Resolving franchise disputes by mediation: an introduction for franchisors and franchisees

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

Mediation is a form of alternative dispute resolution focused on attempting to reach an amicable settlement on a voluntary basis by seeking a mutual compromise. It provides franchisors and franchisees with a less adversarial alternative to going to court or arbitration to have a judge or arbitrator hear their case and rule on who wins.

Mediation is an informal, quick and usually confidential process. Both parties in the dispute have control over the method of mediation used and the choice of the mediator – a neutral third party who is usually a lawyer or a retired judge experienced in this field. The mediator facilitates negotiations and guides the parties towards a settlement. If the mediation is successful, i.e., a settlement agreement is reached, the parties resolve the dispute and move on with their affairs. In franchising mediation, this can involve preserving the franchise relationship, or agreeing to end it in a consensual way, based on the terms of the settlement agreement.

The Benefits of Mediation to Franchisors and Franchisees

Mediation can help both franchisors and franchisees. A franchisor can avoid the risks associated with a case, if it otherwise goes to court, which would be publicly accessible. A trial in court can potentially create reputational risk in the public and in the franchisor’s relationship with the other franchisees in the system. Since mediation is typically confidential, a franchisor may not be required to disclose the details of the settlement in its franchise disclosure document (with some exceptions, for example, if the terms of the settlement are considered “material fact”).

For franchisees and franchisors, mediation can bring a quicker and more cost-effective resolution to what could otherwise be a very costly trial or arbitration hearing. Of course, franchisees typically have more constrained budgets than franchisors. The cost of full-blown litigation in a trial or arbitration hearing can be financially devastating for franchisees who have invested their personal savings or taken on debt to purchase their operation.

Further, mediation can be an invaluable tool for both sides to the franchise dispute by mitigating each side’s risk of losing the case.

A case that proceeds to trial in court or a full arbitration hearing will usually result in one side winning the case and the other losing. This obviously creates inherent risks for both parties as the outcome of a trial or arbitration is unpredictable. Mediation presents a way for the parties to compromise over their claims or positions – there is no loser.

Another benefit of a mediation is avoiding the long delay in a resolution if the case enters the court system. Litigating a case in court takes years, and that does not even account for the process of scheduling a trial, which in a major city, such as Toronto, can add a few more years to the process.

Mandatory and Voluntary Mediation

In some Canadian jurisdictions (such as in Toronto), mediation is a prerequisite in any court case or often the judge requires the parties to attend mediation at some point in the litigation.

The franchise agreement may also include a mediation requirement before the parties are allowed to commence court or arbitration proceedings.

The choice of mediation in franchise disputes can also be voluntary if the franchise agreement does not require it. Both sides may choose to attend mediation on a voluntary basis, even if they are not required to pursue it. Going to court or a full arbitration hearing can potentially cause significant financial hardship to the unsuccessful party if the judge or arbitrator awards damages to the other side, in addition to an award of legal fees to the successful party, all of which can be substantial.

The Mediation Process

The mediation process is quick and informal compared to arbitration or litigation. For a complex case, mediation typically requires a full day. This can amount to $7,000 to $10,000 in mediator’s fees. This fee is normally split equally between the parties. It is in addition to legal fees that each party pays its own lawyers.

The location of the mediation is flexible. It can take place in the offices of the mediator, a neutral location (such as a conference room), or over Zoom, which has become more common. If it is in person, mediation is typically in the franchisee’s geographic region, unless otherwise required in the franchise agreement (if the mediation is mandatory). The parties and their legal counsel are required to sign a mediation agreement with the mediator, agreeing to the following:

• the mediation will be confidential;
• nothing the parties say during the mediation can be disclosed to anyone;
• nothing the parties say can be used in court or arbitration resulting from this or any other dispute, and
• the mediator cannot be called as a witness about anything that was discussed during the mediation.

