Conduct

Review of Franchising Code of Conduct

Submission by the National Alternative Dispute Resolution Advisory Council
This submission addresses the questions raised in Discussion Paper No 1 relating to the dispute resolution provisions of the Franchising Code of Conduct (the code).

Q1. Has the code's dispute resolution process led to an increase in parties adopting mediation over litigation?
As there are no statistics available on the use of litigation and mediation in relation to franchising disputes, both before and after the introduction of the code, there is no definitive answer to this question. NADRAC notes that the survey found that more franchisees and franchisors resolved their problems through discussion and mediation as opposed to legal or court action. This may suggest that it is likely that there has been an increase in the use of mediation to resolve franchising disputes. However, it can be stated no more strongly than that.

Q2. Is the code's dispute resolution process providing a generally less expensive and speedier outcome than litigation?
It is the experience of those members of NADRAC who have mediated franchising disputes that these types of disputes can include:

• franchisees who are in financial difficulty and simply want to get out of the franchising agreement. They cannot afford litigation and certainly do not want the keep the agreement on foot;
• family situations, where a parent has funded his or her child into a franchise. In these disputes broader family issues can arise;
• parties who want to keep the agreement on foot and re-negotiate it for the future;
  disputes that involve other parties eg landlords;
• a dispute between a franchisor and a particular franchisee which can have flow-on effects for other franchisees; or
• a combination of any of the above.
  

These few examples highlight the variety of different scenarios that can be encountered in franchising disputes and the many complexities that can be involved. NADRAC is of the view that mediation is well-placed to deal with these types of disputes because it has the potential for dealing with future relationships, and it allows for multiple parties and/or multiple interests, which can escalate costs and complexity.

However, on the question of whether mediation under the code is providing generally lower costs and speedier outcomes, NADRAC considers that the number of mediations to date is insufficient to draw general conclusions about this aspect of franchising disputes.

It is going to be difficult to address questions 1 and 2 at a later time without adequate research and data collection to establish benchmarks against which the information they seek can be measured.

Q3. Are there any aspects of Part 4 of the code that require clarification? Could the wording of this section be improved?
The code has been in operation since 1 October 1998. There is insufficient information upon which to base any changes to the code. Suggestions for improvement should preferably be based on information gathered over a longer period of time. It is suggested that the code provisions be kept under review.

Q4. Should there be a requirement to mediate in good faith?
This is a matter of some debate within the ADR community. The issues raised by this complex question include:

• the impact on the role of the mediator;
• the parties' perception of the mediator;
• the meaning of the term 'good faith; and
• any added obligation of the mediator to report.

There has been extensive case law developed on the meaning of 'good faith' in contract law and more recently in the specific area of mediation. There are also some legislative provisions in this area. A few examples include:

• under the Farm Debt Mediation Act 1994 (NSW), the parties are required to 'mediate in good faith' or take part in mediation in good faith' (section 11). Farm debt mediation appears to have worked well under this regime. There are similar requirements on parties to a mediation in other jurisdictions:
• under the Uniform Civil Procedure Rules 1999 (Queensland), parties are required to 'act reasonably and genuinely in the mediation' (rule 325) and a party is taken to impede an ADR process if he or she 'fails to participate in the process' (rule 322); and
• in the Co-operative and Community Housing Act 1991 (South Australia), parties seeking to exercise appeal rights are required to have 'made a genuine attempt to have the dispute resolved through a prescribed mediation or conciliation process' (Section 84(3)).
  

The aim of a provision requiring parties to participate is to change their mindset before the mediation, and not to allow it to be used to put undue pressure on the parties during the mediation.

In the case of franchising NADRAC is aware that some parties are frustrated by having to undergo mediation. It is easy for a party to request mediation and then not participate. This strategy could be used to cause delay, impose extra costs on the other party or simply frustrate attempts at meaningful discussions.

On balance NADRAC is of the view that there is some value in making parties participate fully so as to allow constructive discussion. However, NADRAC does not favour the use of the term 'in good faith' because of its legalistic overtones. A formulation that is more in line with the South Australian provision previously referred to appears preferable.

NADRAC opposes any requirement that the mediator should be required to certify that the parties made a genuine attempt to mediate. Any attempt by the mediator to justify certification could raise questions of the protection of confidentiality, and may undermine his/her neutrality. Care needs to be exercised in using terms of expression that may give rise to expectations that substantive rights are being created.

Q5. Is the current requirement for mediation adequate, or should the code allow for other forms of ADR?
NADRAC is of the view that it is sufficient for the code to refer to mediation as the principal method of mandated dispute resolution as this is most appropriate process in the franchising context. However, NADRAC notes that a concern was expressed by small business in its comments to the Small Business Review of Access to the Legal System, that they sometimes needed a quick, relatively inexpensive and final decision.

One of the benefits of the mediation process is that where the parties cannot agree to a resolution, the mediation may go some way to isolating the main issues in dispute. However, where parties cannot resolve the dispute by mediation, they may agree at the mediation to a determinative dispute resolution process instead of proceeding to litigation. Where resolution cannot be reached, the mediator should inform the parties of other available processes.

One possible process is a type of 'case stated'. The parties could produce in writing a set of agreed facts and list those questions to be determined as part of the mediation or immediately following. The papers are considered by a decision-maker with experience in the franchising area, who makes a decision on the matters as stated by the parties by reference to the papers alone. Parties could agree on the person used, or the Office of the Mediation Adviser could appoint an independent person. The costs of the process could be agreed upon, shared between the parties or decided by the decision-maker. It would be a voluntary, quick, and relatively inexpensive additional option available to the parties, who could also agree to be bound by the decision.

Q6. Can the Commonwealth restrict the rights of parties to a franchise agreement to take legal proceedings while the parties are engaged in a ADR process?
NADRAC notes that the farm debt mediation legislation in New South Wales prevents the mortgagee from taking action under the mortgage without first engaging in a satisfactory mediation. This has encouraged parties to get together to resolve disputes. Similarly, consideration could be given to a provision which requires the parties to enter into a mediation process before enforcing the provision of a franchising agreement. This would not prevent a party from taking legal action for fraud, duress, unconscionable conduct or the exercise of rights under relevant legislation. In the end the parties, either through the code or through the courts, will be given the opportunity to use mediation to resolve their dispute.

General Comments
The success of mediation depends on the mediation process being conducted according to relevant and applicable standards The procedures that are used play an important role in allowing the parties to have all relevant information to assess their options and to ensure that they have an opportunity to have their say in an effective way. The preparation of a matter by the parties prior to mediation is a critical part of the process. Key matters that must be addressed include providing accurate advice on the process, encouraging full disclosure by the parties, and ensuring an exchange of written information in the correct form and in accordance with the agreed timetable. As users of franchising mediation emphasise the importance of providing a low cost process, it is not appropriate for mediators to take on this role. Consideration could be given to requesting OMA to facilitate this preparatory stage.

NADRAC understands that the Office of Mediation Adviser evaluates the mediation process by seeking feedback from mediators and parties. However, an independent survey of mediators who have conducted mediations under the franchising code might be warranted to ensure that the mediation process is functioning as effectively as it can for franchise disputes.