Managing Franchise Disputes: Prevention, Resolution, and What the Code Requires

Conflict in franchise relationships is not unusual. Two parties with different perspectives, different pressures, and different expectations are bound to disagree at some point. That's not a sign of a broken system — it's a reality of any commercial relationship.

What matters is how disputes are managed — and whether you've built a franchise system with the processes, the culture, and the leadership to deal with problems before they escalate. For early-stage franchisors in particular, understanding this is critical, because your approach to conflict will shape the health of your entire network.

Where franchise disputes come from

Most franchise disputes don't come out of nowhere. They build over time, often rooted in one or more of these areas:

Mismatched expectations. The franchisee expected more support, more marketing, more hands-on involvement from the franchisor. The franchisor expected the franchisee to be more self-sufficient, more compliant with the system, more engaged. If expectations weren't clearly set during recruitment and onboarding, this gap will widen.

Financial pressure. A franchisee whose business is underperforming will eventually start questioning the value of what they're paying for. Late or missed royalty payments are often a symptom of deeper financial stress, not just poor discipline. Conversely, if the franchisor isn't delivering tangible support and development in return for those fees, the franchisee's frustration is legitimate.

Inadequate support or training. Franchisees pay royalties in exchange for ongoing access to systems, training, and brand development. If that support is perceived as lacking or inadequate — particularly in the early stages when a franchisee is finding their feet — resentment builds quickly.

Communication breakdowns. Many disputes that end up in formal processes could have been resolved with a timely phone call. Poor communication — or no communication — from either party is one of the most common accelerants of franchise conflict.

A business model that doesn't work for both parties. This is the most fundamental issue. If the franchise model isn't structured so that both the franchisor and the franchisee can be profitable, problems are inevitable. A franchise system where only one side is doing well is not a sustainable system — it's a dispute waiting to happen.

Dispute resolution under the Franchising Code of Conduct

In Australia, franchise dispute resolution is governed by the Franchising Code of Conduct, which sits under the Competition and Consumer Act 2010. A new Code came into effect on 1 April 2025, with some provisions taking effect from 1 November 2025. The dispute resolution framework has been updated, and franchisors need to be across the current requirements.

The Code sets out a structured process for resolving disputes:

Step 1: Internal resolution. Either party raises the dispute in writing — a formal notice of dispute — outlining the nature of the issue, the desired outcome, and a timeframe for resolution. Both parties then have 21 days to attempt to resolve the matter between themselves.

Step 2: Alternative dispute resolution (ADR). If the dispute can't be resolved within 21 days, either party can refer the matter for alternative dispute resolution. This is typically mediation — where an impartial third party facilitates negotiation between the parties — or conciliation, where the practitioner takes a more active role and may offer recommendations. Under the updated Code, arbitration is also available if both parties agree in writing.

Step 3: Court proceedings. If ADR doesn't resolve the dispute, either party may commence court proceedings. Either party can also refer the matter to the ACCC if they believe there has been a breach of consumer law or the Franchising Code.

The role of the ASBFEO

The Australian Small Business and Family Enterprise Ombudsman (ASBFEO) is the body responsible for helping franchisors and franchisees access ADR services under the Code. If the parties can't agree on an ADR practitioner, the ASBFEO can appoint one — and must do so within 14 days of receiving the request.

Under the 2025 Code, the ASBFEO has also been given expanded powers, including the ability to publicly name franchisors who fail to meaningfully engage in the ADR process. This "name and shame" provision applies to agreements entered into from as far back as January 2015, so it has retrospective reach. It's a significant shift that raises the stakes for any franchisor who doesn't take dispute resolution seriously.

Once a dispute has been referred to ADR, both parties are required to attend and participate in good faith. Refusing to participate is a contravention of the Code. However, there is no requirement for ADR to result in an agreed outcome — it's a process, not a guarantee.

Why mediation beats litigation

Mediation remains the most common and most effective form of ADR in franchise disputes. It's faster, significantly cheaper, and far less adversarial than going to court. Historical data from when the Office of the Franchising Mediation Adviser was operating (now folded into the ASBFEO) showed settlement rates of around 85% for mediated franchise disputes.

Litigation, by contrast, is expensive, slow, and damaging to the franchise relationship — which is usually beyond repair by the time it reaches court. It also consumes management time and energy that should be going into running the business. For most franchise disputes, mediation should be the preferred pathway.

Other changes in the 2025 Code that affect disputes

The 2025 Franchising Code introduced several other provisions that are directly relevant to how franchise conflicts arise and are managed:

Reasonable opportunity for return on investment. Franchise agreements entered into from 1 November 2025 must give franchisees a reasonable opportunity to earn a return on any investment required by the franchisor. This doesn't guarantee profits, but it creates a new standard that franchisors need to build into their financial modelling and agreement terms.

Compensation for early termination. If a franchisor terminates a franchise agreement early in certain circumstances — such as exiting the Australian market or redefining territories — they may now be required to buy back stock, equipment, and branded merchandise. This provision applies to agreements entered into from 1 November 2025.

Increased civil penalties. The 2025 Code introduced higher penalties for non-compliance. Failure to disclose materially relevant facts, for example, can attract penalties of at least $10 million. Non-compliance with obligations like the duty to act in good faith carries penalties of 600 penalty units (currently around $198,000).

These changes collectively raise the bar for franchisors. Understanding them is not optional — it's essential to running a compliant franchise system.

Prevention is better than resolution

The best franchise systems don't just have good dispute resolution processes — they have a culture that minimises the need for them. That starts with:

Rigorous franchisee selection. Many disputes originate in a poor recruitment decision. If you select franchisees who aren't the right fit — wrong skills, wrong temperament, wrong expectations — you're setting up conflict from day one.

Clear and honest communication during recruitment. Don't oversell the opportunity. Be upfront about what the franchisee can realistically expect, what support you provide, and what their obligations are. Misaligned expectations are the foundation of most franchise disputes.

Comprehensive onboarding and training. A franchisee who feels equipped and supported from the start is far less likely to become a disgruntled one.

Regular, proactive communication. Don't wait for problems to surface. Regular check-ins, field visits, and open channels for feedback create an environment where small issues get addressed before they become big ones.

A business model that works for both sides. If your franchisees are struggling to make a profit, no amount of dispute resolution process will fix the underlying problem. The economics need to work. (This is also now a legal obligation under the 2025 Code's "reasonable opportunity for return on investment" provision.)

Sound internal dispute resolution processes. Have a clear, documented process for handling complaints and disputes within your system. The Franchising Code requires franchise agreements to include dispute resolution procedures that meet minimum standards — but the best franchisors go beyond the minimum and create a genuine culture of fair dealing.

The bottom line

Disputes are a reality of franchising. How you handle them — and, more importantly, how you design your system to prevent them — is a measure of your quality as a franchisor. The franchisors who invest in clear communication, fair structures, and genuine support for their franchisees spend far less time and money on dispute resolution. The ones who don't tend to learn the hard way.

The 2025 Franchising Code has raised the regulatory bar, with expanded ADR obligations, higher penalties, and new protections for franchisees. If you're building a franchise system — or running one — staying across these requirements isn't just good practice. It's the law.

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