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Bulletin | Covid-19

Beyond COVID-19: Treating a Franchisor-Franchisee Dispute as a Divergence to be Reconciled rather than a Battle to be Won

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Franchising Bulletin

"A Bad Settlement is Always Better than a Good Trial" (Honoré de Balzac).

We certainly do not always agree with this wise maxim, since sometimes a judgment is the best way to end a dispute or to obtain compensation for damages suffered. Also, while preferable in many cases, it must be recognized that a settlement is not always possible.

In the Pre-COVID-19 business world, non-judicial means of dispute resolution have gradually been more and more utilized over the past decade as tools for managing and resolving commercial disputes, including those within franchise networks, in a timely, confidential, efficient and cost-effective manner.

Nowadays, as with telework and e-commerce, the COVID-19 crisis has dramatically changed the situation with respect to dispute resolution.

Firstly, it is inevitable that this crisis, and its repercussions of all kinds, will generate a significant increase in the number of disputes and litigation, including within franchise networks.

However, since the beginning of this crisis, the courts have been largely paralyzed, although several courts have now resumed hearing certain proceedings by videoconference.

As of May 6, the Superior Court of Quebec reported that it had had to postpone more than 600 trials, creating an additional backlog of at least 1,500 hearing days for this tribunal only.

Across Canada, by the end of this first acute phase of the crisis, several thousand trials will have been postponed, which will have the direct consequence of further lengthening the delay required for a dispute to be heard by a court (which delay was already, prior to this crisis, far too long to resolve most franchisor-franchisee disputes).

Also, after the COVID-19 crisis, several things will have changed radically: many businesses, including franchisors and franchisees, will be more financially fragile, managers and entrepreneurs will have to quickly implement new ways of doing business (in particular to better protect the health of their customers and employees), the purchasing power of many customers will have diminished, many consumer habits will have changed, and the recovery of business will require a great deal of effort in designing and implementing new ways of doing business to take this new environment into account.

In the Post-COVID-19 context, few franchisors and franchisees will have the resources, time and energy to pursue judicial proceedings that may extend over several years and involve costs (in money, human resources and energy) that could be much better invested elsewhere, without taking into account the impact that such legal proceedings may have on the reputation and credibility of the franchisor and its entire franchise network (particularly on social networks and in the media, which are increasingly fond of this type of unfortunate situation) at a time when the franchisor and its franchisees should focus most of their resources and efforts to adapt to a new commercial reality.

In order to better address and resolve disputes within a franchise network (which are, in the medium to long term, inevitable given the multiplicity of interactions and the fact that the interests between a franchisor and its franchisees which are, to a large extent, convergent, are also, to some extent, divergent), a paradigm shift is now required: a franchisor-franchisee dispute treated as a divergence to be reconciled rather than as a battle to be won.

At the end of a battle, there is a winner and a loser. However, in the context of a long-term collaborative relationship such as that between a franchisor and a franchisee, such a battle is far more likely to result in two losers. Conversely, in a dispute resolution exercise, there may well be two winners.

Also, in the different world we are now experiencing and will continue to experience at the end of this crisis, negotiation, mediation and arbitration will inevitably become the preferred mechanisms for settling disputes and litigation, well before resorting to the courts.

Consequently, in the Post-COVID-19 new business environment, the design and implementation of one or a few quick, efficient and economical dispute resolution tools in the management toolbox of the franchisor-franchisee relationship are no longer a luxury, but have become a necessity to ensure the sustainability of the network.

While it is true that an investment (in cost and time) is required to design, structure and implement a dispute resolution mechanism within a franchise network, experience shows that this investment is much less than that of a single serious lawsuit with a franchisee.

There are many such tools and each franchisor, with the assistance of legal counsel experienced in franchising and dispute resolution mechanisms, and, ideally, in collaboration with its franchisees, can select the one or those best suited to its network (in particular, to take into account the size of the network, the size of the franchised businesses, the number of franchisees, the location of the franchises, the language or languages spoken within the network and the nature of the foreseeable disputes).

Some of these mechanisms also facilitate the use of technological tools to reduce travel costs and the expense of preparing complex procedures and lengthy printed documents, and to expedite the process leading to an agreement or decision that will end the dispute.

Whatever dispute resolution tools are chosen within a franchisee network, in order to be truly useful and to achieve their objectives, they should at the very least :

  1. meet high standards of integrity and fairness recognized and accepted by all stakeholders;
  2. use, when necessary, dispute resolution professionals (including mediators and arbitrators) whose integrity, impartiality and competence are recognized by all stakeholders, and whose selection process is also recognized by all as fair;
  3. be adequately and clearly documented;
  4. be user-friendly;
  5. be well known to the franchisees, and, evidently;
  6. provide for the prompt, efficient and fair resolution or settlement of disputes, taking into account the overall interests of the franchise network as a whole as well as the interests of the persons involved in the dispute.

In most cases, it is also appropriate to involve franchisees in these dispute resolution mechanisms in a variety of ways. For a franchisee involved in a disagreement with its franchisor or with another franchisee, the impact of peer pressure is very often greater (and less confrontational) than that of pressure from the franchisor.

Among the many dispute prevention and resolution tools available to any franchise network, we would like to highlight one that is both simple and particularly effective when properly used: the Wise Persons' Committee, which we described in our newsletter entitled Wise-Persons' Committee: the Collective Consciousness of a Franchise Network.

Fasken has all the expertise and resources to advise and assist you in all aspects of starting, managing and expanding your network, including regarding the relationships, disagreements and disputes with your franchisees and with any association or group of franchisees anywhere in the world.


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