Resolving franchise disputes – a procedural guide for franchisors

Settlements of Franchise Disputes

A settlement of a franchise dispute can happen at any time in the franchise relationship or after it ends. It can take place in the context of an informal settlement, formal mediation or at any point during litigation or arbitration.

• What is a settlement?

A settlement happens when both parties agree on how to resolve a dispute, partially or fully. A settlement of a dispute involves a settlement document, such as a settlement agreement, setting out the terms of the settlement. Often, a settlement involves a release of the rights of the franchisee or both sides of all claims arising out of the franchise relationship, assuming it involves a genuine compromise, and the franchisee obtains independent legal advice.

• What is the benefit of an early settlement?

Reaching a settlement early on can save time, money, stress, and potential reputational damage of a prolonged legal battle. Depending on the severity of the alleged wrongs, and the strengths and weaknesses of a case, one or both sides to the dispute may prefer to work out a settlement with the help of their lawyers to reach an amicable resolution of their differences so that they can move on with their business and personal affairs.

Our article Franchise Independent Legal Advice Certificates provides more details about settlements and types of situations in which they apply (e.g. accidental franchise, transactional scenarios).

Using Meditation to Resolve Franchise Disputes

Mediation can be a required first step under the terms of some franchise agreements before pursuing a franchise dispute. It also be required at some point in a court case, in certain court venues in Canada. In some major cities, such as Toronto, meditation is a pre-requisite to scheduling a trial, therefore making it mandatory at some point in the court litigation process. If the case is resolved in the litigation process, no trial is required.

• What is mediation?

Mediation is a structure for formal negotiations with a mediator who is often appointed collectively by all sides to the dispute. The goal of mediation is to reach a compromise between all parties to the dispute. It involves a give and take of each party’s claim. If mediation is successful, it results in a settlement agreement that all parties sign off on and enter voluntarily.

In mediation, all parties to the dispute have significant control over the process and in designing the terms of the settlement. They determine the method of mediation and select a neutral third party to act as the mediator.

The mediator’s role is to facilitate negotiations and guide the parties towards a settlement. The mediator is not a judge who decides the case. The mediator does not decide the case or award damages like a judge or arbitrator. Rather, the mediator tries to move the parties towards a mutually agreeable settlement.

Our article How Mediation and Arbitration Differ outlines some of the unique aspects of this form of dispute resolution.

• Mediation can be a good method to resolve franchise disputes

Mediation can be relatively quick (usually one day), confidential, and informal. The privacy and confidentiality of the mediation process can often benefit franchisors. There could be reputation risks associated with being involved in a public legal battle. Also, a franchisor may not be required to disclose the details of the settlement in its franchise disclosure document (unless it is considered “material fact” that can impact a prospective franchisee’s investment decision).

Mediation can also provide a more cost-effective resolution to what can potentially turn out to be be a costly, long or complex legal case in court or arbitration. Mediation avoids the risk of our court or arbitration system where often it is a winner-take-all, and the losing party has to pay its own fees as well as the successful party’s fees, in addition to arbitrator’s fees in arbitration and potential damages.

Even if mediation does not resolve a dispute, it can set the stage for more productive talks and negotiation between the parties, helping both parties to understand the other’s position as well as the strengths and weaknesses of their own position. Unresolved disputes can also move to arbitration or litigation as a next step with a more focused approach to the key issues in dispute.

For more on leveraging this form of dispute resolution, see our article Resolving Franchise Disputes by Mediation.

Using Arbitration to Resolve Franchise Disputes

Arbitration can sometimes be a requirement in a franchise agreement, instead of commencing a case in court. An arbitration provision (technically called an arbitration agreement) requires that all disputes between the franchisor and franchisee (e.g. rescission, breach of contract, non-competition claims) be resolved by arbitration rather than in court.

• What is arbitration?

Arbitration is a formal but private legal proceeding where a neutral arbitrator is either selected by all parties or otherwise appointed based on applicable arbitration rules. Sometimes parties in a franchise dispute may turn to an arbitral institution to appoint an arbitrator and apply an established arbitration process with set rules, whether voluntarily or as a requirement in the arbitration agreement.

The arbitrator acts in place of a judge to decide the case outside of court, through a formal arbitration process. Unlike mediation that focuses on the parties reaching a voluntary compromise, arbitration is a formal process. If a full arbitration hearing takes place, it often involves formal witness testimony and legal submissions from the lawyers representing the parties.

An arbitration results in a binding formal decision by the arbitrator on who is right and who is wrong and whether each party to the dispute proved its claims or defences at the arbitration hearing.

Like after a trial in court, an arbitration hearing results in a winner and a loser in the case. The arbitrator’s decision is legally binding and enforceable, like a judge’s decision in court.

Also somewhat similar to a court case (but very different in the procedure and steps), an arbitration has four fundamental phases:

• claim and response/defence;
• discovery of documents (and potentially witness examination);
• potential pre-hearing motions or applications to determine procedural disputes, and
• the full hearing of the arbitration.

However, unlike in court, a significant benefit of an arbitration is in how it allows parties to the dispute to set the rules for the arbitration and shape the process and steps in the proceeding.

Our article, The Ins and Outs of Franchise Arbitration: What Parties to a Franchise Arbitration Agreement Need to Know, provides more information about what to expect in a franchise arbitration.

