Resolving franchise disputes: how mediation and arbitration differ

Article Content

By: Ben Hanuka, Law Works
Editor: Rebecca Colley, Law Works

In our earlier article about franchise mediation, we provided an overview of the key features and benefits of mediation and the mediation process.  Our article about franchise arbitrations discussed the key features of the arbitration process.  In this article, we explain the key similarities and differences between mediation and arbitration in franchise disputes.

The similarities

Both mediation and arbitration are private, alternative, methods to resolving a dispute outside of court – hence they are part of what is called “Alternative Dispute Resolution.”

The private nature of the two methods can be important in franchise disputes.  It can benefit a franchisor if the dispute involves sensitive information that it does not want in the public domain or details that could put its commercial interests or reputation at risk.

Another similarity is the flexibility and timeliness that both methods can provide to the parties. Using mediation or arbitration can resolve a franchise dispute much quicker than hearing a case in court because of the private nature of these methods and their independence of the often-backlogged court system.  The timing depends solely on the availability of the parties, legal counsel and the mediator.

Similarly, both parties have full control over the process and steps in both mediation and arbitration, since they are usually no prescribed rules or procedures and the parties normally negotiate and mutually agree upon the process and steps (although some arbitrations do come with prescribed rules, depending on the terms of the agreement and whether the arbitration is conducted through an arbitration body that prescribes its own rules).

Key differences between mediation and arbitration

The fundamental difference between mediation and arbitration is that mediation involves settlement negotiations and has no decision maker to decide which party prevails. Arbitration is a formal proceeding involving discovery of evidence, hearing of the evidence, and an official determination of the parties’ rights and obligations based on their claims and defences. 

• Mediation

Mediation is a structure for formal settlement negotiations. The mediator does not hold a hearing, officially hear from witnesses or make a decision. Rather, the mediator attempts to facilitate an amicable concession by all sides involved in the dispute with an objective of reaching a consensual settlement. 

The mediator is a neutral third-party who facilitates discussion between the parties.  The mediator cannot force either party into a settlement agreement. They can only discuss with the parties some of the strengths and weaknesses of their positions, their best options and urge them to consider potential common ground.

Mediation is therefore not adversarial.  There is no winner or loser.  There is also no guarantee that it will end in a settlement. Either party can make any settlement offer that it is prepared to make or reject an offer. It typically requires compromise – neither party gets 100% of what it claims it is entitled to. If the parties are too far apart in their settlement offers and cannot bridge the gap, mediation fails to result in a settlement, the parties continue with their formal dispute, either in court or arbitration.

If mediation is successful, the parties will settle all or at least part of their dispute – based on what they have agreed.  If a settlement is reached, the terms of the settlement will typically also include a release, whereby each party releases the other of the right to bring a claim in the future relating to the same dispute.

The role of the lawyers is to represent the interests of their client by providing information to the mediator throughout the mediation session to address the strengths and weaknesses that the mediator raises about the lawyer’s client.  The lawyer provides the mediator with the information that the mediator needs to better understand the party’s position.

Sometimes, the mediator may call a side meeting with only the lawyers for the parties, without the clients present, to clarify some points of contention and how far each party is willing to go in their settlement offers.

The lawyers’ function is also to explain the mediation process to their client and to advise about the merits of the settlement offers that the parties are negotiating.

If the parties reach a settlement, the lawyers for the parties will normally draft the settlement agreement at the end of the mediation session while everyone is still in the room.

• Arbitration

On the other hand, arbitration is an adversarial process involving formal pre-hearing conferences to agree on the procedure of the arbitration, and the formal hearing where the arbitrator officially hears the evidence and witnesses’ testimony and makes a decision about which party is in the legal right and thus who wins the case.

The arbitrator issues a formal decision (called an “award”) which lays out the evidence of the witnesses that was heard at the hearing, the legal arguments of the lawyers, the arbitrator’s decision, and the reasons for the arbitrator’s decision.  The arbitrator acts as a private adjudicator of the dispute, based on the evidence from the witnesses and documents, and the applicable law.  The unsuccessful party is generally liable for a share of the successful party’s legal costs.

The award is a formal decision, although private, but it can be enforced in court against a party that fails to comply with the decision.

The lawyers’ role is to represent their client as counsel throughout the stages of the arbitration, from the commencement to the final hearing, in negotiating the most suitable procedure and steps in the arbitration, making submissions to the arbitrator on behalf of his or her client at all stages of the arbitration, formulating legal arguments, drafting documents and examining witnesses.

Conclusion

While mediation and arbitration share a few commonalities as alternative forms of dispute resolution, mediation is a voluntary process of settlement negotiations that promotes cooperative problem solving and can only result in either an agreed upon settlement, if an agreement is reached, or no agreement at all.  On the other hand, arbitration is a formal process to devise the procedure, to hear evidence and legal arguments and decide which party officially prevails, resulting in a formal decision that can be enforced in court.