DISPUTE RESOLUTION TOWARDS DEVELOPMENT OF A WORKING MODEL

Tips for creating long-term health and alleviating potential issues for your franchise system.

By William Slater Vincent, Esq., Foot Solutions and IFA Franchise Relations Committee member

Disputes between the franchisor and the franchisee are bound to happen sooner or later. Resolving disputes between the franchisor and the franchisee can be expensive and time consuming. Disputes can also adversely impact the franchise system and create ill-will and a hostile working relationship between the franchisor and the franchisee. Therefore, it is in the best interests of all parties for a dispute resolution process to be implemented that is proactive and allows to the maximum extent possible the resolving of disputes at the lowest levels informally and not through litigation. This article sets forth a dispute resolution process that is effective for the long-term health of the franchise system and the franchisor-franchisee relationship. This process is supported through the research of the dispute resolution process of 12 franchise systems.

Phase One: Informal Dispute Resolution

Typically, a proactive franchisor who views the franchise relationship as a business partnership will have several informal ways to settle disputes. Th e fi rst such method is by avoidance. A proactive franchisor practices avoidance through its training franchisees. During this type of training, the franchisor covers in great detail all of the terms, DISPUTE RESOLUTION TOWARDS DEVELOPMENT OF A WORKING MODEL By William Slater Vincent, Esq., Foot Solutions and IFA Franchise Relations Committee member conditions, and obligations required of the franchisee as found in the franchise agreement and other agreements that both parties have signed. Th erefore, at the beginning of the franchise relationship the franchisor has made sure that the franchisee is completely aware of all of his or her responsibilities and obligations. Th is training feature alone will eliminate, or at least alleviate, numerous potential problems.

Th e second stage of informal dispute resolution is performed by the franchisor’s field personnel. Most of the correspondence and personal business that a franchisee has is with the franchisor’s field personnel. Th e field personnel are those who typically first fi nd out and become aware of any problems. Since the field personnel are the first line of resolution in a franchise system, they meet face-to-face with the franchisee to discuss the problem and attempt to affect a practical solution. A great number of disputes are resolved through a one-on-one meeting at this level.

However, there are occasions that dictate that the field personnel are not the appropriate people to resolve the dispute. In such a situation, there will be correspondence between the home office personnel of the franchisor and the franchisee. Th is correspondence typically involves telephone contacts, letters, emails and face-to-face meetings. Th ese face-to-face meetings can occur either at the franchisor’s headquarters or at the franchisee’s location. Once again, at this level, many disputes are resolved.

Oftentimes the franchisee who is in noncompliance will require franchisor assistance. In such a situation, more is required to solve the dispute than face-to-face meetings with field personnel or headquarters’ personnel. In these situations, the franchisor will have a program in place to help franchisees comply with their responsibilities and obligations under the franchise agreement. Situations appropriate for this approach include those beyond the franchisee’s control. For example, this approach is appropriate if the franchisee is having difficulty paying royalties and other fees due to competitive market conditions, a poor location and/or a general economic recession.

In the event the above methods fail to resolve the dispute, the next stage is that of mediation. Th e mediation process entails a non-binding informal presentation by both the franchisor and the franchisee of the dispute to an independent mediator. Th e independent mediator attempts to determine the underlying causes of the dispute and have the parties agree on a mutually beneficial and satisfactory resolution. Mediation is non-binding but allows an outside party to hear both sides. As a result of the use of an independent third party, oftentimes both sides will successfully resolve the dispute.

Occasionally disputes will arise between the franchisor and a large number of its franchisees. In this situation, the dispute is not with an individual franchisee, but with multiple franchisees. To settle such disputes informally, the franchisor will utilize services of its franchisee advisory council or, if there is one, an independent franchisee association. However, the only time such an organization would be used is when disputes needing to be resolved involve the franchise system as a whole. Such an organization would not be used to settle disputes between individual franchisees and the franchisor.

Phase Two: Arbitration

Occasionally, the informal methods to resolve disputes mentioned above will fail. At this point, arbitration usually enters the picture. Most franchisors have included mandatory arbitration in their franchise agreements. Arbitration involves the resolution of the dispute between the franchisor and the franchisee by submitting the dispute to one or more impartial persons who serve as arbitrators. These arbitrators will hear both sides, present their positions, then render a final and binding decision in the matter.

Compared to court cases, arbitration tends to be less expensive and consumes less resources on the part of both the franchisor and the franchisee.

Conclusion

The franchisor-franchisee relationship has often been described as a partnership similar to a marriage. However, as the relationship continues, tensions and disputes can arise. A proactive dispute resolution process is one that emphasizes the settlement of the dispute at the lowest level possible. Th is allows for the retention and maintenance of goodwill and trust between both parties that are not able to be achieved in a more adversarial setting.

William Slater Vincent, Esq., is a board member of Foot Solutions, retired professor of law, management and entrepreneurship and a member of the International Franchise Association Franchise Relations Committee.