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Franchise disputes: What does that dispute resolution clause mean?

By Daniel Shore - August 2013

Like any contract, your Franchise Agreement is likely to include a “Dispute Resolution” clause which sets out the process if things go wrong. While dispute resolution clauses can vary, the key features are typically the same.

The process will generally include a number of steps which escalate in terms of complexity and therefore cost. The intention is that it is in the parties’ best interests that the dispute is resolved as quickly and cheaply as possible.

Set out below is what you might see in a typical Dispute Resolution clause.

Good faith/mutual negotiation

This is often found as a first step in the process (including in the Franchising Association template clause). There are no hard and fast rules as to what this means but, if included, it generally means a party cannot simply escalate the dispute without first undertaking some sort of discussion or correspondence setting out the issues.

Mediation

Mediation is typically the first “formal” step. It is formal in that it requires the involvement of a third party whose job is to try and help the parties towards a resolution. Key features of mediation:

  • It will start as a face to face meeting between the parties (and/or their lawyers) and the mediator;
  • It is “without prejudice”. This means that unless you reach an agreement, any concession made at the mediation will be “off the record” and cannot be referred to at a later point;
  • The mediator’s role is to facilitate discussion and ensure the parties have their say; and
  • The mediator will not make a decision. It is up to the parties to reach an agreement if they can.

Arbitration

If the parties could not agree at mediation (or did not have to go through mediation), Arbitration is usually the next step. It is best thought of as a private Court proceeding. Key features are:

  • The process can be tailored to suit the nature and complexity of the dispute;
  • It is typically faster and more cost effective than a Court proceeding; and
  • The arbitrator will make a decision that will be binding on the parties.

Things to look out for

Do you actually have a dispute? – While “dispute” is often not defined in franchise agreements, a common sense definition is typically applied. For example, if there is simply a debt owed by the franchisee to the franchisor, that is not in itself a dispute which would trigger the Dispute Resolution clause.

Are the steps compulsory? - Key words to look out for are “may”, “must” and “shall’. It is not uncommon to see a clause along the lines of “the parties may refer the dispute to mediation”. Therefore unless the parties agree, the mediation step may not occur. There is of course the ability for the parties to vary the dispute resolution process, if they both agree.

Summary

It is important to have an understanding of what your dispute resolution process is. There is a real risk that if you get it wrong (such as missing a compulsory step), you could significantly complicate the process and potentially compromise a later binding decision.

Daniel is an Associate in our Dispute Resolution Team, specialising in Franchise Disputes, and can be contacted on
07 958 7477.