A real estate franchise agreement

2The Court of Appeal has ruled that Century 21 Australia’s arrangements permitting Victorian Realty Group to trade as “Century 21 Complete Properties” was a franchise agreement for the purposes of the Estate Agents Act 1980 (Vic.).

Section 43(5) of the Victorian Estate Agents Act has its own definition of a “franchising agreement”:

franchising agreement means an agreement whereby an estate agent is authorized to carry on business under any name in consideration of any other person entitled to carry on business under that name receiving any consideration whether by way of a share in the profits of the estate agent’s business or otherwise (emphasis supplied)

One of the reasons this is significant is that each party to the franchising agreement is jointly and severally liable for any defalcations, or negligence, by the estate agent : s 43.

Victorian Realty Group (VRG), while trading as “Century 21 Complete Properties” in Craigieburn, had committed a number of defalcations which resulted in 13 of its clients losing money. Those clients were compensated out of the Victorian Property Fund. The Secretary brought proceedings against Century 21 Australia, the franchisor1 under s 43 to recover those payouts.

Under the terms of the franchise agreement, and the incorporated Policy and Procedures Manual, Century 21 Australia granted VRG the right and obligation to trade exclusively under the name Century 21 Complete Properties. There were other rights and obligations to use “Century 21” in the various ‘trademarked’ forms, and to use various systems and participate in the Century 21 marketing plan. In other words, you and I would consider it a pretty typical example of a franchise arrangement.

The trial judge, however, found that the arrangement was not a “franchise agreement” as defined in s 43 because of the words in the definition “under that name”. VRG was authorised only to carry on business under the name “Century 21 Complete Properties”, not just “Century 21”; and “Century 21 Australia”, the franchisor, did not carry on business under that name.

The Court of Appeal unanimously allowed the Secretary’s appeal. As a matter of practicality and commercial reality both VRG and Century 21 Australia were carrying on business under “Century 21”, not just their respective formal names:

50 In its written case, the respondent seemed to accept that the Franchise Agreement was an agreement that would ordinarily be described as, and understood to be, a franchise agreement. The respondent’s written case described the Franchise Agreement as ‘the unambiguous franchise agreement in this case’. That description was, with respect, apposite. While that description does not relieve the Court of its obligation to properly construe and apply the definition of ‘franchising agreement’, it brings into focus the question of what legislative purpose might possibly exist in differentiating between franchise agreements that have different provisions as to trade names and the terms upon which their use is or is not permitted. That said, it is of course the text of the statutory definition that is paramount in the resolution of this proceeding.

51 ‘Century 21’ is a name. Equally, one might describe the relevant circumstances in this case as involving the use of a name being ‘the Century 21 name’. When one examines the Franchise Agreement (including the P&P Manual) it seems to us that that agreement authorised VRG to carry on business under the name ‘Century 21’ or the Century 21 name. Like any franchise agreement, it did so on particular terms. We have already set out the relevant terms in the present case. The existence of those terms does not gainsay the fact that the Franchise Agreement was one which authorised VRG to carry on business under the Century 21 name.

52 Similarly, in our view, the International Agreement entitled the respondent to carry on business under the name ‘Century 21’ or the Century 21 name within the meaning of the statutory definition. In our view, this conclusion accords with the text of the definition construed, as it must be, in its context and by reference to the legislative purpose of the provisions of the Act.

The focus on commercial reality is no doubt to be welcomed. The decision, however, has little direct relevance to the broader definition of “franchise agreement” for the purposes of the Franchising Code of Conduct as that is not tied just to a name. Instead, clause 5 of schedule 1 to the Competition and Consumer (Industry Codes – Franchising) Regulation 2014 applies to agreements which satisfy 3 requirements including (by way of contrast to the Estate Agents Act) the rather more broadly expressed operation of a business substantially or materially associated with a trade mark, advertising or commercial symbol. More fully, a franchise agreement is an agreement:

(b) in which a person (the franchisor ) grants to another person (the franchisee ) the right to carry on the business of offering, supplying or distributing goods or services in Australia under a system or marketing plan substantially determined, controlled or suggested by the franchisor or an associate of the franchisor; and

(c) under which the operation of the business will be substantially or materially associated with a trade mark, advertising or a commercial symbol:

(i) owned, used or licensed by the franchisor or an associate of the franchisor; or

(ii) specified by the franchisor or an associate of the franchisor; and

(d) under which, before starting or continuing the business, the franchisee must pay or agree to pay to the franchisor or an associate of the franchisor an amount including, for example

Secretary to the Department of Justice and Regulation v Century 21 Australia Pty Ltd [2017] VSCA 205

  1. Century 21 Australia had been appointed the master franchisee for Australia by Century 21 International with powers to appoint and manage “Century 21” franchisees here. ??

