Why do franchise disputes arise?
Any long term commercial relationship has the potential for friction, but the more complicated nature of franchise relationships make them particularly susceptible. That potential is then compounded by the number of franchises within the network - given this, it is perhaps not surprising that so many disputes arise within franchising.
Prevention is always better than cure, and in the case of contractual disputes is usually far more cost effective too. Whilst some disputes will be unavoidable, the majority, in our experience, could be avoided by better communication and management of expectations, by maintaining the perception of the value which the franchise model brings to the franchisee and by early, open and honest engagement when problems do arise. Allowing problems to fester can often lead to wider disenchantment throughout the network.
Motivation When Addressing Disputes
The best way to resolve disputes will often be to seek a commercial solution avoiding the costs, distraction and inconvenience of litigation. However, there are very good reasons why a Franchisor may want to adopt a tough position - they have a very real need to protect the goodwill in the franchise system and there is often a 'bigger picture' to consider. We will often take instructions from Franchisors who want to make an example of an errant Franchisee, sometimes at a cost which is disproportionate to the issues in hand - this is important in sending out a strong message to other Franchisees that they must observe the franchise obligations or 'pay the price' if they do not.
From a Franchisee's perspective, once the relationship has soured there will usually need to be a parting of the ways. The question for the Franchisee will often be whether it can establish a breach of the Franchise Agreement by the Franchisor, which entitles the Franchisee to terminate, thereby allowing them to carry on trading (under a different brand) free of the post-termination restrictions contained in the Franchise Agreement. There will often be a significant power imbalance between the Franchisor and Franchisee, which can have a significant bearing on the Franchisee's ability to 'take on' a dispute. Settlements will often include the Franchisee selling its interest in the Franchise, or sometimes buying itself out of its obligations.
We are often instructed in relation to group franchise actions where we will act for (or against) a body of Franchisees sharing a common dispute with the Franchisor. This will often 'rebalance' the negotiation position and Franchisees may seek to impact the Franchisor's cash flow by withholding franchise fees whilst the dispute is ongoing, to force the Franchisor to negotiate or submit.
Commonly we will encourage the parties to enter into mediation. Under this process the parties each attend a meeting at which an independent mediator acts as a travelling diplomat, going between the parties, seeking to identify the key drivers to the dispute and encouraging the parties to explore alternative propositions in order to find a compromise. The process is quicker and cheaper than litigation and can often lead to negotiated outcomes that could not be achieved in court. Many franchise agreements now encourage, or even compel, a referral to mediation for this reason.