Selecting a Mediator and How to Prepare for a Mediation

In franchise cases, it can be advantageous for the parties to select a mediator with expertise in franchise law and franchise disputes, and with balanced experience working with both franchisors and franchisees. This will help the mediator better appreciate what is at stake for both sides and offer potential settlement options.

Before commencing mediation, both parties should consider the following:

• What issues the party is prepared to compromise on; what is negotiable and what is not.
• What type of an offer would be reasonable to accept (in franchising, it can, for example, involve parting ways, agreeing to continue the franchise, or agreeing on compensation).
• What is the bottom line that a party is prepared to accept as a settlement of the dispute.

Mediators have a variety of methods at their disposal to help the parties come to a mutually agreeable settlement. Different mediators use various methods depending on individual preferences and what may best fit the nature of the dispute and the parties involved:

Mediation Briefs: It is a good practice for the parties (through their lawyers) to deliver mediation briefs before the mediation, to state the facts, claims, legal arguments, and goals for the mediation.

Opening Statements: Some mediators may ask the parties’ legal counsel to make brief opening statements at the start of the mediation. Each side’s statement summarizes its position. Many mediators do not like to use this method because of concerns that this ends up driving parties further apart from the start, rather than bringing them closer together towards a compromise. This can be even more aggravating in a dispute between a franchisor and a franchisee.

Joint Discussions: When opening statements are used, the mediator may allow each party to reply. This is followed by limited discussion around the table about the issues and the parties’ positions.

Private Discussions: Most mediations are predominantly private discussions between the mediator and each side in a private room. The mediator meets with each side in a closed room and asks questions to clarify the information presented in the opening statements or mediation briefs. The mediator may also communicate the other side’s position and counterarguments to highlight for each party the strengths and weaknesses of its case, and thus the risk of proceeding to trial or arbitration hearing. This is the primary tool mediators use to foster the framework of a settlement.

Throughout the mediation process, an effective mediator will foster productive communication and cooperative resolution efforts using some or all of the following methods:

• interpreting the position of each party;
• summarizing the underlying issues and concerns of each side;
• probing the strengths and weakness of each party’s legal position;
• narrowing the issues in the dispute;
• exploring the possibilities that each side will face if settlement is not reached, and
• helping the parties work towards a reasonable comprise.

Offers and Settlement

At some point in the process, the parties will be prompted to make settlement offers, usually with guidance from the mediator. Some mediators may choose to drive the dollar figure of the settlement offer, proposing to each side what they think is fair based on the issues at hand, and the strengths or weaknesses of the party’s position. Other mediators will ask each party to propose starting offers, with the mediator then working between the two rooms to try to bring the parties to a settlement of the franchise dispute.

If the parties reach an agreement, the lawyers will typically draft the minutes of settlement at the end of the mediation session, while still at the mediation. Usually, the parties sign the minutes of settlement before the mediation is completed. Alternatively, the parties may sometimes agree on the key settlement terms, like the settlement amount and other key terms, and to have their lawyers work out the rest of the terms over the following few days after the mediation.

Conclusion

Whether it is mandatory or voluntarily, mediation is often the quickest, most cost effective, and least disruptive method to resolve a franchise dispute. It can be a far less damaging and costly option for both parties. Pursuing mediation can help preserve an ongoing franchise relationship or help the parties agree on how best to part ways. With the help of the mediator, the process can help the parties better understand the possible adverse consequences of going to court or arbitration to resolve the dispute. It can also give them an appreciation of the costs involved and the time delay they will face in completing the remaining litigation steps and scheduling a trial (if in court).

Even if the mediation does not resolve the dispute, initiating the process can plant the seeds for subsequent settlement talks between the parties. The franchisor and franchisee may return for another mediation session later, depending on issues in dispute or required litigation steps, to try to hammer out the remaining areas of contention. At the very least, if the sides are too far apart to reach a settlement, going through the process allows both parties the opportunity to better assess the opposing party’s position before going further with the case.