An arbitration clause means arbitrate

The Irelands were Subway franchisees.

Their franchise agreement with Subway included an arbitration clause:

10. DISPUTE RESOLUTION. The parties want to settle all issues quickly, amicably, and in the most cost effective fashion. To accomplish these goals, the parties agree to the following provisions that will apply to resolve any dispute or claim arising out of or relating to this Agreement, or any other Franchise Agreement the parties have with each other (a ‘Dispute’):

c. The parties will arbitrate the Dispute if the mediation clause in Subparagraph 10.a. is not enforceable, or the parties do not settle the Dispute under the informal discussion and mediation procedures above, or the Dispute is one which this Agreement provides will be submitted directly to arbitration, except as provided in this Agreement. The arbitration will be held in accordance with the United Nations Commission on International Trade Regulations and Law (UNCITRAL) Arbitration Rules administered by an arbitration association, such as the American Arbitration Association or the Institute of Arbitrators or Mediators Australia, at a hearing to be held in Queensland. The arbitration will be conducted in English and decided by a single arbitrator unless the law of Australia requires three (3) arbitrators. Any court having jurisdiction may enter judgment on the arbitrator’s award. Except as provided in this Agreement, a party must commence and pursue informal discussions, mediation, and arbitration to resolve Disputes before commencing legal action.

The Irelands, however, commenced proceedings against Subway in the Victorian Civil and Administrative Tribunal (VCAT) alleging breaches of the franchise agreement, negligence and misleading or deceptive conduct.

Subway applied to VCAT to have the proceeding referred to arbitration pursuant to clause 10. VCAT refused. The Supreme Court dismissed Subway’s appeal. The Court of Appeal, Maxwell P and Beach JA, Kyrou J dissenting, have allowed Subway’s further appeal and sent the matter to arbitration.

Section 8 of the Commercial Arbitration Act 2011 (Vic) provides:

8            Arbitration agreement and substantive claim before court (cf Model Law Art 8)

(1)  A court before which an action is brought in a matter which is the subject of an arbitration agreement must, if a party so requests not later than when submitting the party’s first statement on the substance of the dispute, refer the parties to arbitration unless it finds that the agreement is null and void, inoperative or incapable of being performed.

As the heading indicates, this provision is part of a national scheme to implement the UNCITRAL Model Law on commercial arbitration.

The “problem” was that reference to “court”. While it was not a defined term in the Act, there are any number of court rulings declaring in no uncertain terms that VCAT is not a court – it is an administrative tribunal.

Maxwell P and Beach JA standing back and looking at the big (international) picture, however, held that for the purposes of the Act – a law designed to promote commercial arbitration as a dispute resolution mechanism – VCAT qualifies as a “court”. Maxwell P and Beach JA took somewhat different routes to reach that conclusion but it is perhaps best encapsulated in Maxwell P’s observation:

The clear policy of the Act (and of the model law which it enacts) is that, when parties have agreed to have disputes between them determined by private arbitration, neither party is at liberty to litigate the matter in dispute through the adjudicative mechanisms of the State. For this statutory purpose, in this statutory context, the Tribunal is indistinguishable from those other adjudicative bodies of the State which bear the title ‘court’.

I don’t know if other States or Territories operate under regimes similar to VCAT in, er, parallel to the court system but, as Croft J noted at first instance, Parliament set up VCAT to provide a speedy and inexpensive, low cost, accessible, efficient means of dispute resolution and, apparently, it handles the vast bulk of legal disputes here. But not disputes between franchisors and franchisees (where there is an arbitration clause).

Subway Systems Australia Pty Ltd v Ireland [2014] VSCA 142