Franchising should be, and mostly is, a mutually beneficial partnership between a franchisor and a franchisee but sometimes things go wrong. If that happens, the first step for the aggrieved party would normally be to try to resolve the problem by informal discussion. If that does not produce results, the next step would be to formalise the complaint, usually by appointing a solicitor. However, before doing that, it would be useful to consider how the opposing party is likely to respond.
The parties will react differently to the dispute. A franchisor is in the business long term and will be concerned about negative publicity and what effect the dispute will have on other franchisees of the business. The franchisee probably has less money to pay for an arbitration or a court case and may be less aware of the finer intricacies of the franchise agreement. The party intending to formalise the dispute should be aware of the respective areas of strength and vulnerability and plan their next move accordingly. The best plans will provide some benefits for the opposing party because that will greatly improve the possibility of reaching an agreement and avoiding litigation.
For a franchisee, a key consideration will be if they wish to remain in the business. For a franchisor, the obverse is if they want to retain the franchisee and continue to work with them. If both are affirmative, it is obviously important that the dispute resolution is conducted in an amicable and non-confrontational manner.
If either party does not want to continue the relationship, the way in which the franchisee leaves the business is important. Both parties should act ethically and without acrimony. In particular, the franchisor should appreciate that social media is very powerful and the days are long gone when it was sensible to ‘send a message to the network’.
The re-sale exit
An ideal way of achieving an amicable parting is a re-sale because that provides a continuation of the business and the resulting income stream for the franchisor. It also removes the possibility of future problems with enforcing post-termination clauses. A re-sale provides the franchisee with the sale price and the franchisor with a percentage, if that is included in the franchise agreement as it usually is. A re-sale by an incumbent is much easier to achieve than the sale of a territory that has been previously occupied by a failed or terminated franchisee. The re-sale exit has benefits for both sides.
The non-renewal exit
Franchise agreements are for a fixed period and almost always grant the franchisee the right to renew, subject to certain conditions. Central to the conditions will be the franchisee’s previous compliance with the franchise agreement and the operations manual. A franchisor who is unhappy with the performance of a franchisee can use non-renewal as an alternative to termination. It is less contentious and unlikely to provoke retaliation, such as a counterclaim. Obviously, it is incumbent on the franchisor to make the franchisee aware of an intention to refuse a renewal. This allows the franchisee the opportunity to rectify matters.
For a franchisor, non-renewal is generally a less contentious method of removing a franchisee who is not performing properly. As such, the non-renewal exit usually favours the franchisor.
Rescission of the franchise agreement
The difference between rescinding and terminating an agreement is that rescinding puts the parties back into the positions in which they were previously. The most obvious example of this relates to post-termination clauses. For a franchisee, rescinding the agreement would nullify any post-termination clauses and allow them to carry on the same business in the same territory. Rescission is available in cases where there has been misrepresentation by the franchisor in the materials and financial projections that were used to induce the franchisee to sign the franchise agreement. Rescission usually favours the franchisee.
Negotiation
Negotiation is by far the best method of resolving a franchise dispute. It costs nothing and is less likely to cause resentment and long-lasting reputational risk for the franchisor. It does require a degree of pragmatism by either side which is often in short supply in a franchise dispute.
A franchisee will probably see the franchisor as being more powerful and may take the matter more personally. A franchisor will be concerned about the effect that a negotiated settlement will have on other parts of the business. Also, to avoid showing weakness or inconsistency that will impair their control over the business. These opposing forces are difficult to overcome and may require some input from professional advisors.
Obviously, not all disputes can be resolved by negotiation, but it remains by far the best way of doing so.
Mediation
Most franchise agreements contain a clause that states that in the event of a dispute the parties will firstly try to mediate. This follows the direction of travel of the legal system in which an initial attempt to mediate is a pre-requisite to litigation. Mediation provides both parties with some control over the outcome as opposed to having a verdict imposed upon them by a court. The mediator’s role is to assist negotiation, not to pass judgement. A mediation will only usually last a few hours and very seldom longer than one day. As such, fine details of the dispute and any long-term implications of a settlement are unlikely to be explored. Mediation is much quicker and vastly less expensive than litigation.
Litigation
Litigation is sometimes the only way to settle a dispute but it should only be used as a last resort.
