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How franchise disputes arise and how to resolve them

Updated: May 16, 2023

Franchise disputes nearly always arise when either the franchisor or the franchisee

feels that the other party is failing to comply with what has previously been agreed.

This could relate to the duties of each party as defined in the franchise agreement. It

could stem from the franchisee’s failure to comply with the methods specified in the

operations manual. Another area, which has been the cause of many franchise

disputes, is misrepresentation by the franchisor when selling the franchise, usually

by exaggerating financial projections.


Blame culture is rife in today’s society. If a franchisee fails to achieve his or her

expectations, they will probably blame the franchisor for misrepresenting or mis

selling the franchise. Few will ask themselves if they have made enough effort.

Conversely the franchisor is unlikely to question the viability of the territory or the

training and support that they provided.


A change of ownership or in the management of the franchise has been the cause of

many disputes or where changing trading conditions have caused a business model

to be modified. Disputes have arisen in franchises in which the franchisor has

negotiated national contracts at margins that were too low to be viable for the

franchisees. Another common problem area has been with franchises that charge a

fixed monthly fee instead of a percentage on sales turnover. Another has been the

over-selling of too many non-exclusive territories. Disputes can arise in new and

relatively untested franchises but also in well-established ones.


How disputes escalate

The mindset of tit for tat blaming is often how disputes escalate into major legal

battles. There is a great temptation for a disgruntled franchisee to seek moral

support by sharing their grievances with their peers and on social media. This will

magnify the problem and make it public. A franchisor, wishing to show that they

control the business, will be tempted to act forcefully to quell dissent in order to ‘send

a message to the network’.

The next step for one or both of the parties is to appoint a solicitor. The solicitor may initially suggest mediation but unless they feel that their client’s case is weak not many will advise against taking legal action. A few ‘ambulance chasers’ will actively encourage it. When legal fees start to mount up the gulf between the parties widen. In a high percentage of cases the egos of the protagonists will further exacerbate the dispute.


Resolving a franchise dispute


Negotiation

Direct negotiation is by far the best way of resolving franchise disputes. It costs

nothing, is less time consuming and will cause less long-term damage. In the context

of resolving a franchise dispute the key to success lies in both the parties

recognising that the cost of making some concessions to achieve a settlement is far

less than the cost and the risks involved in arbitrating or, even more so, litigating.

However, that is much easier said than done because good judgement is often

impeded by ego and emotion. There are situations where a negotiated settlement is

impossible but generally, even if one of the parties feels that their case is watertight,

it is still sensible to make some concessions to achieve an out of court settlement.


Mediation

Franchise agreements usually contain a requirement for an attempt to be made to

resolve a dispute by mediation. This involves both sides agreeing on the choice of

mediator and paying up front for his or her services. The mediation will start with a

round table meeting, chaired by the mediator, at which each side will state their

position. With their representatives they will then move to separate rooms to

consider what has been said.


The mediator will go between them to report any movement in their positions. The mediator acts impartially and does not pass judgement but will make comments and recommendations to broker an agreement. The advantages of mediation are that it is private and considerably less expensive and time consuming than litigation. It has a reasonably high level of success but seldom produces an outright win. Sometimes nothing is achieved.


Arbitration

Arbitration is also private, quicker and much less expensive than litigation. Both the

parties must agree who the arbitrator will be. The arbitrator will listen to evidence,

consider the opposing arguments and deliver a verdict, in a similar manner to a

judge. He or she will also decide how the costs will be apportioned. The arbitrator’s

decision is final.


Litigation

If an agreement cannot be reached by other methods the only remaining way of

resolving the dispute is litigation. This is time consuming, expensive and the hearing

is in public. Both franchisees and franchisors should think very carefully before

taking this step. The party who commences the litigation becomes the claimant and

the other party the defendant. The defendant can bring a counterclaim.

The hearing is before a judge who will listen to evidence and pronounce judgement which is final except where leave to appeal is granted. The opposing sides are almost always

represented by solicitors who take care of the procedural matters such as filing

evidence to the court at the required time. In all but the smallest cases each side will

use a barrister to prepare the case, present evidence to the judge, examine

witnesses. Alternatively, either party can act as a ‘litigant in person ’and represent

themselves. They can be assisted by someone who is not legally trained who is

referred to as a ‘McKenzie friend’. A litigant in person can address the judge and

examine witnesses but a McKenzie friend can only talk to their client.


How to secure a successful outcome

As stated above, a negotiated settlement is by far the most satisfactory method to adopt but always in the knowledge that if that fails the dispute may end up in court. It is therefore important for the aggrieved party to have a clearly defined argument and realistic objectives. Also, to appreciate that the defending party will not only seek to expose weaknesses in the complaint but also try to show any bad behaviour of the complainant. A golden rule of the legal system is that a litigant should come to court ‘with clean hands’

As documentary evidence is much stronger than from memory, the franchise agreement and the operations manual will be central to any form or resolution. A complainant should therefore concentrate on being able to show breaches of the agreement by the other party.

Franchisors should be mindful of the fact that, win or lose, a public dispute carries a great deal of reputational risk. Much less so for franchisees.


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