Q. As a prospective franchisee, what should I know about mediation and arbitration before I get started?

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Every franchisee hopes to develop a successful, profitable, independent business following a unique and proven system operating under an established brand name. Every franchisor hopes that it has chosen qualified and energetic franchisees to operate successful businesses for a lengthy period of time.  Neither party expects to have a dispute with the other which may result in litigation.

However, hope is not reality when it comes to a breakdown of the franchise relationship. Unfortunately, franchise disputes are on the rise for a number of reasons, and franchisees in particular should be aware that there are viable alternatives to litigation before the courts when it comes to resolving disputes.  Among the most commonly utilized alternative dispute resolution methodologies are mediation and arbitration. Prospective franchisees should have a basic understanding of how these programs work and why they can be advantageous in avoiding litigation.

Litigation is time consuming, expensive, disruptive, and unpredictable. The court process is subject to long delays, has a negative effect on franchise relationships, exposes the franchise system to risk for both franchisors and franchisees, and can result in undesirable press and social media.

Mediation

Mediation can be mandated in a franchise agreement or another ancillary document like an operations manual.  It is often a pre-condition to commencing litigation or arbitration. Some provinces require mediation before cases can be set down for trial. But most importantly, mediation can be voluntarily agreed to by the parties at any time.

Mediation is not binding and does not result in a decision. However, it has a high success rate and often results in a negotiated solution. It is a confidential non-binding process that can preserve an existing relationship. All parties participate in the process, and the cost is very minimal compared to litigation.  Mediation can be utilized at any stage – a claim need not to have been filed or served.

Mediation takes place before an independent facilitator chosen by the parties. An experienced mediator can assist the parties in crafting a solution which can include tax advantages, a structured settlement, remain confidential, and contain speak well provisions. It is highly recommended that the parties select a mediator with franchise experience and understanding – a franchise legal expert, a respected former judge, or an experienced general commercial mediator.

Mediation follows a structured process. Lawyers are not required, but are usually present. It is essential that client decision makers attend and be prepared, informed, and have authority to settle. The mediator will conduct the process in an open forum, but will also meet in private caucuses with the parties. The mediator will help the parties analyze the issues, determine their goals and options, and if a settlement is reached, ensure that the parties sign the minutes of settlement before adjourning the mediation.

Arbitration

Arbitration is a more formal procedure conducted under specific arbitration legislation and pursuant to an arbitration agreement between the parties. It is conducted like a trial, but with less formality, and the arbitrator is often given significant discretion on procedural issues and the ability to issue a full range of orders and decisions.

Arbitration has a number of advantages over judicial proceedings. It is conducted in a private and confidential forum. The parties can select an arbitrator with specific expertise (e.g., in franchising). Arbitration is cost effective, relatively quick, and conducted efficiently. The parties have the ability to exclude certain matters or issues, and to choose effective and practical arbitration rules. The parties can determine the grounds of appeal, but most arbitration decisions are final and binding, with limited grounds of appeal, and are confidential and not available to the public.

An arbitration agreement can be contained in a separate document or as part of a franchise agreement. The agreement will usually address the scope of the arbitration, qualifications of the arbitrator, the number of arbitrators, rules and procedures for the hearing, the location, time frames, exchange of documents, available remedies, interim awards, jurisdiction issues, limitations on liability and damages, final monetary award options, costs and expenses, and whether the arbitrator will give a written or oral decision.

There are a number of alternate dispute organizations which have experienced mediators and arbitrators on their rosters who can assist the parties in organizing and conducting the mediation or arbitration.

And finally, a recent development combines both mediation and arbitration into a procedure known as “med-arb,” which allows the case to proceed first as a mediation and then continue as an arbitration if mediation is not successful.

Both franchisor and franchisee should canvass these alternatives as early as possible in the relationship.

Frank Zaid
Franchise Mediator, Arbitrator, and Ombudsman
Frank Zaid FRANlegal Support Services