Conflict Resolution in Franchises
This article was written by Mark Sherry and was first published in the Business Franchise Australia and New Zealand magazine, and has been reviewed and updated in April 2020.
Operating a franchise business in the current competitive environment is difficult enough without having the extra stress of having to resolve a dispute with your franchisor. Disputes can arise within a franchise system for many reasons, some of them can be trivial and triggered simply because of personality clashes, whilst others can be quite major. In recent times, the writer has been involved in several disputes between franchisors and franchisees. Issues involved have included:
- A franchisor changing supplier of products so as to obtain for themself a larger supplier rebate, whereas the franchisee saw the new product being supplied as inferior and harder to sell to customers.
- Issues surrounding the franchisor moving to open a new franchise operation where the franchisee felt that the new outlet was going to be too close to their existing operation and would have a significant detrimental impact on it.
- A funding offer by a franchisor to assist a franchisee with a fit out upgrade was arbitrarily withdrawn.
Issues such as these are distracting and extremely stressful. They also create a division in a relationship that is supposed to be ‘win-win’. Ongoing relationships between franchisor and franchisee can be permanently affected in a negative way if such matters are not dealt with constructively. It can also have a detrimental effect on the value of a franchisee’s business.
In New Zealand there is no duty of good faith implied into franchising relationships by statute. Therefore, unless such a duty is actually built into a franchise agreement, and in the writer’s experience this is not common, then franchisors can legitimately make decisions that can negatively affect an individual franchisee simply because such decisions are of commercial benefit to the franchisor. There needs to be the ability to deal with issues that arise in a proactive and dispassionate way. Each party needs to be constructive in the way they deal with the other and they need to be open to considering opposing viewpoints if they are to successfully negotiate their way through the issue at hand.
There is no legislative procedure to follow for resolving disputes between franchisors and franchisees in New Zealand. However, if a franchise system has voluntarily joined the Franchise Association of New Zealand (FANZ), then such systems are bound by the Code of Ethics and Code of Practice espoused by FANZ as best practice. The Code of Practice contains a comprehensive dispute resolution clause which effectively provides that parties will meet together to attempt to resolve a dispute by mutual negotiation. If they are unable to achieve this, they will then attempt mediation using a process prescribed within that code. This normally involves meeting with an independent facilitator to discuss the issues, identify all matters of importance, look for possible solutions and then, if all goes well, settling on a solution that best works for both sides. If mediation fails, then there is the ability to seek resolution through the courts.
For those franchise systems that are not members of FANZ, the process to follow in a dispute is often set out within the franchise agreement. In many instances, it provides for an initial discussion about the matter in dispute, followed by a mediation process and then, potentially arbitration or litigation. Arbitration is process where the parties agree on an arbitrator (often an expert in the area where the dispute has occurred) to resolve the issue after hearing arguments from both sides. The arbitrator has the power to resolve the issue and make orders much as a judge would if the matter had gone to court.
The difference between a franchise system that is a member of FANZ and one that is not, is that the code of practice for a FANZ affiliated franchise system includes rules around the standards of conduct between parties. One party is not able to cause significant detriment to another party’s business where their action could be considered unnecessary or unreasonable. There is also a positive obligation to act in an ethical, honest and lawful manner. Whilst this falls short of a “good faith” obligation, it does provide for a greater balance where a franchisee feels that a franchisor holds the position of power.
Whatever the situation, if a dispute arises between franchisor and franchisee, it is important to approach the issue, where possible, with the intention of resolving it in a manner that will enable all parties to continue to have a constructive relationship in the future. To do otherwise means that even if the issue itself is resolved, the ongoing relationship can be permanently affected in a negative way, and this in turn can lead to ongoing stress that impacts on productivity and profitability.
It is important in scenarios where a franchisee feels that there is a power imbalance or that they are generally not good at dealing with conflict, that they instruct a lawyer with good franchise knowledge and dispute resolution skills to assist them in their time of need. Where possible such advice should be sought as soon as it appears that the issue may not be able to be resolved by mutual agreement. In many instances it is helpful to seek some brief advice prior to any meeting being held to try and informally resolve an issue as good franchise lawyers will have significant experience in how disputes can best be resolved.
A franchisee will find that by seeking proper advice in the early stages of a dispute that they are likely to save a lot of time, cost and angst. The later in time that a lawyer is introduced to assist in resolving a dispute, the more difficult it can be for them to reach an outcome in a cordial manner that is also mutually satisfactory, as parties can already have acted in a way that makes it more difficult to recover a constructive ongoing relationship.