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Bulletin

Dispute Prevention and Resolution Tools for a Franchise Network (Part 3 of 3)

Fasken
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Overview

Franchising Bulletin

To complete our trilogy devoted to various dispute prevention and resolution tools within a franchise network (the first two bulletins of which can be re-read by clicking here and here respectively), we will now discuss arbitration and the wise persons' committee.

5.      Arbitration

 

In cases where all mechanisms of communication, negotiation, conciliation and mediation have failed, the parties to a disagreement have no choice but to rely on a final decision made by a third party (a court, an arbitrator or an arbitral tribunal).

 

As for strikes and lockouts in labour relations, which should be used only as a last resort (since, regardless of the outcome, all parties will be harmed), the use of a third party decision to resolve a dispute between a franchisor and a franchisee (or, even worse, many franchisees) or between franchisees should be viewed as a last resort and should be used only after all other avenues and resources have been exhausted to find a better resolution.

 

No matter how skilled a third party (like a judge or an arbitrator) may be, she or he cannot possibly know the franchise system as well as the franchisor and its franchisees. There is therefore always a risk that her or his decision creates additional problems within the network, has consequences contrary to the interests of the network or generates a ripple effect.

 

An example of this is a franchisor-franchisee dispute over the interpretation of a non-competition covenant in the franchise agreement (there have been several such cases in recent years).

 

If a judge concludes that the clause goes beyond what is necessary to protect the legitimate interests of the franchisor in terms of its scope, duration or territory, the judge will have no choice but to strike the clause down completely (since a judge cannot rewrite the agreement).

 

This will obviously put an end to the immediate conflict between the franchisor and the franchisee, but it will also have a serious impact on the entire franchise network, since this judgment will mean that the non-competition covenants of all the other franchise agreements in the network (at least those stipulating a clause similar to the one that was the subject of this judgment) will most likely suffer the same fate, leaving the franchisor in a very vulnerable position in the face of delinquent franchisees and former franchisees.

 

On another level, a court or arbitrator can only decide the dispute as presented to it (e.g., remedy a past situation), whether by a condemnation to pay money owing, penalties or damages, by orders to do or not to do certain things, or by rescinding or terminating certain contracts.

 

This may be appropriate in many cases, but in the context of a franchisor-franchisee relationship or of a relationship between franchisees, it may not really resolve the underlying issues.

 

Let’s consider the case of a franchisee who sues its franchisor for termination of the franchise agreement and damages.

 

If, after many months of waiting and a very expensive trial, the court decides to dismiss the disgruntled franchisee’s lawsuit, what happens?

 

The franchisor (having won the court case) is still left with a very unhappy franchisee in the network who, after the trial, will be very reluctant to work with the franchisor or to participate in the growth of the franchise network.

 

It is true that such situations, which occur regularly, eventually find a solution, most often through a settlement reached after the judgment.

 

The end result is that the whole process comes down again to having to negotiate a resolution of the situation.

 

Finally, a court or arbitrator does not have access to the full range of possible solutions that may be reached through a negotiation or a mediation.

 

For example, in a negotiation or mediation, the parties may decide to modify their agreements, terminate some of them, enter into new ones, set up a process to sell the franchise, agree on compensation for aspects of their relationship other than those in dispute (e.g., special advertising support for a franchisee whose sales have been affected by the franchisor's misconduct), or involve persons not directly involved in the dispute (e.g., a landlord whose rent has become too onerous).

 

These are all possibilities that an arbitrator or judge does not have access to, as she or he must decide on the basis of the contracts in force and the circumstances that brought the parties before her or him.

 

That being said, if the parties to a dispute within a franchise system must absolutely rely on the decision of a third party to resolve it, the franchisor will have to ask itself whether it would be preferable to resort to an arbitrator rather than to a court.

 

If the franchisor chooses arbitration as the ultimate method of resolving disputes within its network, then the franchisor will have to include a clause to that effect in its agreement (since, in contractual matters, arbitration must arise from a contract).

 

The decision to include an arbitration clause in a contract, as well as the content of an arbitration provision, is complex and must take into account many factors.

 

Arbitration is not a panacea and is not appropriate for all franchisors or, even within a franchise network, for all disputes. Among other things, it is therefore necessary to identify which disputes are suitable for arbitration and which are not.

 

In addition, and contrary to popular belief, arbitration is not always cheaper or faster than litigation. This may be the case if the parties, and their counsels, actively cooperate to make the process effective and efficient, but experience has shown that, in the context of acrimonious litigation, such cooperation is often difficult to obtain from all.

 

Where either party, or counsel, chooses not to cooperate fully in the conduct of the arbitration, or worse, to object or obstruct it, the process can become much more time consuming and costly. In some cases, arbitration can be just as expensive, if not more so, than litigation.

 

The two main practical advantages of arbitration are (i) its relative confidentiality, since, contrary to court proceedings, an arbitration file is not publicly available, except in the case where judicial proceedings are needed (for example in the event of a motion for homologation of the arbitration award if the other party refuses to comply with it), and (ii) the fact that the arbitrator is chosen by the parties, which allows them to select an arbitrator with the qualifications and expertise required by the nature of the dispute.

 

On the other hand, it should be noted that, unlike a court judgment, a party dissatisfied with an arbitrator's decision cannot appeal it to a court.

 

The decision to include, or not to include, an arbitration clause in a contract must therefore be carefully considered with the help of qualified professionals in this field.

