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Log In / Register | Apr 23, 2014

Franchise Code: Good Faith and Dispute Resolution, Pt 4

This is a look into the issues of the franchise code. The Australian government has a Senate inquiry into a franchise code. In the end of this four part series, the options paper that divides the Senate recommendations into four parts lists the issues of good faith and dispute resolution. There is so much to write about in relation to either of the issues of good faith or dispute resolution – much less both – that it is impossible to give them proper justice in a short space.  Even so, I will try to summarise the relevant points as I see them.

Insert an explicit “good faith” provision into the Code 

Yes, YES, YES.....and no. 

I doubt that any person with a genuine interest in the franchising sector would object to a regulation that requires “franchisors, franchisees and prospective franchisees (to) act in good faith in relation to all aspects of a franchise agreement”. 

There is Court authority in Australia to support the premise that an implied term of good faith (and fair dealing) already exists in franchise arrangements and the Senate recommendation seeks to take this from an arguable proposition to an explicit requirement. 

Kudos to the Senate.  But what does it mean and will it change anything? 

Only very rarely will a franchisor (or a franchisee) concede that they have acted in ‘bad faith’; this type of conduct will almost always have to be determined by a Court.  And herein lies the problem. 

We already have an inclusion in the Trade Practices Act that prohibits any corporation from engaging in “unconscionable conduct” (s. 51AC, also s.51AA) – a kissing cousin at least to ‘good faith’.  (I consider the difference as being drafting in the negative and positive respectively).  The Courts have made various rulings about what sort of conduct may be regarded as ‘unconscionable’ however as an exhaustive definition is not possible there has been little progress applying this section to everyday franchising disputes. 

The ACCC – which definitely does have an active interest in this area – has not been able to influence general franchising practice by enforcement of this section.  It is a section that is available to be used by franchisees in Court, but is usually subordinate to allegations regarding misrepresentation. 

So we are likely to have the same problem we already face with ‘unconscionability’ – it is almost always subject to interpretation, which a Court will be required to resolve.  The ACCC will take some matters before the Courts - attempting to obtain general rulings about a principle that cannot be exhaustively defined - but the franchisees that might benefit from the inclusion will still be unable to afford to take the matter to Court.  

I like the concept – I actually do – but without fixing the more fundamental problems of access to justice and dispute resolution this change cannot achieve the results intended. 

Conveniently that leads to.... 

Dispute resolution – Office of the Mediation Adviser 

The proposal is actually to change the name of the OMA to the “Office of the Franchising Mediation Adviser” or the “Franchising Code Mediation Adviser”.  Honestly – pick one, I don’t care, a rose by any other name and all that.  However I will take this opportunity to get on my high horse instead. 

The OMA are good people; they have a clear job to do and by and large they do it well.  They field enquiries from franchisees (and franchisors) and upon request will appoint a mediator to a dispute, as required by the Code.  They claim that: 

“Around 75% of mediations conducted through the OMA result in a binding settlement that both parties are prepared to live with.” (www.mediationadviser.com.au/alternatives). 

This is true, as far as it goes, but as has been pointed out on BMM before, the actual resolution rate based on enquiries, rather than appointments of mediators, is closer to 20% - and the Senate Inquiry was concerned that the role of the OMA was not sufficiently recognised as a resource in franchising disputes. That begs the obvious question - how many disputes actually get resolved to the satisfaction of both parties? 

So recent claims that Australian franchising is in ‘good health’ lack objective credibility and have been made without any hard data regarding the actual number of franchisors that fail, the actual number of franchisees that fail or the actual number of franchise disputes that are not resolved.  

I will not repeat the comments or conclusions of the 3 independent inquiries into the shortcomings of the current system save to say that it was clearly recognised that franchising dispute resolution – and mediation in particular – need significant attention. 

‘Mandatory’ mediation under the Code (it is only mandatory if one party to the dispute calls for it) is, quite frankly, the bastard child of Artemis and Hades.  I am a big fan of genuine mediation – it works well, but where one party is dragged against their will into a mediation (and expected to compromise, if not cheerfully then at least reasonably) it is unrealistic to expect a positive outcome. 

I say it is a credit to the OMA mediators that they are able to get such a success rate at all – but I am not yet convinced of the quality or durability of the settlements.  But this is for another day. 

Dispute resolution represents the most significant opportunity for improving current franchising practice.  I simply do not understand how the Senate can acknowledge that the system has a major problem and yet recommend that the solution is to change the name of the Government office. 

What about extra resources for the ACCC? 

The Senate (in a recommendation excluded from the Options Paper) has suggested that extra resourcing for the ACCC should be considered.  This is not the answer either because it still does not give franchisees the ability resolve their own disputes and the problem is partially to do with the perception of the role of the ACCC in franchising matters.  

The best analogy I can think of to explain the role of the ACCC is this: 

Imagine you are driving your car and another vehicle collides with you.  Both you and your vehicle are suffer damage.  The police are called and they take statements from both parties and any witnesses. 

After investigating the incident, the police may charge the other driver with an offence and take the matter to Court to enforce the relevant road use laws. 

But do you expect that the police to make arrangements for the repair of your car?  Towing?  Do you expect the police prosecutor to ask the Court to make an award to cover the cost of repairs and compensate you for your injury?   

Of course not - the police are not the enforcers of civil damages, nor are they expected to do so.  The police may, on occasion, seek restitution in special circumstances, but generally you are required to pursue your own remedies in Court, largely regardless of whether the police are successful in obtaining a conviction. 

If you think of the ACCC in the same way it is not hard to recognise why extra resources are not going to make any significant difference to the problems faced by ordinary franchisees trying to resolve their disputes with a disinterested, or antagonistic, franchisor.  

So what would help? 

I maintain that this is the time for us, as an industry, to apply pressure for the Commonwealth Government to create a proper Australian Franchising Office which incorporates: 

  1. an investigative role to address complaints (but not acquiring the enforcement jurisdiction of the ACCC);
  2. a pro-active dispute resolution function, not just limited to mediation (incorporating the OMA, which does provide a valuable service);
  3. education and makes available basic resources (not many people realise the ACCC publishes some good, but limited, information);
  4. a centralised register of franchising information (which will provide statistics for research into such things as the effectiveness of dispute resolution); and
  5. a franchising tribunal with the authority to deal with all franchising issues, including ‘good faith’, Trade Practices claims, awards of damages, mandatory injunctions and leasing (which would need to be co-ordinated with the States). 

Having one Office to deal with the various aspects of day to day franchising will not solve all of the problems of the industry but the above points address the root causes of the problems we currently see, rather than the consequences. 

Conclusion 

Thanks for following me along these articles.  I have formed an opinion, as I looked at the Senate recommendations and the questions asked in the Options Paper, that the Minister may not have just been sitting on his hands doing nothing for the last 6 months as we all thought, because at least someone among his advisers has recognised that the Senate recommendations – although well meaning – are practically flawed in many respects. 

That is not to say I endorse how this process has been handled (far from it) but I must wonder whether no changes are better than bad changes. 

The Senate Inquiry has identified the issues, but has not made recommendations that resolve the issues, only some of the consequences.  Other solutions are required. 

I strongly encourage anyone interested in the health of the franchising sector in Australia to express your own views by submitting a response to the Options Paper, which is due by 10 July.

This is part 4 of the following 4 part series:

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