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Bulletin

Dispute Prevention and Resolution Tools for a Franchise Network

Fasken
Reading Time 8 minute read
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Overview

Franchising Bulletin

One aspect of the franchisor-franchisee relationship may be of great benefit to focus on is the prevention and resolution of disputes between two or more members of the network, including disputes between the franchisor and one or more of its franchisees, those between franchisees and those between partners or shareholders of the same franchisee.

Any serious conflict or dispute between strategic partners within the network may indeed divert a significant portion of the resources and attention of the involved parties, who then become adversaries, towards objectives that are often contrary to their common interests and the best interests of the network.

It is therefore appropriate to establish in the organizational structure of a franchise network fast, effective and credible processes and mechanisms for the prevention, detection, management and resolution of disputes.

For this reason, we will devote three bulletins to some of the main dispute prevention and resolution mechanisms within a franchise network.

First, it is important to recognize that these processes and mechanisms must be designed and implemented on a "fit for purpose" basis for each franchise system and that a mechanism that is appropriate for one system may be completely inappropriate for another.

Indeed, there are many other dispute prevention, management and resolution mechanisms and tools (the literature in this area lists at least 25 recognized ones). Furthermore, each of these mechanisms (both those discussed in these bulletins and all others) can be adapted to the specific needs and characteristics of each network.

It is therefore essential, in all cases, to seek the advice of experts in the field before designing, drafting and implementing any such mechanism or tool.

With that important caveat in mind, here are some of those mechanisms:

1.      Effective two-way communication mechanisms

One of the characteristics of many situations where there are differences of opinion or dissatisfaction is that each of the parties to the disagreement tends to shut down quickly.

This often leads to some form of breakdown in communications, which is the starting point for a rapid deterioration of the situation and a progressive worsening of the dissatisfaction or divergence which becomes, in turn, a dispute, a conflict and… a lawsuit.

When communication between a franchisor and a franchisee, or between two franchisees, is done only through lawyers, it bodes very poorly for the continuation of their relationship and for the network as a whole.

Regardless of the outcome of a dispute, there are a number of important practical issues that arise in connection with almost all legal disputes between a franchisor and a franchisee.

For example, as such a legal dispute progresses through the court system (which can take several years and consume significant financial resources on both sides), how can the franchisor and this franchisee continue to deal and communicate with each other on a daily basis?

Should the franchisor visit the franchisee like everyone else? Should the franchisor invite the franchisee to franchisees’ meetings? Isn't there a risk that the franchisee will get information from these meetings that can be used against the franchisor? Is there not also a risk that the franchisee will disrupt these meetings or use them to promote his or her cause to other franchisees or to engage in full-scale attacks on the franchisor? If the franchisor foresees that the agreement will be terminated at the end of the dispute, is there not a risk of inviting the franchisee to meetings where opportunities or projects will be discussed that will only be made public after the franchisee has left the network?

Furthermore, if, before or during the dispute, the franchisor has sent a notice of termination to the franchisee, can it still, without risk of this being interpreted as a waiver of the notice, continue to act towards its franchisee as if the latter were still a franchisee of the network? Can it collect its royalty payments for periods subsequent to its notice of termination?

This is only a brief sample of the many practical, and important, questions that often arise in a franchisor-franchisee dispute.

The answers to these questions are delicate and sometimes difficult, especially since each situation is different and, consequently, so are these answers.

It is in a franchisor's best interest to do everything possible to avoid getting into such a situation (although, admittedly, it is sometimes unavoidable).

The first way to prevent the vicious cycle that begins when the parties to a dissatisfaction or problem stop communicating directly with each other is to develop in advance healthy and effective communication mechanisms.

These mechanisms must allow for true two-way communication in which each of the parties involved is assured of being heard by someone who will seek a real solution to the situation, again with the interest of the network as the primary criterion for decision-making.

It will not be enough that these mechanisms are in place, but they must be well communicated to each franchisee, be user-friendly and they must work properly on every occasion that a franchisee uses them.

