Regulatory and representative bodies in Australian franchising
3.23 Following is a list of the regulatory and representative bodies for the franchising sector in Australia who were involved in this inquiry.24
Australian Competition & Consumer Commission (ACCC)
3.24 The ACCC is an independent statutory authority responsible for enforcing the Trade Practices Act 1974 as it applies to the franchising sector. Its role is to ensure compliance with the Franchising Code of Conduct (the Code) and the TPA through education, liaison and, where necessary, enforcement action. To this end, it develops educational and compliance materials such as guidelines, articles and fact sheets, and gives presentations in each state and territory.25
Office of the Mediation Adviser (OMA)
3.25 The OMA is a government funded body established in 1998, when the Code first came into effect. The role of the OMA is to appoint mediators to assist franchisors and franchisees in resolving their disputes without going to court.26 However, franchising parties in dispute do not have to use an OMA mediator; they can use an alternative mediator if both parties agree.
3.35 Part 4 sets out the procedures for resolving franchising disputes. The Code states that mediation must take place where a dispute cannot be resolved between the parties themselves and either party refers the matter to a mediator. The mediation adviser, appointed by the Minister in accordance with section 25 of the Code, appoints a mediator of their choice where the parties cannot agree to a mediator on their own. The parties (or their representatives) must attend mediation to attempt to resolve the dispute, though no requirement to participate in good faith exists within the Code. If, after 30 days of unsuccessful mediation, either party asks the mediator to terminate the mediation, this must occur. The Code does not provide for the mediator to make a determination about the merits of each party’s case in the event of failed mediation. (Trade Practices (Industry Codes – Franchising) Regulations 1998, sections 24 to 31, pp. 24-26)
Other mandatory industry codes
3.45 Two other prescribed mandatory industry codes have been established under section 51AE of the Trade Practices Act 1974 (TPA). They are the Oilcode and the Horticulture Code.
3.46 The Trade Practices (Industry Codes – Oilcode) Regulations 2006 (the Oilcode) came into effect on 1 March 2007. It operates as a mandatory industry code under section 51AE of the TPA and replaced the repealed Petroleum Retail Marketing Sites Act 1980 and Petroleum Retail Marketing Franchise Act 1980.43
3.47 The Oilcode regulates the conduct of suppliers, distributors and retailers in the downstream petroleum retail industry. It was implemented to establish the following:
• consistent and transparent approaches to terminal gate pricing and fuel re-selling agreements;
• standard contractual terms for supplier-retail re-selling agreements; and
• an independent dispute resolution scheme.44
3.48 As with the Franchising Code of Conduct, the ACCC is responsible for administering the legislation under which the Oilcode operates. The Oilcode’s effectiveness is also monitored by the ACCC.45
3.49 The most relevant aspect of the Oilcode to this inquiry is the dispute resolution scheme. Under section 41 of the Oilcode, the Minister is required to appoint a Dispute Resolution Adviser (DRA). This person must arrange mediation or other assistance where the relevant parties cannot resolve the dispute themselves and is granted the authority to make a non-binding determination about the dispute.
Section 45(1) also stipulates that mediation and assistance provided in accordance with the Oilcode must be carried out in good faith.
3.50 These dispute resolution processes do not restrict parties to the dispute from making direct complaints to the ACCC or pursuing litigation.47
3.51 The Trade Practices (Horticulture Code of Conduct) Regulations 2006 (the Horticulture Code) came into effect on 14 May 2007. It regulates participants in the horticulture industry and was implemented to achieve the following objectives:
• provide greater clarity and commercial transparency between growers and wholesale traders; and
• establish a dispute resolution scheme.48
3.52 The dispute resolution procedure provisions stipulate the circumstances in which a mediator may be appointed to resolve disputes. In contrast to the Oilcode, the Horticulture Code does not oblige the parties to mediate in good faith, and the appointed mediator may terminate the mediation if it is unlikely to resolve the dispute. (Trade Practices (Horticulture Code of Conduct) Regulations 2006, section 36).
The Mediation Process
Existing mediation provisions
7.9 As previously outlined in paragraph 3.34, Part 4 of the Franchising Code of Conduct (the Code) sets out mediation procedures to be followed in resolving franchising disputes. Parties are initially obliged to try to agree about how to resolve a dispute but, in the event that they cannot, may refer the matter for mediation. When either party seeks to put a mediation process in place, section 29(6) states: ‘The parties must attend the mediation and try to resolve the dispute’.5
7.10 Parties may agree to appoint a particular mediator. Where they cannot agree, either party may approach the Office of the Mediation Adviser (OMA), which will then appoint a suitably qualified and experienced mediator.6
7.11 The Department of Innovation, Industry, Science and Research (DIISR), which has responsibility for providing policy advice on franchising to the Minister for Small Business, Independent Contractors and the Service Economy, submitted the following information to the committee regarding the current operation of the OMA:
OMA statistics indicate that around 75 per cent of mediations conducted through the OMA result in a binding settlement.7 Under the terms of the Government contract with the OMA, the maximum fee for the mediator is $275…per hour. The cost of the mediation is shared between the parties involved (unless otherwise agreed). On average, mediations cost each party approximately $1,500 and average completion time after the appointment of the mediator is five weeks.
