An important advantage of arbitration is the ability of both sides to negotiate a customized arbitration plan and timetable that is unique to their case (or, where an agreement cannot be reached, to have one set by the arbitrator). A streamlined procedure that removes unnecessary steps and customizes the discovery process can be used to resolve cases more quickly, allowing both the franchisor and franchisee, and sometimes additional parties, to return to their business or otherwise move on from the dispute. It is often much more cost-effective than court litigation, both in simple and complex disputes. An arbitrator with specialized franchise and arbitration expertise can guide the parties to tailor an arbitration process based on the nature of the franchise dispute and the position of the parties.
This article highlights common franchise disputes and outlines key elements that customized arbitration plans typically include for resolving such cases. It is important to note that franchise arbitration is not a one-size-fits-all approach. While this article provides a general approach to typical claims and common types of evidence, each case is unique and applying a one-size-fits-all approach may be unfair to one or all parties. Indeed, one of the key principles and advantages of commercial arbitration over court litigation is the ability to put in place the most suitable procedure for the individual dispute based on all relevant factors. As such, cases that initially seem “complex” may ultimately revolve around a few key issues, leading to a more streamlined process than anticipated, while others may unfold in the opposite way.
Common franchisee claims
Statutory rescission claims by franchisees are based on alleged failures to deliver a franchise disclosure document (FDD) as required under provincial franchise legislation. Rescission claims can range from relatively straightforward grounds of non-compliance to complex grounds that require a determination of what constitutes a material fact or a material change.
• Procedure for determining liability in straightforward rescission claims: These rescission claims often rely on allegedly missing fundamental requirements, such as grounds relating to financial statements or a franchisor’s certificate. The arbitration hearing on the liability phase in these types of cases can potentially be limited to the submission of the parties and analysis of key documents, like the FDD and franchise agreement, and any additional relevant evidence from the parties.
• Procedure for determining liability in complex rescission and misrepresentation claims: More complex rescission claims, such as claims that require a determination of material facts or material changes based on contentious evidence, or claims of misrepresentation, may require more extensive evidence from the parties. This can include the financial history of the location and communications between the parties. If financial projections are involved, expert forensic accounting evidence may be required as well.
Depending on the position of the parties, and the nature of the evidence that each side plans to advance, these types of disputes may require a more involved arbitration plan and timetable. The procedure will likely involve more elaborate discovery steps, potential documentary discovery disputes, and the exchange of expert reports. The hearing of the arbitration will require an efficient arbitration plan with all sides presenting their own evidence and having the ability to challenge each other’s evidence.
• Procedure for assessing damages in franchisee claims: The procedure for assessing damages can be relatively simple or more involved depending on the categories of compensation that a franchisee claims. If the bulk of the alleged damages is limited to the franchisee’s cost of setting up the franchised business, the accounting evidence can be straightforward, such as invoices for franchise and related fees, construction, equipment, and the like. If the damages claim is more complex, such as claims for foregone wages, operating losses, or lost future income, or where a defense includes allegations of underreporting, more extensive evidence may be required. This can include the examination of financial and income tax records, supporting financial documentation and other source documents, and potentially expert forensic accounting evidence.
Examples of how the franchise arbitrator may adapt the process
The following are two examples to illustrate how the parties and a franchise arbitrator can adapt the arbitration process to the complexity of each dispute:
• In a relatively simple case: A dispute over an allegedly missing key component in an FDD can perhaps be resolved by a limited production of documents and a short arbitration hearing.
• In contrast, a complex misrepresentation claim: This may include several discovery steps, forensic accounting reports, and a more comprehensive hearing with witnesses.
These examples demonstrate how arbitration may be scaled to suit the unique claims in each franchise dispute.
Common franchisor claims
Common franchisor claims include termination disputes and injunction applications related to non-competition covenants.
• Procedure for determining termination claims: Franchise termination claims are usually based on the scope and gravity of an alleged default, such as allegations about the sale of unapproved products or services, underreporting royalties, unsanitary conditions, unapproved marketing, etc. The dispute may also involve whether the alleged defaults were cured and whether the parties acted in good faith in the enforcement of their contractual rights and the performance of their contractual obligations. This may require varying degrees of complexity in the presentation of evidence, including discovery steps, witness testimony, etc.
• Procedure for assessing damages: Assessing damages in termination cases may require determining alleged foregone royalties, loss of goodwill to the brand, mitigation of damages, and what constitutes a reasonable time to replace a franchisee. As with other damages issues, there may be a need for forensic accounting evidence.
Common injunction applications
Some common injunction applications may be interlocutory (i.e., before the full adjudication of the case) in nature, to enjoin (i.e., prevent) the other party to the franchise agreement from taking certain steps. Injunction applications tend to involve an intensive exchange of discovery evidence—affidavits, documentary productions. They may also require rulings on discovery undertakings and refusals, an interim urgent hearing, and a full hearing on the merits of the injunction application.
• Franchisors sometimes bring an application to enjoin a former franchisee from engaging in an allegedly competing business. This process may involve evidence about the nature of the allegedly competing business and the people operating it, the franchise system and businesses involved, etc. The determination of the application may also require examining the interpretation of the non-competition covenant. Evidence may be produced related to the alleged misuse of trademarks or other proprietary information (such as operating manuals, unique specifications or recipes, customer lists) and the alleged damages.
• Franchisees sometimes bring an application to enjoin a franchisor from terminating the franchise agreement. The evidence in these applications may include the types of evidence discussed earlier under franchisor termination claims, such as evidence about the alleged defaults and whether they were cured, evidence about the parties’ underlying intent, alleged harm to each party, etc.
Conclusion
The arbitration of franchise disputes may involve a broad range of procedural considerations, from simple to complex, to suit the nature of the dispute, the evidence, and other requirements of the liability or damages claims and defenses in the case. Cases can range from the examination of a few rescission grounds based on the contents of the disclosure document to those involving a myriad of documents and events or disputes involving multi-layered damages claims. Often, franchise disputes involve claims and counterclaims, requiring a procedure that takes all claims and counterclaims into account.
An arbitrator with the necessary expertise can efficiently manage both simple and complex franchise cases from start to finish, while ensuring that procedural and substantive disputes are resolved fairly and equitably.