We have often seen situations that have degenerated into legal disputes because the franchisee did not know where to turn to resolve a problem or because the franchisee's attempts to communicate their dissatisfaction went unanswered.

The reality is that very few situations resolve themselves if not appropriately addressed; rather, the vast majority tend to escalate if not addressed in a timely manner.                     

2.      An "Ombudsman"

Although mostly associated with the public sector (governments, municipalities, hospitals, etc.), the ombudsman is a mechanism that can be very useful in preventing disputes within franchise networks.

In a few words, the ombudsman is a person, or a service, operating completely independently of the franchisor's management (to preserve a high level of impartiality), whose role is to receive and listen (generally on a confidential basis) to complaints, grievances and recriminations, to make an initial assessment, to guide the complainant to the right resources to resolve the matter and, in certain cases, to intervene with the franchisor's senior management to try to find a reasonable solution.

Organizationally, the ombudsman therefore generally reports directly to the franchisor’s chief executive officer or, even better, to its board of directors.

The ombudsman periodically reports on his activities (and the results of his interventions) and makes recommendations to prevent or better resolve complaints and recriminations that are addressed to him.

However, it does not negotiate on behalf of the complainant or the franchisor, does not act as a mediator or arbitrator and has no power to impose a solution or render a decision with respect to a dispute.

His role is therefore essentially that of a facilitator whose intervention takes place before a complaint, grievance, problem or dissatisfaction degenerates into a dispute.

Its weight in a franchise network is essentially moral. In fact, his activity reports, which may contain findings, comments and general recommendations, are widely distributed (not only to the franchisor's management, but throughout the network), so that the franchisor's representatives have a definite interest in collaborating reasonably with the network's ombudsman.

There are some businesses that provide external ombudsman services. This can allow a franchisor to afford a part-time ombudsman and ensure a higher level of impartiality on the part of the ombudsman (since the ombudsman is not employed by the company, but rather provides professional services in this capacity).

If you wish to use such a tool, however, you must be very careful to do so, otherwise both you and the ombudsman may lose a lot of credibility.

Several years ago, a franchisor with approximately 125 franchises found this tool very interesting (especially since the level of dissatisfaction within its network was rapidly increasing).

The CEO of this network saw it as an important additional advantage for him: to be able to free himself from having to respond to the numerous grievances from franchisees.

He therefore announced, with great fanfare, the appointment of his director of finance and controller (in fact, his right-hand man) as "ombudsman" for the network. However, the latter retained his position as CFO and remained the right-hand man of the CEO.

As you can certainly predict, this franchisor did not get any of the benefits he was looking for from this appointment.

When an ombudsman is an employee of the franchisor, she or he may not combine that role with any management or other role that may involve representing the franchisor to franchisees, employees, suppliers or anyone else doing business with the franchisor.

Even as an employee, it is imperative that the ombudsman remain impartial in the performance of his or her duties in this capacity.

Moreover, for this mechanism to function, this impartiality must be recognized by all persons likely to call upon its services (including, first and foremost, the franchisees).

A word of caution is in order. The establishment of an ombudsman within a franchise network entails costs (if only in terms of compensation). It is important for the franchisor to evaluate these costs before embarking on this path. Terminating an ombudsman service a year or two after it has been put in place is an excellent way for a franchisor to lose credibility, particularly with respect to its real willingness to quickly resolve complaints and recriminations within its network, with its franchisees.

It is also important to know that the Canadian Franchise Association (CFA) and, in Quebec, the Conseil québécois de la franchise (CQF), both offer to their members (franchisors and franchisees) the services an independent ombudsman.

In the second bulletin of this trilogy, we will discuss the mechanisms for handling complaints and problems and the implementation of a mediation program within a franchise network.

Fasken has all the experience and resources necessary to help you draft agreements that protect your rights and prevent disputes, as well as to advise, guide and assist you in all cases of difficulties or disputes with one or more of your franchisees.

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