Choosing arbitration in franchise disputes: A guide for lawyers representing franchisees

Common concerns about arbitration for franchisees

1. Confidentiality and publicity: Franchisees may view arbitration’s confidentiality as a disadvantage, believing it shields franchisors from the negative publicity that public court proceedings might bring. This perception may lead to the view that arbitration reduces the franchisor’s incentive to settle.

However, arbitration rules or agreements can often be negotiated to allow for public disclosure of the results, offering franchisees some degree of transparency.

2. Cost concerns: Arbitration involves upfront costs—such as arbitrator fees and administrative expenses—that may seem prohibitive to franchisees already under financial strain.

Yet, litigation often incurs comparable or higher costs due to procedural delays and drawn-out timelines. Arbitration’s streamlined process typically results in faster resolution, reducing overall expenses while offering the financial certainty of a quicker outcome.

3. Unequal financial standing with the franchisor: Franchisees may believe that courts are more sympathetic to their “underdog” status compared to arbitrators, whom they perceive as neutral to a fault.

In reality, arbitrators—particularly those mutually selected by the parties—are experienced professionals committed to impartiality. The key lies in choosing an arbitrator knowledgeable in franchise law and arbitration procedure and committed to fair decision-making.

Benefits of arbitration for franchisees

1. Speed and finality: Arbitration moves at a significantly faster pace than litigation, avoiding court scheduling delays. For franchisees, this expedited resolution can be critical for minimizing business disruption and enabling them to move forward.

In addition to its expedited timeline, arbitration offers the advantage of finality. Arbitration awards are binding and rarely subject to appeal, ensuring a quicker and more definitive resolution. For franchisees, this reduces the uncertainty and cost of prolonged legal battles, allowing them to focus on moving forward.

2. Cost-effectiveness: While arbitration involves upfront costs, its streamlined procedures can save franchisees money compared to protracted court battles.

3. Control over the process: Arbitration allows both parties to participate in selecting the arbitrator, ensuring they have a say in choosing someone with relevant expertise and neutrality.

4. Privacy: Unlike court proceedings, arbitration keeps disputes private, protecting sensitive business information and reputations.

5. Preservation of business relationship: Arbitration’s collaborative approach is less adversarial than court litigation, which can help preserve business relationships. In franchising, where disputes often occur within an ongoing franchise relationship, arbitration minimizes reputational harm and facilitates resolutions that allow parties to continue working together effectively under their franchise agreements (at least until the end of the case, and that of course depends on the facts of the case and what the claim is for).

6. Possibility of group claims: While arbitration agreements often preclude class actions, franchisees can sometimes pursue group claims or related arbitration proceedings, sharing costs and legal efforts to make the process more accessible.

7. Customization of the process: Unlike court proceedings, which follow predefined rules, arbitration allows parties to tailor the process to their needs. This flexibility can include customized schedules, streamlined discovery, and agreed-upon evidentiary standards. For franchisees, this customization can address the unique aspects of their dispute. It is also a more efficient and focused process and likely reduces the overall legal costs.

8. Access to specialized expertise: Arbitrators can be chosen for their specific knowledge of franchise law and industry practices. Unlike judges, who may require significant time to understand the complexities of franchising, a knowledgeable arbitrator can dive into the issues with a higher degree of familiarity, leading to a more informed and fair resolution of the case.

9. Enforceability across borders: Arbitration awards benefit from streamlined international enforceability through treaties like the New York Convention. This makes arbitration particularly valuable for franchisees in disputes involving cross-border elements, ensuring that resolutions are recognized and enforceable in multiple jurisdictions, including the US and elsewhere.

Complicating factors in arbitration

1. Non-signatories to the arbitration agreement: Franchise disputes often involve parties not bound by the arbitration clause, such as guarantors or affiliated entities. Non-signatories may not agree to arbitration, complicating the process.

2. Jurisdictional conflicts: Some agreements require arbitration under foreign laws or procedures, creating enforceability issues when provincial franchise statutes apply. For example, a requirement for arbitration under U.S. laws in a dispute governed by franchise law in a Canadian province is unlikely to hold up.

3. Ambiguous or unfair terms: Poorly drafted arbitration clauses, such as those with vague arbitrator selection processes, can render agreements unenforceable. Clauses imposing unfair conditions on franchisees must be carefully assessed by legal counsel.

Conclusion

Arbitration offers franchisees significant advantages, including speed, privacy, cost savings, and greater control over the process. For franchisees who have the option to choose arbitration, understanding its benefits and limitations is key to making an informed decision.

While skepticism is common, arbitration often provides a fair and efficient resolution mechanism that minimizes disruption to the franchisee’s business and personal life. When appropriately drafted and executed, arbitration remains an effective alternative to litigation.

Further reading:

Our article “The ins and outs of franchise arbitration: what parties to a franchise arbitration agreement need to know”, examines the differences between arbitration and court litigation. 

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The information contained in this article is provided for informational purposes only and does not constitute legal advice. Readers should not act on this information without seeking professional legal advice from a lawyer experienced in this area. The content in this article may not reflect the most current legal developments, and the application of law can vary in different provinces and territories. As such, the information in this article is not guaranteed to be complete, correct, or up to date. The author and the publisher of this article disclaim all liability for any actions taken or not taken based on any or all of the contents of this site. 

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