Alternatives To Litigation In Franchise Disputes

Author: Jonathan Mesiano-Crookston

Date: NOV 7th, 2014

Topic: Industry Experts

Sometimes, it just can’t be helped. Franchise relationships may go sour, whether because of poor financial results, disagreements, differing interpretations of contracts, or just bad communication. When that happens, most people turn to resolving their disagreements through long, costly, litigation.

People are often not aware that there exist two main alternatives to the public judicial system for commercial disputes: arbitration and mediation. These processes can sometimes be faster, cheaper, and more efficient than regular litigation. They are of no assistance if the parties don’t know that they exist, or how to take advantage of them. This article, therefore, will provide a very quick overview of both systems as well as some of their advantages and disadvantages, in order to help provide some guidance to those who might find themselves embroiled in a commercial franchise dispute.

Arbitration

The first of these alternative systems, arbitration, is fundamentally a private trial. Instead of the parties appearing before a public judicial system, they agree to appoint a trusted neutral third party who will act as a decision maker/arbitrator. This arbitrator will hear evidence, make decisions about the credibility about evidence and witnesses, and ultimately make a legal determination of which party’s position ought to be chosen over the other. In these ways it is very similar to the regular court process.

As opposed to the regular court process, which proceeds in according to a pre-set series of steps, arbitration can be tailored by agreement of the parties to be as involved or as streamlined as desired. This allows the parties some latitude to adjust the costs and time spent on the arbitration to the scale of the dispute being resolved.

Parties can agree to go to arbitration at any time, including by agreement while in the midst of regular litigation. In franchising, it is also relatively common for the parties’ franchise agreement to require them to arbitrate disputes arising from that agreement (or at least certain types of disputes arising from it).

Because arbitration results in a binding decision, it is often most suitable where one party believes it has a strong case, or where the parties’ interests may not overlap so as to make mediation possible (as will be discussed below). It is also useful where the parties favour confidentiality, as arbitration is typically completely confidential, which can be important in this age of easily-accessible information. However, because the result will often be in one party’s favour, the arbitration process may serve to polarize the parties, and therefore make a continued relationship between them more difficult, something that should be kept in mind if an ongoing relationship is beneficial.

Mediation

Mediation is a process involving a trusted third party, but in which that third party does not make a binding decision (as in arbitration), but rather helps to guide the parties to craft their own resolution to the dispute. It is often much quicker and less expensive than litigation or arbitration, because there are few pre-trial evidence-gathering steps, often few or no witnesses, and most of the costly steps related to gathering and producing evidence within a litigation or arbitration process are often not present.

Instead the parties typically exchange their best evidence, prepare a written brief outlining their best arguments, and then get together at a neutral location with the other parties and the mediator in order to try to come up with a mutually agreeable solution. It is usually done completely without prejudice, meaning that the parties cannot use the comments made during mediation later at trial or in litigation or arbitration processes, so that the parties feel free to truly express their opinions.

Just as with arbitration, mediation is normally confidential, and can be conducted at any time if the two parties agree, even in the midst of a larger litigation or arbitration process. Mediation can be required by the parties’ franchise agreement, although this is less common than arbitration provisions.

Franchise disputes, like many types of commercial disputes, generally lead to a “winner takes all” result when determined by a judge or arbitrator, making litigation or arbitration especially risky strategies for clients. Mediation can therefore be a very useful alternative, as it allows the parties to craft their own process and resolution reflecting a compromise position acceptable to all the parties. Furthermore, even if mediation itself does not yield a successful settlement, the process will always provide insight into the strengths and weaknesses of each party’s case, frequently resolve certain factual or procedural issues, and the discussions almost always move the parties toward a range of possible resolutions.


The biggest negative to mediation is that, as a non-binding form of dispute resolution, it requires the active participation of both parties to be successful. Also, if the parties are too far apart that they cannot actually cause their interests to overlap (i.e. they cannot come to an agreement they can all live with), mediation cannot help the parties, as it normally does not result in a final decision. Instead, the most the mediator can do at the end of the day is suggest, if the parties ask, which way he or she would decide the outcome if he or she was a decision maker. (Although note that there are more complicated forms of mediation combined with arbitration, which allow the mediator to make a final decision on any points of disagreement after discussion between the parties has gotten them as close as they are going to get.)

Conclusion

Arbitration and mediation are both creative alternative methods to resolve disputes that can often be quicker, cheaper, and more flexible than regular Court process. Both franchisors and franchisees should keep them both in mind as part of their dispute resolution “toolkits” when a dispute arises.