< Back to Articles TOC

MEDIATE, ARBITRATE OR LITIGATE:
FRANCHISORS TALK THE TALK, BUT WHEN WILL THEY WALK THE WALK

For an unprecedented period of time, business people have resorted to litigation in order to resolve disputes which arise from contracted obligations. Franchisors and franchisees have also followed the pursuit of settling contractual concerns through litigation. In fact, as an expert in the foodservice industry, a large proportion of my practice is acting as an expert witness in litigation for either franchisees or franchisors.

Over the past several years, however, Alternative Dispute Resolutions (ADR) has become a more significant and meaningful way to settle disputes ultimately reducing legal expenses, time and emotional drain. While there are several forms of ADR, the most common methodologies are those of mediation and/or arbitration.

Mediation

In order to bring a dispute to mediation, both parties to the dispute must agree that they would like to attempt to settle the dispute in a non-binding manner. The parties retain the services of a mediator who will try to come to a fair resolution which will make sense to both parties. The mediator is a neutral party with no decisions making power. If both parties agree to the resolution, the dispute is ended. If the mediation process is successful, disputes which could go several years in litigation can be settled in a matter of days, if not hours, through successful mediation. Franchisee/Franchisor relationships which would be normally terminated due to litigation, can usually be amicably settled through the course of mediation, thus, preserving, in most situations, the business relationship.

Arbitration

Arbitration procedures are more formal than mediation in so far as an arbitrator will hold a court like session allowing both parties to hear and respond to the other parties allegations and defenses. Unlike a mediator, the arbitrator is granted the power to make decisions for the parties and therefore is able to make a ruling on how the parties proceed. Arbitration can be both binding and non-binding, however, unilateral decisions are made by an arbitrator rather than the mutual acceptance of both parties accomplished in mediation. If the arbitration is binding, then both parties are subject to the arbitrators findings. If the arbitration is non-binding, the disputants still have an opportunity to carry forward to litigation if they so desire.

It is our experience, that the arbitration process, depending on the level of dispute, can be effectively dealt with within a two to three month time frame with fairly little stress or strain on the part of either of the disputants.

Mediation in Franchise Contracts

While most franchise lawyers speak aggressively about the benefits of mediation and arbitration over litigation, the truth is, they do not aggressively suggest that their franchisor clients add a mediation or arbitration clause to their franchise agreement. A mediation and arbitration clause which is incorporated into the franchise agreement, would ensure that all disputes between the parties be brought to mediation or arbitration. Further, it may indicate that failing successful mediation, that binding arbitration will be the last recourse for both the franchisor and the franchisee.

However, the real reason that mediation and arbitration clauses are not formally incorporated into a franchise agreement is to provide the franchisor with the flexibility to recommend mediation and arbitration only if they want to. Depending on the dispute, both methodologies, mediation and arbitration tend to be more beneficial to the franchisee rather than to the franchisor. If mediation or arbitration will be to the detriment of the franchisor, the franchisor given its deep pockets, resources and usually greater sophistication, prefer to go to litigation. In most cases, the franchisee does not have the wherewithal in terms of sophistication nor financial resources to fight the franchisor through litigation, thus making the Franchisor the winner of the dispute before it is even brought to court.

While franchisors and franchisor solicitors are talking up a storm about the benefits of mediation and arbitration, these benefits really accrue to the franchisee. Given our experience in the industry, it is clear that many disputes are settled or terminated simply because the franchisee does not have the ability to take on the franchisor. If the franchisor, given all their knowledge and wisdom, believes that they will successfully win in a mediation or arbitration, they will move quickly to recommend this approach in order to achieve the results which they desire quickly. However, if a franchisor believes that a mediation or arbitration will work against them, litigation becomes a far more attractive alternative for them.

The Challenge

Our challenge to the franchise industry is two fold. As franchisors are suppose to be providing franchisees with their experience, knowledge and know-how in order to be successful, the franchisor should also be willing to settle disputes in a timely manner. We believe that although the Canadian Franchise Association (CFA) has stipulated that mediation should be considered before litigation for franchisor members to be “members in good standing”, more must still be done. We challenge Canadian franchisors to voluntarily place mediation and arbitration clauses into their franchise agreement, thus, illustrating to franchisees that they are willing and able to settle disputes in a timely manner without putting financial stress on the franchisee. Further, this will illustrate to the franchisees that the Franchisor is not interested in simply taking their money and securities but are also interested in settling potential disputes in a timely and cost efficient manner.

Our second challenge is to franchisees. We believe that franchisees should be demanding a mediation or arbitration clause to be incorporated into their franchise agreement. Franchisors who are members of the Canadian Franchise Association have agreed with the CFA to ensure that mediation is a first alternative to litigation although there is no contractual obligation to do so.

If your Franchisor or potential franchisor is a member of the CFA, challenge them to incorporate a mediation and arbitration clause into their franchise agreement. Those franchisors that acquiesce to your request will illustrate, in my opinion, more than basic good will, they will illustrate and demonstrate that their success is based on your success and that your problems are their problems. It will ensure that you are more than partners and that you are in business “together”. It will illustrate that your franchisor is willing to be a partner in your success by striving to mitigate potential damages.

Conclusion

Alternative Dispute Resolution through mediation and arbitration is the wave of the future. At the current time mediation and arbitration are not legislative requirements to be implemented into franchise agreements. However, it is our opinion that if a franchise agreement is drafted properly and that everyone is working in good faith, mediation and arbitration agreements which are firmly entrenched into the franchise contract will enhance the franchisee/franchisor relationship and ensure that both parties are more successful.

On a positive note, while not a legislative requirement, the CFA has developed a roster of seasoned franchise professionals to act as mediators or arbitrators in franchise disputes. The development of this panel illustrates the CFA’s commitment and the commitment of industry professionals to move forward …hopefully franchisor’s will follow along by incorporating mediation and arbitration resolution requirements into their franchise agreements.

< Back to Articles TOC