Franchise disputes nearly always arise when either the franchisor or the franchisee feels that the other party is failing to comply with what has previously been agreed. These disagreements can stem from various issues, such as:
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Breaches of the franchise agreement regarding duties and responsibilities.
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The franchisee’s failure to follow operational guidelines.
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Misrepresentation by the franchisor, particularly exaggerated financial projections.
The Culture of Blame in Franchise Disputes
Blame culture is prevalent in today’s society. If a franchisee fails to achieve their expectations, they often blame the franchisor for misrepresentation or mis-selling the franchise. Few will reflect on whether they put in enough effort.
On the other hand, franchisors rarely question the viability of the territory they assigned or the adequacy of the training and support they provided. Disputes frequently arise when ownership or management changes within the franchise or when shifting market conditions force modifications to the business model.
Common causes of disputes include:
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National contracts negotiated at unsustainable margins.
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Fixed monthly fees instead of a percentage-based royalty model.
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Over-selling of too many non-exclusive territories.
These issues can occur in both new and well-established franchises, leading to significant friction between the parties involved.
How Franchise Disputes Escalate
Disputes often escalate due to a tit-for-tat mentality. Franchisees may seek moral support from peers or social media, which amplifies the problem and makes it public. In response, franchisors may act forcefully to maintain control, further inflaming tensions.
The next step for either party is often legal consultation. While solicitors may initially suggest mediation, many encourage legal action unless their client’s case is weak. As legal fees rise, the gap between the parties widens. Egos on both sides can exacerbate the dispute, making resolution more difficult.
Resolving a Franchise Dispute
1. Negotiation
Direct negotiation is the most cost-effective and time-efficient way to resolve disputes. Making some concessions to reach a settlement is often far less costly and risky than arbitration or litigation. However, emotions and egos can make negotiations challenging. Even if one party believes they have a strong case, it is usually in their best interest to consider an out-of-court settlement.
2. Mediation
Most franchise agreements include a mediation clause requiring both parties to attempt resolution through a neutral mediator before pursuing legal action. Mediation involves:
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Selecting and paying for a mediator.
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A round-table discussion where both sides present their positions.
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Separate discussions with the mediator acting as an intermediary.
Mediation is private, faster, and cheaper than litigation. While it doesn’t always lead to an outright win, it often results in a compromise that prevents costly legal battles.
3. Arbitration
Arbitration is another private and relatively quick method of dispute resolution. Both parties must agree on an arbitrator, who will:
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Hear evidence from both sides.
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Consider legal arguments.
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Deliver a final, binding verdict.
Arbitration is less expensive than litigation, but the decision is final, meaning there is no right to appeal.
4. Litigation
If no agreement is reached through other methods, litigation is the last resort. This process is:
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Time-consuming and expensive.
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Public, which can damage reputations.
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Governed by strict procedural rules.
In court, a judge hears the case and delivers a ruling. Both sides are typically represented by solicitors and barristers, although individuals can represent themselves (as a ‘litigant in person’), sometimes with the assistance of a ‘McKenzie friend’ who provides non-legal support.
How to Secure a Successful Outcome
A negotiated settlement is the most satisfactory resolution, but both parties should be prepared for potential court proceedings. To strengthen their case, the complainant should:
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Have a clear argument and realistic objectives.
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Gather documentary evidence, such as the franchise agreement and operations manual.
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Focus on breaches of the agreement rather than emotional grievances.
Franchisors must remember that public disputes pose a significant reputational risk, regardless of the outcome. By prioritising negotiation and mediation, both parties can often reach a resolution that avoids unnecessary legal battles.
Final Thoughts Franchise disputes can be stressful, but understanding how they arise and how to resolve them effectively can prevent unnecessary legal complications. Whether you are a franchisor or a franchisee, approaching disputes with a level-headed and strategic mindset is key to achieving a positive outcome.
