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.
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