Legal guidance: How to deal with a franchise dispute

Franchising is, by its nature, 'heavy' on disputes because franchise agreements are usually complex, last for a long time, and franchisors enter into a large number of them, reflects Franchise Lawyer John Pratt

Franchisor's Perspective:
Franchisors should recognise the strong likelihood of disputes arising with their franchisees and need to budget for it. Although litigation should always be the last resort, if you do not have the funds or legal expenses insurance to take action against franchisees you are putting your franchise at risk.

Franchisors need to investigate legal expenses insurance although very few insurance providers cover franchise disputes, and if they do the cover is limited.

If the future of your franchise is threatened and decisive and quick action is required then litigation may be the only option. If franchisees start competing against the franchisor or collaborate with and pass on confidential information to competitors immediate action in the form of an injunction is required.

In most other situations litigation will certainly be one of the alternatives but probably not the best. In order to give yourself additional options your franchise agreement should provide that disputes can be dealt with by mediation and possibly arbitration.

Mediation is an extremely effective way of resolving franchise disputes because it can take place relatively quickly and normally lasts only a day. As a result the costs involved are low and often following mediation the relationship between the franchisee and the franchisor can be maintained. The whole point about the mediation process is that the parties decide to resolve the issues themselves. A resolution is not imposed on them by an arbitrator or a judge and so ultimately whether the dispute is resolved is in the parties' hands. The parties tend to feel less bruised by this process than when lawyers 'take over' the dispute.
Franchisors should also investigate whether the dispute can be resolved commercially rather than confrontationally. Normally, disputes between franchisors and franchisees arise because either the franchisor no longer wants the franchisee to be part of the system or the franchisee no longer wants to be part of the system - so why not facilitate a sale of the franchisee's business?

If a franchisee is allowed to sell his franchise business in accordance with a timetable agreed by the franchisor, the parties will have achieved their objectives. Such a solution is not always available and indeed may not be appropriate, but commercial resolutions of disputes should always be investigated.

Franchisee's Perspective:
Franchisees tend to be in a weaker financial position than franchisors and many franchisors use this to their advantage in any dispute with their franchisees. Certainly if franchisees want to take on their franchisor through litigation they need to be certain that they have the funds to pursue the franchisor. Most don't and those that do have little idea of the time and stress to which litigation gives rise. Very few litigants - even those that are successful - would ever wish to repeat the experience!

What are the alternatives? Mediation certainly needs to be on your list of alternatives. Arbitration, whether through the British Franchise Association (BFA) scheme or otherwise, should also be considered although you should not assume that this is necessarily any cheaper than litigation. Complaining to the BFA, particularly if the franchisor is a member, will certainly receive a reaction from the BFA, but is unlikely to resolve the dispute - certainly if you are looking for reimbursement from the franchisor. It may make you feel good, but it won't put any money in your pocket.

The same applies to complaints to the media and/or government bodies. As a result the advice to franchisees is the same as to franchisors - try to find a commercial resolution!