Franchisees beware of arbitration clauses

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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.

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VCAT is Court and therefore arbitration clause effective

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In  Subway Systems Australia Pty Ltd v Ireland [2013] VSC 550 Croft J held that a requirement in a franchise agreement that disputes be referred to arbitration did not prevent VCAT hearing and determining the dispute. The matter came before Croft J as an application for leave after a VCAT member declined to find that the Tribunal was bound by  s.8 of the Commercial Arbitration Act 2011 (Vic)) (CAA) to refer the dispute to arbitration.  In broad terms s.8 of the CAA requires a court before which an action is brought in a matter which is the subject of an arbitration agreement to refer the matter to arbitration if one of the parties makes that request. Croft J held that VCAT was not a “court” for the purpose of s.8(1) and therefore VCAT was not bound to refer the dispute to arbitration. In Subway Systems Australia Pty Ltd v Ireland [2014] VSCA 142 the Court of Appeal allowed an appeal from Justice Croft's decision. Maxwell P and Beach JA held that VCAT was a "court" for the purposes of s.8 of the CAA. Kyrou AJA dissented. This means that the dispute must now be referred to arbitration. The Court of Appeal's decision can be found here:

Subway Systems v Ireland_merged_17114[1]


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Mortgagee lender does not have duty of care to ensure that a loan isappropriate for borrower

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Defaulting mortgagor borrowers defending court proceedings by the mortgagee lender often allege that the lender owed them a duty to investigate their income and assets and liabilities to determine whether the loan could be serviced. The legal basis for such a claim was recently rejected by the Supreme Court of New South Wales in Westpac Banking Corporation v Diagne [2014] NSWSC 822. Among the many claims made by the defaulting mortgagor borrowers was that the lender had a duty to "[p]rudently investigate the income, assets and liabilities of [the borrowers] and the proposed business plan of [the borrowers] in order to determine serviceability" and "[t]o take reasonable remedial action when the loans fell into arrears, including investigating the causes of the arrears, working with [the borrowers] to remedy the problems identified and continuing to monitor the ability of the borrowers and guarantors to adequately service the facilities". Included in the alleged duty was a duty "to appropriately set and alter limits on overdraft facilities".

Ball J rejected the borrower’s claims. His Honour applied Tai Hing Cotton Mill Ltd v Liu Chong Hing Bank Ltd [1986] AC 80  and held that the lender did not have a duty of care to investigate the borrower’s circumstances to determine whether the loan that was made was appropriate for them.

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My clerk can be contacted via this link http://www.greenslist.com.au/ if you wish to retain my services for any legal matter which is within the gamut of my legal experience