The ABCs of Arbitration for Franchises

When you start and run a business, it is never part of the plan to have a dispute. However, involvement in disputes does arise. At the very beginning of business relations, there tends to exist optimistic feelings about the future of the business.

It is important to consider the possibilities of becoming embroiled in disputes even at the point of entering a new business contract, whether you enter as a franchisee or a franchisor. Having some kind of idea about how things may unfold in the event of a dispute has you better prepared. It is especially critical to bear this in mind for international contracts, which involve parties from varying legal systems and jurisdictions, not to mention cultures.

Dispute Resolution Clause

Most commercial contracts do include the dispute resolution clause in their content simply as a matter of course. This clause is to clarify precisely who will handle a dispute, where one would resolve it, how to manage it, and the by which law it will be managed.

Each of these things requires careful consideration before coming to a decision. It must be made clear how each party entering the contract prefer to approach a potential dispute. An arbitration procedure must be in place to be carried out before matters reach trial in court. One can include other matters like limiting liabilities under the contract in this clause of the contract.

Arbitration vs. Litigation

There are several reasons as to why arbitration is the more attractive method to resolve disputes, rather than litigation. Some of the reasons are as follows:

Enforceability

Before the enforcement of a court judgment in a foreign country, one must determine if the countries are in a contract that allows reciprocal enforcement of each country’s judgments. There are complex rules regarding this aspect, and this may lead to unpredictable outcomes for each party. However, arbitration enforcement can happen in any of the 156 countries signed up to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards.

Neutrality

The parties who have entered into a contract may choose the venue of the arbitration resolution. This is helpful if there’s a concern over the independence of courts local to one of the parties. Of course, you should seek legal advice on the choice of arbitration location. This is because there are legal implications that apply to the process.

Flexibility

In the case of arbitration, parties can agree on how the arbitration process will proceed. Besides, they will also have a say in picking the arbitrator. The procedure and rules for arbitration are also open to discussion.

The procedure of arbitration is not unlike that of court proceedings. The difference lies in the fact that the parties have the option to agree on a range of things between them. It thus gives the parties the benefit of a considerably faster process than litigation.

Confidentiality

A court proceeding is not confidential, but arbitration is held in confidence. In the context of franchising, this is a particularly important point for consideration. Resolving disputes confidentially offers advantages in protecting the brand reputation and the integrity of the network. This is essential for the future of the company in question. The other advantage if there’s confidential business information relevant to the case, you can share it without fear of it becoming public knowledge. This is a major risk in a court case as most details are made public during the hearing and the judgment.

Finality

Appealing a court judgment is far easier than appealing an arbitration award. There are usually very few grounds on which you can appeal an arbitration award. It is thus both an advantage and a disadvantage depending on whom the arbitration favors.

However, there is still the benefit of closure and finality. That’s because you will know that once the award is delivered, the process is closed.

In the area of franchising, arbitration may not be the most suitable choice for every dispute. It is also a rather costly process when you consider the arbitrator’s fees and the cost of facilities. However, many advantages could outweigh these cons in some cases. Therefore, for most franchising disputes, arbitration is better in comparison to other dispute resolution methods.