Franchise fights

When GE Money announced in February 2009 it was selling off the Wizard brand to Aussie, not all franchisee owners looked kindly to swapping allegiances from orange for purple.

And despite dangling a $10,000 carrot of free marketing support in front of franchisees who signed agreements with Aussie by February 27, many chose to try to renegotiate aspects of their amended franchise agreements.

Among the terms they wished to negotiate were commission arrangements, the scope of the exclusivity territory to be assigned to each participant, the "nature, type and competitiveness" of products offered by Aussie for sale through the participants, the rights of participants to sell their franchisees and compensation arrangement, the rights of Aussie to terminate agreements, and compensation offered should Aussie terminate without consent.

At the time, the lodgement of the collective bargaining notification by Wizard franchisees confirmed speculation that a number of franchisees were unhappy with the agreement reached between Aussie and GE Money over the sale of their businesses.

Owning a franchise can be a very positive experience, but as the case above highlights there is potential for disputes to unexpectedly arise even among the biggest names in the business.

Areas of ire
Alan Wein, principal of Wein Mediation is a lawyer and entrepreneur, who also sits as a senior panel mediator for the Office of the Victorian Small Business Commissioner. One of his areas of expertise is franchising disputes.

He has noticed an increase in the number of people seeking mediation since the credit crisis hit. "Disputes will normally simmer for a couple of months, if not a year, and now we're seeing them come to the fore." When times are tough, people start to point fingers.

The case of Investor Finance is demonstrative of this. In October 2008, Investor Finance director Adam Thomas released a statement that the sub-prime crisis had forced the business to "restructure" under a new entity. The sudden closure of the business spurred a number of franchisees to complain of the Investor Finance's failure to deliver on promises of lead generation, training and unmet payments. Many franchisees threatened legal action.

According to Wein, when a business is failing you have to ask is it failing because of general economic conditions or is it due to the failure of the franchisees to abide by the systems and practices recommended by the franchisor. But if you get a situation where the overwhelming majority of franchisees are failing in reasonably good economic circumstances then you begin to question whether the system itself is healthy or not. In which case, you need to look at the services provided by the franchisor, and if they are reasonable, effective and proven.

"Misrepresentation" is an oft heard complaint. But according to Wein, it is a very "vexatious" area in that sometimes franchisors do provide training, but if a franchisee is unsuited to the enterprise, than no matter how much training is given the business may fail. "Sometimes a franchisee lacks a competence, lacks the ability, doesn't want to learn, and doesn't want to devote full time and attention. And some of these issues of misrepresentations are in fact, misrepresentations in reverse that the franchisees themselves need to be responsible for," Wein says. "Misrepresentation shouldn't be used as a sword to swing that disguises a franchisees failure to do their own due diligence."

Another area of dispute is "unconscionable conduct", one of those catch-all phrases whereby essentially if there is a person or party involved in the transaction that has a special disadvantage and that is taken advantage of by the other party. There are legal definitions, but it is a very grey area, Wein says. Possible examples would be agreements made where there were some language difficulties, comprehension problems or a psychological impairment of some sort.

Another area of dispute is often the head lease, as outlined in the agreement. In most circumstances the head lease is usually in the name of the franchisor with the franchisee either guaranteeing it or signing a sublease for the premises. "So if the business does go bad for whatever reason, there is a potential liability that's not only hinging on the franchise agreement, there is also potential liability with regard to the occupancy - which can be an enormous liability."

Mediation
The key word when it comes to resolving disputes between franchisees and franchisors is mediation. If a dispute arises, the Franchise Code of Conduct provides that the parties must first try to resolve their matter through an alternative dispute mechanism rather than running off to the courts.

According to Wein, not only must both parties seek resolution first outside of the courts, but it is a preferable solution. "Mediation provides the parties with the most efficient and low cost form of self determinative justice available to them," he says. "Because if they're unable to resolve their dispute and they run to court they'll have a decision imposed upon them by a judge and they lose their right to self determination. Also there is enormous legal risk in any litigation. And there's the cost involved and time spent away from your other business activities."

Parties can have a mediation organized within several weeks to a month, whereas litigation can take many months even a year or longer to lodge the papers, do the discovery, make the statement of claim, lodge a defense and lodge counter claims, et cetera. What happens to the business relationship and franchise in that time? "It just deteriorates," Wein says.

Expectations
Sitting around table to hammer out a dispute is very different from walking into a courtroom. A positive end result hinges on both parties ability to come into the process with a willingness to listen. "If they do come in with a predetermined mindset they won't actively listen to the other party and they won't be open to options of how to resolve the matter, not only from the other side, but from the other people engaged in that process including myself," Wein says. "Try and understand that the other side has a story as well. Once they've heard all of that, then they can form a view of what's in their widest possible interest."

"Widest possible interest" is an interesting concept. In litigation, parties focus on legal right and issues. But in mediation, while legal rights and issues are considered, the resolution must be balanced by what's in their commercial interest.

Wein describes it as opportunities that may be lost and foregone by both parties by continuing in an unresolved dispute - issues such as relationships, reputation, time and involvement and distraction due to the dispute, the stress and anxiety that results from being in a dispute, the need to getting certainty and minimizing legal risks. "So therefore the definition of what's in their widest possible interest is far greater than perhaps a litigation can provide them, because in mediation it's the parties themselves that make the final decision, not me as a mediator, not their lawyers," Wein says, adding that it is part of his role to help the parties understand what is their widest possible interest.

Due diligence
There are strict rules and guidelines that apply under the Franchise Code of Conduct and parties need to be aware of the Trade Practices Act, the Fair Trading Act and the Small Business Commission Act which all attempt to provide a fair commercial playing field.

But the presence of regulation doesn't prevent a franchisee from making an imprudent decision and going into a franchise that they're not suited for, which is not a misrepresentation of a franchisor, warns mediation specialist Alan Wein.

Prior to signing the franchise agreement, the franchisee must sign a certificate proving that they have received independent legal advice and financial advice. If they choose to ignore so than they do so at their own peril, Wein says. "I've been involved in a number of hearings over the years and franchisees have been given advice by their advisors and ignored it, so where's the responsibility in that scenario?"

According to Wein, the best possible way to avoid mediation or litigation is to do your due diligence. "My opinion is that it doesn't matter how good you believe you are or how proficient you believe you are in understanding agreements, always seek professional advice," he says. "You can't afford not to go to a lawyer or an accountant to get good advice. They will tell you what to look for and what to ask for."