7.13 The Department also provided information on the level of activity of the OMA:
The latest report from the OMA indicates that the OMA has received around 3,064 dispute enquiries since 1 October 1998. Over the same period, 919 appointments were scheduled with mediators. The number of dispute enquiries received by the OMA each year is generally stable, averaging around 365 enquiries each year since 2002. This is despite the growth of the franchising sector over the same period. The largest number of dispute enquiries relate to the retail trade industry, including motor vehicle, fuel and food retailing.10
7.14 It identified ‘Terms of Termination/Exit Arrangement’ as the most frequently mediated issue and further noted that: ‘The majority of the referrals to the OMA are from the ACCC, solicitors and industry representatives (such as the Franchise Council of Australia)’.11
7.15 The lower number of referrals from franchisees is inconsistent with claims in franchisee submissions to the committee that there is significant disputation in the sector. This is likely to reflect a combination of lack of confidence by franchisees in mediation processes (discussed further below); use of mediators other than those appointed by the OMA; and the establishment of internal dispute resolution mechanisms in some franchise systems.
OAAL put forward a number of reasons why franchisees might choose not to engage in mediation through the OMA, including fear of retribution; potentially high costs; a sense that franchisors are unlikely to engage in meaningful negotiation; and the possibility that franchisors will draw out the process in order to pressure the franchisee into giving in to franchisor demands.
7.27 It is difficult to assess the efficacy of current mediation provisions in the Code in the absence of a reliable understanding of the true extent of disputation in the sector. The committee therefore recommends that the government require the Australian Bureau of Statistics (ABS) to develop mechanisms for collecting and publishing statistics relating to the franchising sector, with a focus on franchise disputation and dispute-related franchisee turnover, using information collected from both franchisees and franchisors. This may be appropriately undertaken as part of existing business surveys, or as a new survey directed at the sector only.
In light of these comments, the relatively high settlement rate cited for the
OMA mediations is potentially misleading. The blunt settlement figure provides no indication either about the relative satisfaction of the parties with the mediation outcome, or whether the mediation outcome subsequently occurs. According to Mr Robert Gardini:
…the high settlement rate of motor vehicle dealer disputes under mediation is not representative of a high rate of dealers receiving equitable resolutions to their disputes. Although mediation is being sought more frequently by dealers, this is merely indicative of their inability to seek adequate redress in the court system, and not a testament to the effectiveness of the settlement process. It should not be forgotten that ‘settlement’ can encompass…any one scenario on a continuum of outcomes, including (at best) the circumstance of a satisfactory outcome for both parties, to the more realistic results whereby a dealer is reluctant but can live with the terms of the settlement, and finally (arguably the most common outcome) where a dealer has little choice but to accept any offer in the absence of either adequate legal redress or the ability to fund costly legal proceedings.
Committee of the South Australian Parliament.41 Mr Tony Piccolo MP, representing the Economic and Finance Committee, told the committee:
The current code requires you to attend mediation. It does not require you to attend mediation in good conscience or in good faith. Unfortunately, in reality that is how it is treated in practice. It requires you to participate in a process. If you drag the process out as a franchisor your position to bargain with the franchisee is strengthened. You weaken their position even further than it is already. There has to be some discussion about good faith dealing
Alternative dispute resolution mechanisms
7.57 Having regard to both the limitations of mediation as it currently exists and the high, often prohibitive, costs of litigation, many submitters and witnesses asked the committee to consider the introduction of alternative dispute resolution mechanisms in franchising. Suggestions put forward included an increased focus on pre-mediation strategies; the creation of a tribunal to make determinations; or the introduction of a franchising ombudsman.
7.59 This notion was supported by POAAL, who cited the example of how they have negotiated an internal mediation process with their franchisor on behalf of their members:
A better model is a dispute resolution process involving a stepped process with early discussion and resolution at lowest management level. This includes provision for higher referral if the dispute is not resolved quickly and to the satisfaction of both parties. Such a system was established through negotiation…by POAAL
7.60 The committee received some suggestions that a low-cost tribunal be introduced to sit above the current mediation process, to make determinations on disputes without the need for recourse to litigation, a tribunal would have the power to make a decision in cases under a certain threshold.
A franchising ombudsman
7.66 The committee received suggestions that the introduction of a franchising ombudsman may assist in dispute resolution:
I would have thought there is a role for an industry ombudsman. There needs to be someone who by their experience and the authority of the position can attempt to have some influence.
Prohibitive costs of independent litigation
9.24 A recurring theme in submissions to the committee was that the expense of litigation, including time, severely limits the ability of many franchisees to take independent legal action even when they are confident of demonstrating clear breaches of the Code. Some submitters also put forward their belief that franchisors, or their legal representatives, deliberately draw out legal proceedings in order to exhaust any funds the franchisee may have available to finance the action. For example:
Given that many franchisees are in a parlous financial situation, they have virtually no recourse to private action against a large company. And in many cases, when a franchisee has commenced suit…the large franchisor practises delaying tactics until the franchisee can no longer afford the legal fees, and in some unfortunate cases, has had to sell their property and even declare bankruptcy.25
9.25 Mr Scott Cooper wrote:
The gaping void…is the undeniable fact that the legal system is out of reach for the vast majority of franchisees. Most franchisees are not adequately resourced personally, emotionally or financially to confront a well financed and well practiced franchisor by engaging the legal system…All too common with the law, it is not the person with the strongest case that succeeds in litigation, but the person with the deepest pockets.26
9.26 These sentiments were echoed by Ms Nicole Hoy:
I believe based on my experience with the Office of Mediation Advisors [sic], the ACCC and the legal system, that until there is a method put in place that can provide affordable and immediate relief, it is near impossible for the average franchisee to enforce their rights under their agreement or under the code. The average franchise agreement is usually 5 years. The average franchisee is a small business operator with limited resources. Justice is simply out of reach.