Franchisees beware of arbitration clauses

Prospective franchisees should be cautious about agreeing to the inclusion of arbitration clauses in franchise agreements. It is common for a franchisee to enter into an 'occupancy' or 'licence' agreement with an entity associated with the franchisor which entity is the lessee of the premises from which the franchisee will conduct its business.

At the sane tine the franchisee usually enters into a franchise agreement with the franchisor. The so-called 'occupancy' or 'licence' agreement commonly has all the characteristics of a lease with the consequence that the agreement is a lease. In Victoria, if the 'occupancy' or 'licence' agreement is a lease any dispute will constitute a 'retail tenancy dispute' governed by Part 10 of the Retail Leases Act 2003 (2003 Act).

VCAT has exclusive jurisdiction to hear and determine 'retail tenancy disputes'. If the dispute resolution provisions in the franchise agreement require that disputes under that agreement be referred to arbitration the franchisee could be in the difficult position of having to prosecute or defend two proceedings at the same time - one in VCAT and another before an arbitrator.

This is the consequence of the Court of Appeal's decision in Subway Systems Australia v Ireland [2014] VSCA 142. In that case the franchisee conducted its business from premises in Doncaster, Victoria. The arbitration clause in the franchise agreement required the arbitration to take place in Queensland. VCAT held that the "licence" agreement was a sub-lease with the consequence that that dispute will be determined as a 'retail premises dispute" in VCAT in Victoria under the 2003 Act.

VCAT also decided that it could hear and determine the dispute under the franchise agreement. The Court of Appeal held that VCAT did not have jurisdiction to hear and determine the dispute under the franchise agreement which will have to be heard and determined by an arbitrator in Queensland.