Alternative Dispute Resolution: Striving for Open Communication between Franchisor and Franchisee

Alternative Dispute Resolution Striving for Open Communication

At the beginning of every franchise relationship, even if everything starts on the best of terms, it is always important to think about how you might handle any issues that may arise.  If a franchisee later becomes disgruntled, how is your system prepared to respond? In the franchise context in particular, before jumping to expensive litigation, the franchisor should consider alternative dispute resolutions in order to find a resolution.

As a preliminary step, in order to avail itself to alternative dispute resolution, the franchisor must make sure that mediation and/or arbitration are included in the dispute resolution provision of the franchise agreement.  That way, the parties, at the franchisor’s option, are obligated to attempt to resolve the issues in other ways before resorting to the expensive and time-consuming route of litigation.

In addition to the benefits of saving cost and time, alternative dispute resolution, such as non-binding mediation, also allows for an opportunity to preserve the franchisor-franchisee relationship.  In mediation, the parties can work together toward more creative solutions than what litigation may have to offer.  For example, the parties may decide that the best end result is for the franchisor to assist the franchisee in marketing and selling the franchised business to a third party, which allows the franchisee to recoup some or all of his or her investment and allows the franchisor to avoid having a termination or closed franchise unit on its record (and disclosed in the franchise disclosure document).  Even if both parties cannot be made entirely happy, mediation can help both parties be able to live with the result.  In litigation, that option is not always available because the court will decide a winner and a loser.

Further, mediation also provides each side with the opportunity to share their story in a less formal setting without evidentiary rules and formalities of litigation.  If communication issues were the cause of the current dispute, mediation provides a forum to re-open the lines of communication between franchisor and franchisee so that each side can benefit from being heard.  On the one hand, the franchisee can explain and show why he or she is disgruntled in the first place (lack of training, lack of on-going assistance, poor communication, etc.) and the franchisor can show the franchisee that it is willing to work with the franchisee to keep them in the system. Also, the franchisor can show other franchisees in the system (who are not involved in the dispute) that it is not quick to sue and blame its franchisees, but rather is willing to enforce compliance amicably.

If possible, remove from the discussion any individuals who may have gotten into prior arguments.  However, make sure that a decision-maker from each side is always present at mediation.  Strong communication and creative problem-solving will all go to waste if a decision maker is not available to decide the issue has been resolved (or still needs more work).

Even if the franchisee will ultimately leave the system, creating an open dialogue and attempting to resolve the issue(s) creatively allows the franchisee to (perhaps) leave the system with less of a sour taste in their mouth, which is important for the franchisor.  Prospects may be reaching out to this franchisee within the next year (because the exiting franchisee is required to be disclosed in the franchise disclosure document for one year), so the more positive facts surrounding that exit, the better.