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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Arbitration clause ineffective to oust VCAT's jurisdiction

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In a fascinating decision given today the Supreme Court of Victoria held that an arbitration clause in a lease could not oust VCAT’s jurisdiction under the Retail Leases Act 2003 (2003 Act).  In Subway Systems Australia  Pty Ltd v Ireland [2013] VSC 550 Croft J held that VCAT was not a “court” within the meaning of the Commercial Arbitration Act 2011 (Cmlth).  The matter came before Croft J after a VCAT member declined to find that the Tribunal was bound to refer the dispute to arbitration under s.8 of the CAA. 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) of the CAA and therefore VCAT was not bound to refer the dispute to arbitration.  His Honour also accepted that  by the time s.8 of the CAA might be said by a party to a lease to be engaged, s.94 of the 2003 Act  had already rendered void the clause requiring disputes under the lease to go to arbitration. Section 94(2) of the 2003 Act provides that a provision in a retail premises lease is void to the extent that it purport to exclude the application of a provision of the 2003 Act  or to limit the right of a party to a lease to seek resolution of a retail tenancy dispute under Part 10 of the 2003 Act.

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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.

More on s 251 of the Building Act

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OPINION PIECE

I have been asked to explain the opinion that I proffered on 13 April that a landlord which complies with s 251 of the Building Act 1993 could not  recover the costs of compliance from the tenant.

Section 251 is similar in many respects to s 52 of the Retail Leases Act 2003: under both Acts the owner/landlord is required to do certain work and, if it is not done, the tenant can do the work and recover the cost of so doing from the owner/landlord.

VCAT has considered the question of whether a landlord can recover the costs of complying with s 52 of the 2003 Act.  In Cafe Dansk Pty Ltd v Shiel [2009] VCAT 36 Deputy President Macnamara (as his Honour was then known) dismissed the landlord's argument at  [44] as follows:

I find Dr Croft's sceptical views on this point compelling. It would, in my view, make a mockery of s 52 if Parliament having allocated the responsibility for certain repairs to the landlord, the landlord could then send the bill to the tenant for the cost of carrying out those repairs....

In my view the same logic applies to s 251 of the Building Act.

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Author: Robert Hays Barrister subject to copyright under DMCA.