Published By CorporateLiveWire
A number of years ago, the International Franchise Association Franchise Relations Committee published a handbook entitled Resolving Disagreements by Working Together: A Dispute Resolution Handbook for Franchisors and Franchisees. The Introduction states that “[R]esolving disagreements to the satisfaction of both franchisors and franchisees has become the hallmark of successful franchise systems.” That premise has equal, if not greater, application today.
Franchise disputes are on the rise. Franchise legislation gives critical legal rights to franchisees. Conflicts can arise for a variety of reasons: franchisee unprofitability, new ownership, franchise system growth, market conditions, new competition, inconsistent treatment of franchisees, and failure to disclose material information.
How can franchisors and franchisees work together to create good franchise relationships and resolve disputes? It is up to both parties to establish good relations. However, the franchisor should initiate programs for early dispute resolution (“EDR”) which offer quick solutions at a low cost, help maintain the franchise relationship, minimise disruption, do not require lawyers, and can result in business solutions.
A very simple provision in a franchise agreement or an operations manual to negotiate disputes is worthy of consideration. Such a provision calls for a first level of negotiations within a short time frame, followed by a second level involving senior management if the first level does not result in a resolution. The negotiations are confidential but without prejudice to either party if there is no resolution. If no agreement is reached another alternate dispute resolution mechanism (e.g., mediation) can be invoked.
A few established franchisors have established peer groups or peer review panels to resolve disputes, particularly intra-franchisee disputes. The programme requires formal rules and procedures including the composition of the panel. Franchisor management must endorse and promote the programme. Hearings are confidential but generic findings can be made available to the franchisee body. These programmes may not result in a binding decision, but a recommendation for timely consideration by senior management can be very influential.
Another useful programme for early dispute resolution is a CEO hotline. Leadership of a franchisor comes from top management. Accordingly, the CEO can establish a private means of communication allowing franchisees to contact the CEO on a confidential basis, with no repercussions, and receive a quick and meaningful response.
Another EDR programme which franchisors should consider is the establishment of an independent franchise system ombudsman. The programme is confined to the specific franchise system and is funded solely by the franchisor at no cost to franchisees. The ombudsman is an independent contractor and not an employee of the franchisor. The ombudsman should have credibility, franchise experience, and alternative dispute resolution training. The ombudsman operates as a go-between with the objective of resolving the dispute. There are no repercussions to a franchisee that raises a matter with the ombudsman, and there is no direct interaction between the parties.
The IFA and the Canadian Franchise Association have successful ombudsman programmes in place. In fact, both use the same experienced ombudsman person.
If EDR programmes do not result in a resolution, alternate dispute resolution or ADR programmes can be utilised. These need to be documented in a franchise agreement or an operations manual. The common ADR methods are mediation and/or arbitration. A mediator or arbitrator in a franchise dispute should have significant understanding of franchising.
Mediation is a formal procedure which requires the consent of all parties to the dispute. Many franchisors provide for mediation in their franchise agreements or ancillary documents, and it is often a pre-condition to commencing litigation or arbitration. The parties can agree to mediate a dispute at any time, but a mediation agreement should be executed before commencing mediation.
An independent mediator is chosen by the parties. Mediation is a confidential, non-binding and without prejudice open process in which the mediator assists the parties to analyse the issues, goals and possible resolution. Nothing said or produced can be used in any court process. There are no court filings, and the mediator has no authority to make orders or findings. Franchise mediation has a high success rate of negotiated solutions.
Arbitration may be of benefit to resolving franchise disputes if mediation is not successful. Arbitration is private and confidential. No documents are available for public review, and the public and the media cannot attend. Many jurisdictions have arbitration legislation and there are international treaties dealing with arbitration. The parties must sign an arbitration agreement which can be a standalone document or contained in another agreement like a franchise agreement. It can require the arbitrator to have specialised knowledge of franchising and can deal with matters like the appointment of the arbitrator, hearing days, procedure, motions, evidence, discovery, document production, appeals, form of decision, damages, injunctions, and timelines. By creating a streamlined process, arbitration can be much quicker than an ordinary trial. An arbitration decision is confidential and usually cannot be appealed.
Frank Zaid
Franchise mediator, arbitrator, business operations consultant, expert witness, ADR Chambers
