Franchise Lawyer Blog

At least one study reveals that in 2007, over 45% of franchisors included arbitration as the method for dispute resolution in their franchise agreements. Arbitration can provide the parties to a dispute with substantial benefits. Arbitration is touted as a method for resolving disputes more efficiently than litigation, saving both money and time. In addition, arbitration provides the parties with the ability to control the process and to obtain an unappealable resolution.

Unfortunately, the process of arbitration does not always result in the hoped for benefits. Costs skyrocket with the addition of arbitrator fees and administrative fees. Arbitration often results in what may be perceived as an “arbitrary” determination; the oft-heard reputation of arbitrators to cut the baby in half. Also, with limited discovery and procedural safeguards, the parties can be left with a feeling that they did not have their day in court.

But arbitration does not necessarily have to result in such dissatisfaction (although, no doubt, any losing party is likely to be dissatisfied regardless of whether the claim was arbitrated or litigated). The parties should remember that arbitration is a creature of contract and the process can be tailored to the parties' satisfaction. They can contract for certain discovery or discovery limits. They can contract to limit the arbitrator’s discretion. And, the parties can decide which administrative organization to use (if any) thereby possibly substantially reducing their costs.

If the parties to a franchise agreement consider all options and variations in the course of drafting the arbitration provision, the parties will have far greater control over the dispute resolution process. This will presumably result in a more favorably received method for resolution.

Julianne Cowan Lusthaus

At the ABA Annual Forum on Franchising in Toronto this past week, several of the presentations touched on the subject of mediation, specifically as a dispute resolution method stated in the franchise agreement. The concept was discussed in what was for me a surprisingly positive light. I have never thought much about the concept of contractually induced mediation. If it is phrased as mandatory it seems unproductive conceptually. Parties are less likely to agree to anything if they are forced to the table at the expense of other remedies. If it is not mandatory, it seems like a toothless concept. If the parties could voluntarily agree to resolve their dispute, they wouldn't be having a dispute in the first place. But one of the presentations at the Forum introduced statistics that suggested that parties are more likely to resolve a dispute if they enter into mediation first, to a surprisingly high degree.

Which leads me to a question. Do you think mediation works? Do you use it in your franchise agreements? If so, do you phrase it as a mandatory requirement to the initial exclusion of all other remedies? If not, how do you introduce it?

This query is an experiment of sorts. I have never offered a survey type question on this blog before. It you do respond, via our contacts page, I will provide to you a summary overview of the other information I receive in response.

We attended the 32nd Annual American Bar Association Forum on Franchising in Toronto last week. The opening session featured Greg Nathan, a psychologist and franchising expert, who examined the psychological dynamics of the franchisor/franchisee relationship. At one point, he posted a franchisee mood monitor: how do franchisees feel about their relationship with their franchisor and their franchisors' attitude towards marketing, support and business in general?

As is so often the case with psychology, many of the observations seemed obvious: of course franchisees are happier when they are respected and treated fairly. But if it is so obvious, why did Nathan report widespread dissatisfaction among franchisees in terms of their perception of their franchisors' treatment of them? Why do these concepts of respect and fairness get confused in their translation into the marketplace?

Because economics, or economic perceptions, interfere. Apparently, many franchisors believe that decisions that make sense according to the bottom line are acceptable even if they make people unhappy. There is a prevailing attitude of "It's just business, nothing personal." And the franchisors' assumption is that franchisees understand that. The question was asked of franchisors: does it matter if your franchisees are happy or mad? Some thought it didn't. Business is business. But the statistics Nathan presented strongly suggested otherwise.

Nathan suggested that everything is personal. Even decisions that make perfect financial sense can be deeply resented. It becomes essential that franchisors step away from the bottom line and examine the long term effects of short term business decisions. Nathan suggested that the construction of a healthy system might, at times, require decisions that aren't optimum from a short term economic perspective.

Growth of a system depends on satisfied franchisees. That satisfaction must become a measured economic metric for a system to succeed. Why? Because a system is an organic thing, whose growth is dependent on the overall health of the body. Nothing slows growth more than bad word of mouth from established franchisees. Does this require blatant pandering to the moods of the rank and file? No, it requires common sense. You must convince your franchisees that decisions are for the mutual good, even if they require short term financial pain. You must also sometimes be prepared to weather difficult times as a franchisor, if the immediate short term solution is going to turn your franchisees against you.