VCAT or Arbitration? The Beauty Contest continues
- George Konidaris - Principal Lawyer
- Nov 11, 2016
- 7 min read
For most Retail Tenancies Disputes between a Landlord and Tenant, the decision to proceed to VCAT is quite clear and uncontroversial. Introduce a Franchise Agreement and things may get complicated especially where the Franchise Agreement contains an Arbitration clause as was the case with Ireland v Subway Systems Australia Pty Ltd and Subway Realty Pty Ltd (VCAT).
The Irelands, who were the Franchisees of a Subway Franchise Sandwich outlet in the Doncaster Shopping Centre Food Court, had a dispute with Subway concerning the relocation of their shop. The main issue the Irelands had with Subway was that Subway, according to the Irelands, failed to negotiate a new Lease for them in the new Food Court when the Shopping Centre relocated their business.
Typically, franchisors sub-lease or grant licences under a head-lease to their franchisees and in many instances, the franchisors maintain complete control of the head-lease negotiations with the head-lessor/landlord. This often leaves franchisees at the mercy of their franchisors when it comes to the conduct and control of their head-lease negotiations. It is not uncommon for the Sub-Lease or License Agreement to be held in a different, but related company of the Franchisor which was the case with the Irelands.
VCAT Decision
The Irelands brought their case in VCAT against both Subway Realty (as their Sub-Lessor Landlord) and Subway Systems Australia (the Franchisor) claiming that their License Agreement was in fact a Sub-Lease and therefore, VCAT had exclusive jurisdiction to determine their Retail Tenancy Dispute which involved both their Franchisor and Landlord.
The alternative, according to Subway, was to invoke the Arbitration Clause in the Franchise Agreement and bring an Arbitration in Queensland. The Irelands joined Subway Systems Australia (the Franchisor) as a party to the VCAT proceeding under the provisions of section 60 of the VCAT Act 1998.
Both Subway Systems Australia and Subway Realty brought an application claiming that the entire proceeding ought to be stayed by reason of the Arbitraiton Clause and the operation of the Section 8 of the Commercial Arbitration Act 2011 and the fact that according to Subway, the License Agreement was not a Retail Lease as was claimed by the Irelands. The application to stay the proceeding was unsuccessful.
VCAT agreed with the Irelands that the License Agreement was in fact a Retail Lease (a Sub-Lease) and the dispute was a Retail Tenancy Dispute and therefore, VCAT had exclusive jurisdiction to determine the Retail Tenancy Dispute.
VCAT however went a step further and held that not only was the License Agreement a Sub-Lease, but that VCAT was not a "court" for the purpose of section 8 of the Commercial Arbitration Act 2011.
Supreme Court Appeal and validity of Arbitration Clause
Subway Systems Australia (the Franchisor),, but not Subway Realty (the Sub-Lessor/Licensor) appealed the finding that "VCAT is not a court" for purposes of the Commercial Arbitration Act, to the Supreme Court and were unsuccessful before His Honour Justice Croft. The Lease v License decision remained unchallenged.
Apart from His Honour dismissing the Appeal, he also expressed concerns about the validity of the Subway Standard Arbitration Clause and referred the file to the office of the Small Business Commissioner and the ACCC as he did not consider it desirable for the Irelands and other parties in a similar situation, to have to deal with the complexities of the UNCITRAL rules, requests to the Secretary-General of the Permanent Court of Arbitration in the Hague and journeys to Queensland, as compared to the speedy and inexpensive resolution of disputes by VCAT.
Below is the relevant extract of His Honour's judgment:
60. There is, however, an aspect in relation to the proper construction and operation of the arbitration agreement which is, in my view, directly relevant to this proceeding and the proposed appeal. It is not an issue which is relevant in the sense of being decisive with respect to the proper construction of the provisions of the CAA and the question whether the word “court” in s 8(1) of that Act encompasses VCAT. It is, rather, a matter which might be thought to go to the wisdom of Parliament in not legislating to treat VCAT as a “court” for the purposes of s 8(1) of the CAA. However it might be sought to rationalise the utility of subjecting parties, such as the Irelands, to the complexities of the UNCITRAL Arbitration Rules, a request to the Secretary-General of the Permanent Court of Arbitration in The Hague and a journey to Queensland, a two hour flight, for an arbitration hearing, it is difficult to see how this regime could compare at all favourably with the speedy and inexpensive resolution of disputes by VCAT. The inelegancies and problems with the terms of the arbitration agreement exacerbate, rather than ameliorate this position. A good deal of attention has been given by the Commonwealth Government to franchising arrangements, and in very recent times. For these reasons, I think it may be helpful to forward a copy of these reasons and any other material requested with respect to these proceedings to the Australian Competition and Consumer Commission, the Australian Small Business Commissioner and the Victorian Small Business Commissioner; and will do so accordingly.
