6th May 2014
The most recent few decades might someday be referred to as the Age of the Franchise. The reasons for this popularity are fairly obvious: Franchisees get the benefits of an established brand, the collective experience of existing locations and the franchisor, and access to resources and materials to promote their business.
The downside to the franchise becomes stark when there are disputes. The courts, as a rule, regard franchise agreements as contracts of adhesion, because of the typical disparity of resources between franchisors and franchisees, and the fact that most franchisees are unable to negotiate the terms of the franchise agreement offered to them. As a result, litigation can be incredibly expensive and damaging to both parties, leading to a steady rise in the popularity of alternative dispute resolution (ADR), i.e. mediation and arbitration.
The fallout from a soured franchise agreement can be immense. For the franchisor, failure to disclose or other material violations of the law or the franchise agreement can result in a court order to not only refund the franchisee their fee, but to purchase at the original price all equipment and supplies acquired by the franchisee in good faith. Since under certain circumstances, failure to disclose findings can be upheld years after the original agreement is signed, this can be a significant monetary loss for the franchisor. And this doesn’t even take into consideration the harm to reputation that can hurt franchise growth and overall sales.
For the franchisee, litigation can be ruinous. Even when they are compensated for the cost of the franchise, they may have lost years of potential profits and suffered other losses than cannot be directly associated with the franchise dispute, and thus not be part of any settlement.
As a result, both parties have great motivation to find alternate means of resolving disputes. Mediation can be a powerful process when disputes are not fundamental – i.e., when both parties wish to continue in the franchise agreement but have unresolved disagreements regarding payments, fees or other portions of the franchise agreement.
Even when the partnership is impossible to continue, binding arbitration can be a better solution than the court system. Franchisees can avoid the cost of mounting litigation, which can in some cases actually outstrip any financial recovery they might get from refunds and equipment purchases, while the franchisor avoids publicity.
For both franchisors and franchisees, alternative dispute resolution conducted by a trained, certified ADR professional is usually a better choice than litigation.