“Moving deck chairs on the Titanic”: Legal headaches as franchising reforms flounder

Australian franchisees risk being left without meaningful reform to dispute resolution practices if long-running disagreements about access to justice in the scandal-plagued franchising sector aren’t resolved, experts have warned.

The body tasked with investigating options for an overhaul of the $182 billion franchising sector released a 48-page regulatory impact statement yesterday, canvassing a range of reforms recommended by the parliamentary committee inquiry into franchising earlier this year.

But proposed changes to dispute resolution practices have raised eyebrows among consultation participants, amid longstanding criticism the status quo favours powerful franchisors.

Under current franchising rules, the Australian Small Business and Family Enterprise Ombudsman (ASBFEO), state small business commissioners and private providers offer franchisees non-court dispute resolution services, such as mediation.

Earlier this year, legislators, finding mediation had failed many franchisees, recommended investigating introducing binding arbitration into the franchising code, but the government’s franchising taskforce says it has identified a “potential policy problem” that may derail these plans.

Identified as “complex legal considerations”, the introduction of arbitration powers into the franchising code raises potential constitutional headaches around the jurisdiction of the courts and separation of powers.

The taskforce has floated several other options for improving dispute resolution without introducing arbitration into the code, including officially merging the Office of the Franchising Mediation Advisor (OFMA) into ASBFEO and strengthening third-party involvement in dispute resolution.

But University of Sydney lecturer and former OFMA Derek Minus says that option would be akin to “moving deck chairs on the Titanic”.

“[It creates] the appearance of useful activity that has little chance of addressing the real problems identified in the committee report, which are preventing the delivery of fair, timely and cost-effective dispute resolution,” Minus tells SmartCompany.

Constitutional headaches?

Both Minus, a known advocate for arbitration, and small business ombudsman Kate Carnell, have argued the federal government should move ahead with arbitration.

Carnell tells SmartCompany the OFMA is already effectively integrated into ASBFEO’s franchisee assistance functions, and that arbitration is needed to restore franchisee confidence in dispute resolution.

“The problems come when either side, but particularly franchisors, aren’t willing to mediate in good faith,” Carnell says.

“There needs to be an arbitration type of operation that isn’t about lawyers at 20 paces.”

Carnell notes constitutional concerns about building an explicit arbitration function into the franchising code, saying the reforms will likely require separate legislation to implement.

“There are ways to do it, and we know how to do it,” Carnell says.

Australia’s food and grocery code already has an arbitration function, but that piece of regulation is voluntary, which allows the sector to avoid potential constitutional issues, as noted by a 2018 review. The franchising code is not voluntary.

“Arbitration is crap”

Others are urging the taskforce to embrace an entirely different solution. Jenny Buchan, a UNSW Business School professor and franchise law expert, says neither arbitration or mediation will deliver access to justice for franchisees.

“Arbitration is crap,” Buchan tells SmartCompany.

“It can be extremely expensive, and it’s almost impossible to appeal an arbitral decision.”

Instead, Buchan is calling on the taskforce and the federal government to reconsider its entire approach to overhauling the sector by introducing separate franchising legislation.

“[The taskforce] hasn’t once mentioned the possibility of independent franchise legislation, which is the approach of most countries around the world that have franchise regulation,” Buchan tells SmartCompany.

“The current regulation has been in place for 21 years and it has failed. Franchising is now sophisticated and it deserves a sophisticated approach.”

Buchan says it appears the Coalition isn’t taking franchising reform seriously enough.

“They still seem to believe the market will sort things,” Buchan says.

“No effective change”

Minus has also criticised the government’s approach, saying the prospect of franchising reform risks being derailed if arbitration is not introduced.

“What’s most likely going to happen is nothing,” Minus says of the reform process.

“Things will change, but the result will be no effective change.”

Minus, a critic of the taskforce, is concerned the government will adopt an option that would require dispute resolution processes to be included in franchise agreements, which he argues would deliver more of the same for franchisees.

“Very little will come out of this taskforce that will improve the opportunity of the franchisees who have been duped,” Minus warns.

Consultation on the regulatory impact statement will run through to December 6, businesses are invited to participate with their own views.