Court of Appeal & Review of the Commercial Arbitration Act 2011 by the LCCSC
Upon further Appeal by Subway Systems Australia to the Court of Appeal, by majority Decision the Further Appeal was upheld.
With two Supreme Court Judges (and one VCAT member) taking the view that VCAT is not a "court" for the purpose of section 8(1) of the Commercial Arbitration Act 2011, and two Supreme Court Judges finding that VCAT was in fact a "court" (but reached their conclusions on different grounds), it was not surprising that the Law Crime and Community Safety Council (LCCSC) resolved that each jurisdiction would consult with key stakeholders and their peak national bodies and report to the LCCSC to consider what amendments should be made to the Commercial Arbitration Act, following the Court of Appeal Decision.
The letter to the Law Institute of Victoria from the Victorian Department of Justice calling for submissions can be found here and the Law Institute of Victoria's response can be found here.
Retail Leases Act 2003 and VCAT continues to Prevail over Arbitration Clauses
An arbitration clause to the extent it seeks to oust the jurisdiction of VCAT in Retail Tenancy Disputes, remains invalid by reason of section 89 and 94 of the Retail Leases Act 2003.
Once VCAT determined that the License Agreement was in fact a Sub-Lease, it was the common position between the parties that VCAT would have exclusive jurisdiction to determine the Retail Tenancy Dispute as between Subway Realty and the Irelands. Subway Realty did not appeal any aspect of the VCAT decision and continued to remain a party to the VCAT proceeding.
The position was also confirmed by His Honour Justice Croft at paragraph 63 of his Honour's Judgment where he adopts and accepts Subway's submissions that the Retail Leases Act 2003 and VCAT, insofar as Retail Tenancies Disputes are concerned, takes priority over Arbitration and that there is no inconsistency between the Commercial Arbitration Act 2011 and the Retail Leases Act 2003.
Below is the relevant extract of his Honour's judgment:
64 ... In my view, these submissions correctly state the position, which is that the effect of s 94 of the RLA is to render a dispute to which s 94 of RLA applies, a matter which may not be the subject of arbitration in Victoria. ...
The Court of Appeal dealt with a narrow question of law as to whether VCAT was a "court" or not for the purpose of section 8 of the Commercial Arbitration Act 2011.
The fact that VCAT was held to be a "court" for the purpose of the Commercial Arbitration Act 2011 does not oust VCAT's exclusive jurisdiction to hear and determine Retail Tenancies Disputes as is touted in some reports.
The VCAT proceeding between the Irelands and Subway Realty continued in VCAT and the proceeding against Subway Systems Australia was stayed.
The case (either at first instance or on appeal) did not consider the issue of whether or not the Franchisor (Subway Systems Australia) should be joined as a party to the VCAT proceeding under section 60 of the VCAT Act 1998 (which often occurs with other third parties such as the joinder of a guarantor to VCAT proceedings) and whether the joinder of the Franchisor could be stayed by reason of the Arbitration Clause.
Conclusion
VCAT has exclusive jurisdiction to determine "retail tenancies disputes" as defined under the Retail Leases Act 2003 (subject to a few exceptions).
This position remains unchanged.
It will be interesting to see what eventuates from the LCCSC Report as well as the investigations by the ACCC and the Small Business Commissioners Office with regards to the validity of the Subway Arbitration Clause following His Honour, Justice Croft's referral of the the court file.
Whether the Franchisors will succeed in compelling Franchisees to split their cases and have their Retail Tenancies Disputes heard at both VCAT and Arbitration should an aspect of the dispute not be solely between a Tenant and Landlord, or whether VCAT will win the beauty contest and determine all disputes between all relevant parties where a Retail Tenancies Dispute is concerned, remains to be seen.
Having disputes with similar and related facts, issues and parties, being ventilated and determined in proceedings conducted in different jurisdictions with the prospect of having conflicting decisions with the associated costs and delays, can hardly be in the interests of providing speedy and efficient justice.
There would seem to be compelling arguments for VCAT to join the Franchisor to Retail Tenancies Disputes under Section 60 of the VCAT Act 1998 to avoid a multiplicity of proceedings
If you have a Franchise Dispute and are unsure of whether to bring your case to VCAT or Arbitration, advice should be sought as soon as possible and before filing or serving a dispute notice under your Franchise Agreement.
For more information concerning the above cases or if you require advice concerning your franchise or lease dispute, please contact us for a 20 Minute Free Consultation.
