Franchising inquiry: Is it time Australia launched a franchise court?

Tensions are running high in the world of franchising and Australia needs a new court to deal with them, according to legal and business experts.

A new submission to the Senate’s inquiry into the effectiveness of the Franchising Code reveals franchisees may not even know they can take a dispute with their franchisor to mediation.

The Office of the Franchising Mediation Adviser, a Commonwealth-appointed body that helps franchisees and franchisors through mediation processes, says in its submission that since its establishment 16 months ago, it has received only 400 requests for mediation from the country’s 79,000 franchisees.

The office says “there well may well be significant unhappiness and financial difficulty being experienced by a large number of franchisees in the industry in certain franchise systems”, but it can’t necessarily tell if this is true or not because all it has to go on is the volume of complaints it receives.

The Mediation Adviser suggests the low number of complaints reflects that its services are not known to franchisees, or they are too scared to make contact with the office, though no formal speculations could be made.

The office can only take franchisees and franchisors to the mediation stage of a dispute — if nobody can agree beyond this point, the parties have to set up their own arbitration or go through the courts.

Reflecting on this, the Franchising Mediation Adviser’s submission examines whether an arbitration model should be a go-to for the Australian franchise sector, pointing to the Food and Grocery Code, where parties are able to go to binding arbitration when negotiation and mediation have failed.

How would arbitration work in franchising?

There have been several calls for a small business-focused disputes court over the years, but the Mediation Adviser’s submission says it would be tough to establish a federal tribunal because it could mess with the separation of powers.

Instead, it mentions the “highly active and effective” office of the Australian Small Business and Family Enterprise Ombudsman, which hears from countless small businesses but currently does not have the power to refer disputes to a compulsory arbitration process.

Australian Small Business and Family Enterprise Ombudsman Kate Carnell tells SmartCompany she is investigating how her office can get involved in new dispute resolution models to help franchisees.

“It’s certainly something we’re looking at seriously. The point is very real: mediation only works when there is an interest in resolution from both parties. You can’t make someone ‘mediate’ in good faith — and you end up with scenarios, not just in the franchising space but more broadly, where court is the only option,” Carnell says.  

The Small Business Ombudsman is currently undertaking an inquiry into access to justice for small businesses and Carnell says this could help drive conversations about how her office could compel arbitration to take place.

However, Australia would also have to review monetary limits for claims through arbitration so they properly reflect the losses that franchisees can sometimes experience, Carnell says.

“If people have lost their businesses and potentially their homes, that’s a big problem [in terms of monetary limits]. And fairly obviously, the court is not an option for small businesses,” she says. 

A new avenue

Marianne Marchesi, franchising law expert and principal at Legalite, says her own submission to the Senate’s inquiry will echo calls for a new “avenue” of dispute resolution.

“I wholeheartedly agree with the idea — there needs to be an avenue that is affordable for people that can result in binding decisions,” she tells SmartCompany.

The biggest challenge for franchisees and franchisors now is that small claims tribunals in each state simply aren’t able to hear disputes.

“If a claim is a small claim they can use these systems, but for claims like misleading or deceptive conduct in franchising, you just can’t,” she says.

But if a franchising arbitration body is such a good solution, why hasn’t it been front of mind as stories of franchisee trauma have come out over the past year?

“We’ve probably been hearing a lot of viewpoint of franchisors so far on these issues,” Marchesi suggests.

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