Franchise agreements almost universally contain a clause that calls for disputes to be resolved by negotiation, failing which the parties will mediate. Only if that also fails should litigation be commenced. This is entirely sensible because mediation is far less expensive and time-consuming than litigation. It is confidential, non-confrontational, and therefore less stressful. It leaves the parties, rather than a court, in control of the outcome. Why then is it not the automatic choice for many franchisors?
Back in the day, before social media changed the franchisor/franchisee dynamic, most franchisors believed that the best way to settle a dispute with a franchisee was to litigate. Logic suggested that a show of force would demonstrate a determination to control the franchisee network. The franchisee, probably with limited financial resources, would feel intimidated and be likely to withdraw their complaint. If they didn’t, their lack of experience in the legal system would further weaken their resolve. In any event, it was important to ‘send a message’ to the other franchisees that dissent would inevitably result in costly and time-consuming litigation.
For many franchisors, over the last decade, litigation proved to be a bad choice. Losing in court brought large legal costs and a substantial and humiliating counter-claim pay-out to the franchisee. In some cases, where the franchisor has won, there has been collateral damage to the business through bad publicity, which has resulted in reduced new franchisee recruitment rates and damaged growth. Accordingly, a litigious approach by franchisors is now seen to be outdated, and it has been replaced with a more collaborative and conciliatory way of doing things.
Alternative dispute resolution (ADR), especially mediation, is now widely acknowledged to be a far more effective method of resolving a franchise dispute. And it has been there, in most franchise agreements, all along!
So; what are the disadvantages of complying with the franchise agreement and opting for mediation?
The downside is very small because the parties remain in control throughout. If either side decides that the negotiation within the process is not going to produce an acceptable outcome, they can halt the proceedings without penalty. Everything remains confidential. Nothing that has been discussed or any tentative offers that have been made can be disclosed in the court case that will probably follow the failed mediation. The only downside is the cost of the mediation and the time that it has taken. The cost is a fraction of a similar amount of court time, and the preparation is relatively simple.
The advantages, however, are considerable because mediation offers the franchisor, with a strong case, the opportunity to demonstrate reasonableness from a position of being firm but fair. The mediator will be entirely neutral but will use their experience and expertise to help the parties individually see the reality of their situation. If this results in less than an even compromise, which would be inevitable if one case was much stronger than the other, the outcome for both sides would be better than if they had gone to court.
With the assistance of the mediator, the resulting negotiated settlement would still provide a franchisor with a strong case with a satisfactory outcome. The franchisee, if they did indeed have a weaker case, would also be better off because, if nothing else, of the saving on legal costs. They would be less resentful of the decision, which they had in part negotiated, and therefore less likely to complain widely on social media. Both parties would find it much easier to re-establish a working relationship within the franchise.
The franchisor would have almost everything that they would have ‘won’ in court, but they would have removed the uncertainty of a legal battle. Very importantly, instead of sending a forceful, dominating message to the other franchisees, they would be shown to be reasonable and conciliatory. Which, after all, is exactly what a modern franchisor should be.