• Advantages for franchisors to use arbitration

Like mediation, arbitration can be a much quicker way to resolve a dispute than the court litigation process. It also gives all sides more control over the process than a court process.

The scheduling of the steps in arbitration and the full hearing is only a function of the availability of the arbitrator, the parties and their lawyers. This approach can save years of going through the court litigation process and waiting for a court trial date.

Arbitration is also often confidential process, not open to the public, which may be to the benefit of a franchisor.

Using Court Litigation to Resolve Franchise Disputes

Litigation is the most traditional and typical method to formally decide a dispute, in this case by a judge. Court litigation normally involves the longest timeline. It is a time-consuming and complex process that involves many one-size-fits-all court steps, often complex scheduling steps and delays to resolve procedural disputes in the case, and elaborate steps to progress a case through the system all the way to a trial.

• What is litigation?

The court litigation process is the most rigid approach to resolve a dispute. Parties have very limited leeway to shape or modify the litigation process.

The major steps in the litigation process are:

• internal investigation and evaluation by each side and their lawyer of the key facts, evidence and legal issues in the dispute;
• commencing the case in court or defending the case – pleadings (claim, defence/response and, if applicable, counterclaim);
• discovery of the evidence (including out of court witness examination/questioning), court applications/motions to resolve procedural disputes (such as disputes about steps, timetables, production of documents, etc.);
• trial.

A trial is the last step in a court litigation process (except for possible appeals from the trial decision). Much like in most arbitration hearings, a trial involves opening statements, advances calling witnesses and presenting evidence, and closing submissions. At the conclusion of a trial, the judge decides the merits of the dispute and whether to award damages.

Our article Understanding the Commercial Litigation Process provides an overview of the general steps that you can expect in litigation that also apply to franchise disputes.

• Advantages for franchisors to pursue litigation

Litigation may be the preferable approach to pursuing the resolution of a dispute if timing or confidentiality are not of significant concern, mediation has failed or has little process of success, or the franchise agreement does not require arbitration.

Preparing for a Mediation, Arbitration or Litigation

While mediation is informal and does not involve the steps and procedures involved in arbitration or court litigation, each of these methods of resolving a dispute requires thorough preparation.

Franchisors can do a lot to bolster their case by helping their legal counsel assemble all the relevant documents and correspondence needed to establish their position in the dispute. This includes documents that are favourable to the franchisor and those that may be unfavourable.

In litigation or arbitration, each party is required to produce all such evidence, if relevant.

In all procedures (mediation included), all such evidence (the good and the bad) can be important for legal counsel to fully appreciate and assess positions and respond to the other side.

At minimum, franchisors should provide their lawyer with these core franchise documents early in the process:

• the franchise disclosure document (FDD) including all its exhibits (such as the franchisor’s financial statements);
• the franchise agreement;
• lease and sublease;
• all other agreements;
• all documents exchanged before the parties entered into the franchise agreement, including all representations and negotiations, and
• key recent correspondence leading up to the current dispute.

Our article, The Devil is in the Details: Gathering Evidence to Bolster Your Case, delves into more specific information about the types of documents needed to prepare for different types franchise disputes.

Other Sources that May Be Helpful to Franchisors involved in a Franchise Dispute

Over the years, Law Works has written many articles that outline legal procedures that can apply to different types of franchise disputes. We have written these checklist articles for lawyers with franchise clients. They cover various types of actions, claims, and remedies that may be relevant to their case. The following is a summary of each article if any is relevant to your situation.

• A Checklist for Common Law Franchise Causes of Action

This article provides an outline of frequently claimed substantive franchise causes of action under common law and what they entail. These include: misrepresentation, breach of contract, and other noteworthy issues (e.g. a franchisor taking over the operation of a franchised business).

• A Checklist for Franchise Causes of Action – Statutory Claims

This article provides an outline of frequently claimed substantive causes of action in franchise disputes. These include: rescission, misrepresentation and failure to comply with disclosure obligations, disclosure exemptions, breach of the duty of fair dealing and good faith, interference by the franchisor with the right of franchisees to associate in a class action or group claim, claims made against a individuals (e.g., franchisor’s associate), disputes about the impact of waivers and settlements and damages.

• Statutory Damages in Franchise Disputes

This article outlines statutory damages under provincial franchise legislation that are commonly imposed on the franchisor or the franchisor’s associate. They include: rescission reimbursement, damages caused by misrepresentation or failure to comply with disclosure obligations, damages for breach of the duty of fair dealing and damages for breach of the right to associate.

• Pleadings Under Attack in Franchise Disputes

This article examines a wide range of pleadings challenges revolving around causes of action that go outside the four corners of the franchise agreement. The examples in the article deal with the following allegations: breach of franchise agreement and duty of fair dealing, oppression, international interference with economic relations, agreement to renew a franchise agreement, breach of trust/fiduciary duty, claims against parties related to the franchisors, and whether amendments to a pleading are barred by a limitation period.

Conclusion

Successfully navigating franchise disputes on behalf of a franchisor requires strategic evaluation of the unique circumstances of each case. Whether using mediation, arbitration or litigation, franchisors’ legal counsel should weigh the legal and contractual requirements, as well as the benefits and drawbacks of each type of resolution, to make informed decisions. Ultimately, a combination of preparedness, documentation, legal acumen and advocacy is the key to achieving fair and efficient resolutions in the dynamic landscape of franchise dispute resolution.

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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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