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Why mediation is the best way for a franchisor to settle a dispute with a franchisee.

Updated: May 16, 2023

Franchise agreements almost universally contain a clause that calls for disputes to be

resolved by negotiation, failing which the parties will mediate. Only if that also fails should

litigation be commenced. This is entirely sensible because mediation is far less expensive,

and time consuming than litigation. It is confidential, non-confrontational and therefore less

stressful. It leaves the parties, rather than a court, in control of the outcome. Why then is it

not the automatic choice for many franchisors?

Back in the day, before social media changed the franchisor/franchisee dynamic, most

franchisors believed that the best way to settle a dispute with a franchisee was to litigate.

Logic suggested that a show of force would demonstrate a determination to control the

franchisee network. The franchisee, probably with limited financial resources, would feel

intimidated and be likely to withdraw their complaint. If they didn’t, their lack of experience in

the legal system would further weaken their resolve. In any event it was important to ‘send a

message’ to the other franchisees that dissent would inevitably result in costly and time-

consuming litigation.

For many franchisors, over the last decade, litigation proved to be a bad choice. Losing in

court brought large legal costs and a substantial and humiliating counter-claim pay-out to the

franchisee. In some cases, where the franchisor has won, there has been collateral damage

to the business through bad publicity which has resulted in reduced new franchisee

recruitment rates and damaged growth. Accordingly, a litigious approach by franchisors is

now seen to be outdated and it has been replaced with a more collaborative and conciliatory

way of doing things.

Alternative dispute resolution (ADR), especially mediation, is now widely acknowledged to

be a far more effective method of resolving a franchise dispute. And it has been there, in

most franchise agreements, all along!

So; what are the disadvantages of complying with the franchise agreement and opting for mediation? The downside is very small because the parties remain in control throughout. If either side decides that the negotiation within the process is not going to produce an acceptable outcome they can halt the proceedings without penalty. Everything remains confidential. Nothing that has been discussed or any tentative offers that have been made can be disclosed in the court case that will probably follow the failed mediation. The only downside is the cost of the mediation and the time that it has taken. The cost is a fraction of a similar amount of court time and the preparation relativly simple.

The advantages however are considerable because a mediation offers the franchisor with a strong case the opportunity to demonstrate reasonableness from a position of being firm but fair. The mediator will be entirely neutral but will use their experience and expertise to help the parties to individually see the reality of their situation. If this results in a less that an even compromise, which would be inevitable if one case was much stronger than the other, the outcome for both sides would be better than if they had gone to court.

With the assistance of the mediator, the resulting negotiated settlement would still provide a

franchisor with a strong case with a satisfactory outcome. The franchisee, if they did indeed

have a weaker case, would also be better off because, if nothing else, of the saving on legal

costs. They would be less resentful of the decision, which they had in part negotiated, and

therefore less likely to complain widely on social media. Both parties would find it much

easier to re-establish a working relationship within the franchise.

The franchisor would have almost everything that they would have ‘won’ in court, but they

would have removed the uncertainty of a legal battle. Very importantly, instead of sending a

forceful, dominating message to the other franchisees they would be shown to be

reasonable and conciliatory. Which, after all, is exactly what a modern franchisor should be.

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