Suing Your Franchisor? But What Does Your Franchise Agreement Say?

Most franchise agreements contain several provisions relating to dispute resolution; and, as you might expect, most of these provisions are designed to be franchisor-friendly. The typical franchise agreement will include some or all of the following:

Mandatory Mediation

Before you can sue your franchisor in court, you may first have to submit your claim to mediation. Some franchise agreements even require the parties to submit to mediation before they can go to mandatory arbitration (see below). Mediation is a form of non-binding alternative dispute resolution (ADR) in which the parties attempt to work together with the help of a neutral third-party mediator to amicably resolve their differences.

Mandatory Arbitration

Arbitration differs from mediation in that the neutral third-party (in this case, an “arbitrator”) makes a decision on behalf of the parties. The arbitrator’s decision may or may not be binding, and in some cases franchise agreements will actually call for a decision to be made by a panel of three or more arbitrators.

Splitting the Costs of ADR

Many franchise agreements state that the franchisor and franchisee must split the costs of mediation or arbitration. While this may initially sound fair, keep in mind the balance of power. Franchisors generally have greater access to capital than their franchisees, and while the cost of paying an arbitrator (or panel of arbitrators) for a week of their time can be a significant expense for the average franchisee, it is usually just a drop in the bucket to their franchisor.

Attorneys’ Fees

Another common franchise agreement provision states that the prevailing party in any dispute must pay the non-prevailing party’s attorneys’ fees. Even if you are fairly confident in the outcome of your case, the results of ADR and litigation are never guaranteed, and taking on the risk of paying both parties’ legal fees can weigh heavily in the decision of whether to pursue a claim.

Choice of Jurisdiction and Venue

Finally, your franchise agreement also likely specifies the geographic location where any mediation, arbitration or litigation must occur. And, guess what? It’s not in your hometown. Most likely, you will have to travel to the franchisor’s location in order to attempt to enforce its obligations. But, even if your franchise agreement happens to call for a neutral location, the cost factor is once again designed to help insulate the franchisor.

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