unilaterally change the franchise agreement.

Other changes to the code include clarification on the franchisor’s part as to whether they will amend a franchise agreement on the sale of the business, and if the franchisee will be required to undertake significant capital agreement during the life of the agreement.

Krawitz says this last point is particularly important for technology-focused franchises and is the cause of many disputes.

“Let’s say you’re in a technology-driven business and your franchisor hasn’t made you aware from the outset that you might need to go and spend $20,000 on getting ready for a new product or a new system or having a new fit-out,” he says.

“Industries that are really fast-moving and dynamic will have a greater potential for disputes to occur if there hasn’t been full disclosure and expectations set from the start.”

Krawitz says changes to the code are targeted at the minority of rogue franchisors who abuse or neglect their relationships with franchisees.

In a bid to further define franchise law, the West Australian parliament recently introduced a bill aimed at rogue franchisors, based on a similar bill adopted in South Australia.

The intent of the State-based bills is to impose dispute resolution processes where franchisors can be fined up to $100,000 for the company and $10,000 for staff of the franchisor who may contravene the code.

Conaghan says there is no need for additional state regulation as it creates different obligations in different states.

“It would act as a disincentive to franchisors to open operations in those states because of the increased risk and compliance costs of managing different pieces of legislation,” he says.