 

Having acted on several occasions (both as arbitrators and as lawyers for a party to an arbitration), we can attest to the fact that only a minority of the arbitration clauses with which we have had to deal appropriately met the needs of the parties. Often, at the outset of an arbitration, the parties and their counsel had to be persuaded to substantially modify or supplement the arbitration clause in the contract in order for the arbitration to proceed properly and within a realistic time frame.

 

This is not a matter to be taken lightly or left in the hands of persons who do not have adequate knowledge and experience.

 

There are many interesting possibilities for a franchisor who chooses to adopt this method of dispute resolution.

 

Here is an example.

 

A major international franchisor in the real estate brokerage business found that there were a number of disputes within its network between franchisees or between real estate brokers operating within the network's franchised real estate agencies, particularly with respect to commission splitting, alleged violations of territorial exclusivity, so-called unfair competition or solicitation of real estate brokers or customers.

 

It therefore decided to set up an arbitration process within its network in which the arbitrators were other franchisees not involved in the dispute. The arbitrators were in fact franchisees operating in markets other than those of the belligerents and who had an excellent reputation among the network's franchisees.

 

In addition, because of the vast territory covered by the network, this process involved the exchange of documents by technological means and hearings by video and phone conferences.

 

This process, even if it presents a certain degree of complexity, generally allows the parties to obtain a final decision within 60 days. In addition, because the process is internal to the network, disputes and arbitrators' decisions remain confidential and are not available to the public (or the media).

 

Depending on the size of a franchise system and the nature, extent and likelihood of disputes within the system, before such disputes arise, a franchisor should focus on putting in place mechanisms that will allow the parties to reach a solution as quickly as possible that is in the best interests of the system as a whole and does not create more problems than it solves.

 

6.      The Wise Persons’ Committee

 

Although this is a tool whose role is not limited to dispute resolution, we cannot end this trilogy without a few words about wise persons’ committees.

 

This is a mechanism that offers very interesting possibilities, particularly for resolving certain difficulties and differences within the network.

 

The primary role of a Wise Persons’ Committee is to provide key leaders with the advice of so-called "wise persons" who have no vested interest in the situation presented to them and who can therefore provide an "outside" perspective based on their extensive experience or expertise.

 

In the context of a franchise network, these individuals could be, among others, former executives of the franchisor or former franchisees who are now retired. With the advancement of the baby boomers, there should be more and more of them.

 

They are chosen because of their extensive experience (in life and in business), skills and wisdom. They are primarily people who (a) know the franchise system well and can therefore recognize where its best interest lies, (b) are not actively involved in the system and (c) have no stake in the outcome of their recommendations.

 

If a franchisor decides to use the support of such a committee as a dispute resolution tool, then it would be beneficial if the appointment of its members were the subject of a consensus within the network. Most importantly, franchisees will need to recognize that the persons appointed to this committee are not under the control of the franchisor and have no interest in favouring the franchisor, or any other member of the network, in their recommendations.

 

The franchisor may wish to refer to this committee disputes within the system, which it does not appear to be able to resolve on its own, for recommendations as to reasonable avenues of resolution that are in the best interests of the system.

 

The experience and selflessness of the members of this committee allow them to look at things from a different perspective and, sometimes, to see the forest rather than just the trees. This allows them to take a broader view and consider the longer-term implications of the dispute and the various options for resolution in the interests of the franchise network as a whole.

 

If the committee members have some influence (including reputation within the network) on the parties to a dispute, in some cases they may also act as conciliators to facilitate a reasonable resolution.

 

Whatever mechanisms are chosen within a franchise network, in order to be truly useful and achieve their objectives, they must, at a minimum, (a) meet high standards of professionalism and procedural fairness that are recognized and accepted by all stakeholders, (b) be adequately and clearly documented (c) be user-friendly, (d) be well known to franchisees and, of course, (e) permit the fast, efficient and equitable resolution or settlement of disputes having regard to the overall interests of the franchise system as well as those of the participants in the dispute.

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

On the other hand, the franchisor will also have to be careful about its own behaviour when a dispute arises.

A number of researches and studies in the area of business litigation have shown that the fact that a participant or stakeholder continues to act in accordance with the prevailing relational norms between the protagonists (read within the network) when a dispute arises greatly reduces the level of hostility during and also after the dispute.

Translated into the area of dispute management within a franchise network, this means that a franchisor can greatly reduce the negative impact of a dispute, or even a litigation, with a franchisee or between franchisees if it ensures that it acts and, equally important, is perceived, both by the participants in the dispute and by the other members of its network, as acting :

a.  In accordance with the values promoted by the network;

 

b.  In the interest of the network as a whole and with a view to preserving the integrity of the network;

 

c.  With integrity;

 

d.  In a fair manner.

 

Especially in the case of disputes and litigation, the perception of the protagonists (the franchisee(s) involved) and of the bystanders (mainly the other franchisees) of the franchisor's behaviour is very important.

There have been many instances where disputes that were or appeared initially relatively innocuous have escalated into major conflicts within networks because many, and sometimes all, of the franchisees who were not initially involved in the dispute have come to the conclusion that the franchisor was acting unreasonably, unfairly or abusively towards one of their colleagues.

As a strategic partner to its franchisees, a franchisor must, at the earliest possible stage, clearly and openly communicate its values to them and, thereafter, act at all times in a manner consistent with those values and in the best interests of the entire network. Consistency and a concern for fairness will also be important factors in preventing a dispute from escalating or having too great an impact on the entire network. This also implies that the franchisor must make as clear as possible to the franchisees its decision-making process regarding disputes and litigation, as well as the reasons for these decisions and its actions when they affect, or are likely to affect, several of them.

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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