By Frank Zaid, Frank Zaid FRANlegal Support Services
Canadian Franchise Association, Franchise Voice Updater, March 1, 2023
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 “Resolving 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.
Successful franchise systems are built on trust and solid relationships. However, there will always be variations in individual franchisee performance and a lack of trust will likely arise at times of stress or upset. Experience has taught us that both franchisors and franchisees should be prepared for disagreements or disputes. Franchisees should understand how a franchisor will work towards resolution of disagreements or disputes.
Near the end of my 40-year career as a franchise lawyer I become trained as a franchise mediator and arbitrator. My diverse experience in this capacity has convinced me that many franchisors and most franchisees are not prepared for disagreements or disputes and are not well versed about early or alternate dispute resolution to avoid litigation. Franchisors learn how disputes can be resolved early and often by business means and take the lead in instituting dispute resolution programs. Franchisees should become informed as to what programs are in place to resolve disputes and how their franchisors approach the subject in franchise disclosure documents and franchise agreements. Franchisors and franchisees should have open discussions about the subject.
Some fundamental attributes of a franchisor that understands the importance of early resolution of disputes can be assumed from how a franchisor generally approaches building a fair and open franchise relationship:
- Timely and informative communications by a franchisor help to allay rumours and build trust. Does the franchisor keep its franchisees informed of important changes and system developments? Does the franchisor encourage suggestions and react professionally to franchisee complaints?
- Does the franchisor have programs in place to assist underperforming franchisees affected by unexpected circumstances like new competition, a pandemic, illness, climatic disasters, negative social media, supply chain problems, and the like?
- Does the franchisor have early dispute programs in place like a simple provision in a franchise agreement to negotiate disputes in several stages on a without prejudice and confidential basis including with senior management?
- Does the franchisor have a franchise mentor program for new franchisees or a peer group or peer review program to assist in resolving disputes?
- How can franchisees contact the CEO or a designated member of the executive team to discuss a problem on a without prejudice basis and will the CEO or designated contact person commit to consider the matter quickly and objectively with a quick response?
- And has the franchisor considered or established an independent franchise system ombudsman program. The ombudsman should have credibility, franchise experience, and alternative dispute resolution training and basically 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.
Franchisee advisory councils have become more popular in recent years. The effectiveness of a FAC will depend on its constitution, composition, and representation. FACs should consider major operational matters, new system developments or changes, and matters that will require substantial cost to franchisees. With the approval of a FAC regarding these matters, acceptance by the franchisee body is almost certain.
The Canadian Franchise Association’s Code of Ethics states that “both parties should make reasonable efforts to resolve complaints, grievances and disputes with each other through fair and reasonable direct communication, and where reasonably appropriate under the circumstances, mediation or other alternative dispute resolution mechanisms”. 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. A mediator or arbitrator in a franchise dispute should have significant understanding of franchising. The process is confidential and without prejudice and there is a high rate of success in mediated franchise disputes.
Finally, arbitration can be used to resolve 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. 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 specialized knowledge of franchising and can deal with the appointment of the arbitrator and the procedures and rules for arbitration. By creating a streamlined process, arbitration can be much quicker than an ordinary trial. An arbitration decision is confidential and usually cannot be appealed.
Hopefully, these comments will encourage franchisors, franchisees and franchise lawyers to become informed of the use of early and alternate dispute resolution procedures and to include them as part of the franchise system. And with new innovative procedures, disputes can be resolved quickly and efficiently with reduced costs and minimal disruption, and most importantly the franchise system will be an example of a “hallmark of successful franchise systems”.