Disputes that arise about contractual arrangements are not uncommon in small business, writes Dr. Michael Schaper, deputy chairman of the Australian Competition and Consumer Commission. These types of disagreements often start with a simple misunderstanding about each partyÕs rights and obligations under the contractual arrangements they have entered into. The result can be an expectation gap between the parties. If a misunderstanding escalates to a dispute, it often leads to an allegation of ÔI have been misledÕ.

The franchising sector is one area where numerous complaints are received by the national franchising regulator, the Australian Competition and Consumer Commission (ACCC). During the last financial year the ACCC received more than 500 franchising complaints, and more than a quarter of these related to contractual disputes.

Based on our experience, the ACCC recommends some simple steps which franchisees can take when attempting to resolve a dispute with their franchisor. Using this framework may mean you can avoid the substantial time and stress that is often associated with drawn out contractual disputes.

If you feel you have been misled, your first step should be to contact your franchisor to try to resolve the matter. Opening up the lines of communication between you and your franchisor can often work to bridge any expectation gap that may have developed. If your dispute is a simple misunderstanding then talking directly with your franchisor will likely be the quickest and most effective way to resolve the matter.

If your discussions with your franchisor do not lead to a mutually acceptable outcome there are formal dispute resolution processes available to you both.

The Franchising Code of Conduct provides a choice of procedures for formally resolving disputes about franchise agreements. Firstly, franchise agreements must set out an internal complaint-handling procedure for the franchise system.

Secondly, there is a code complaint-handling procedure. These are designed to assist franchisees and franchisors to avoid potentially costly and time-consuming legal action. You can choose to use either or both of these procedures.

Code procedure The initial steps to follow when using the code complaint-handling procedure are:

• You must inform your franchisor in writing of the dispute, outlining the nature of the dispute, what outcome you want and what action you believe will settle the dispute,

• You and your franchisor should then try to agree on a way to resolve the dispute, and

• If you cannot agree within three weeks on how to resolve the dispute, either party may refer the dispute to a mediator.

The Office of the Mediation Advisor (OMA) can appoint a mediator on request.

See http://www.mediationadviser.com.au for further information.

Mediation is usually much faster and cheaper than court action. Around 75 per cent of mediations conducted through the OMA result in a binding settlement that both parties are prepared to live with. If mediation is not successful and you believe there is evidence that you have been misled or deceived, you may then consider making a complaint to the ACCC. If you are considering this approach, you should keep in mind that the ACCC can only take action if a contractual dispute involves a clear breach of the Franchising Code of Conduct or the Trade Practices Act 1974.

When the ACCC receives a complaint it assesses it against a number of criteria. Most importantly, if the ACCC decides to take action it must ultimately be able to prove its case in a court of law. Therefore, we prioritise the matters we investigate to focus on those where we have reasonable prospects of success. These are generally matters where there is sufficient and credible evidence to support the complaint; the subject of the complaint is an issue of law, rather than of a personal dispute or grievance, and the matter is more appropriately addressed by the court than by mediation.

While the ACCC encourages franchisees to follow the above framework for dispute resolution, prevention will always be better than the cure. In the ACCCÕs experience, a number of the franchisees that encounter contractual disputes have not sought professional advice, or conducted enough research, before entering the franchise system.

Prospective franchisees can help themselves by doing their homework. This includes verifying the franchisorÕs claims (or “representations”) wherever possible. Seeking legal, accounting and business advice from professionals with franchising experience when considering entering a franchise system may assist you to avoid experiencing an expectation gap with your franchisor down the track.

Another good way of checking out whether a franchisorÕs representations are accurate is to contact existing and past franchisees.

It is also wise to prepare a business plan and critically assess the franchise agreement and financial promises. You should carefully check any earnings claims made to determine whether they are achievable.

Finally, if these representations are made verbally, ask the franchisor to confirm them in writing. This will avoid any misunderstandings later, and could even act as evidence if a complaint is made or the parties end up in court. If you think you may be heading into a serious dispute with your franchisor, or are unsure about your rights, you should also seek out independent legal advice, as well as looking at the extensive background information available on the ACCC website (www.accc.gov.au).