A: Successful franchise systems are built on trust and solid relationships. However, there will always be variations in individual franchisee performance, and disputes can arise at times of stress or upset. Precedence 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 trained in franchise mediation and arbitration. My diverse experience in this capacity has convinced me that the majority of franchisors and franchisees are not prepared for disagreements or disputes, and are not familiar with early or alternate dispute resolution to avoid litigation.
Franchisees should be informed of their franchise’s dispute resolution procedures and programs, and how their franchisors approach the subject in franchise disclosure documents and franchise agreements. Franchisors and franchisees should have open discussions about the subject.
As a franchisee, you should gauge whether a franchisor understands the importance of dispute resolution from how they approach the franchise relationship. Timely and informative communications by a franchisor help to dispel rumours and build trust. Here are some key questions franchisees should consider regarding their franchise’s approach to dispute resolution:
- 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 negative press, new competition, a pandemic, illness, climatic disasters, supply chain problems, and the like?
- Does the franchisor have early dispute programs in place like a simple provision in the franchise agreement to negotiate disputes in several stages on a confidential basis and without prejudice, involving 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? Will the CEO or designated contact person commit to consider the matter quickly and objectively with a timely response?
- Has the franchisor considered or established an independent franchise system ombudsman program? The ombudsman should have credibility, franchise experience, and alternative dispute resolution training. The ombudsman should operate as an intermediary 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 franchisee and the franchisor.
Franchisee advisory councils (FACs) have become more popular in recent years. The effectiveness of a FAC will depend on its constitution, composition, and representation, so it is therefore important for franchisees to participate. 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 franchisees to become informed of early and alternate dispute resolution procedures so they can look out for them when assessing franchise systems. With new, innovative procedures, disputes can be resolved quickly and efficiently with reduced costs and minimal disruption.
Frank Zaid
Principal
Frank Zaid FRANlegal Support Service
fzaid@frankzaid.com