Gurmeet S Jakhu, Partner
Hamilton Pratt Solicitors
Birmingham, United Kingdom
Topic 8: The Relevance of
Dispute Resolution
Mechanisms in Franchising
1
Dispute Resolution Mechanisms in
Franchising
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
Introduction
Types of disputes
How to Approach disputes?
Termination Provisions
The relations comes to an end
Forms of Dispute Resolution
Court Action – Restrictive Covenants and Injunctions
Mediation
Arbitration
Distinguishing Features
Other forms of ADR
2
Introduction
• Disputes arise as with all other business
agreements
• Franchise Agreements are long term
relationships
• Disputes in franchising are a fact of
franchising/inevitable
– Complex provisions
– Long term contract
– Fr’sor obliged to take action
3
Types of Disputes
Disputes can arise:
• At the beginning – misrepresentation
– Overselling - Financial projections, business plans, website,
advertising literature
– Figures must be capable of verification
– Disclaimers
• During the course of the Agreement
– Breach of contract Eg: not following the System; renewal terms
not complied with
– Minimum performance clauses
4
Types of Disputes (contd.)
Disputes can arise:
• Upon termination
– Validity of termination
– Enforceability of the termination provisions
• Post termination restrictive covenants
• Post termination obligations
5
Approach to Disputes
• Guiding principles in franchise disputes:
– Avoid heavy handed legal approach
– Don’t bee seen as a “soft touch” and allow Fr’ees to cherry pick
• In the UK the BFA’s Code of Ethics
– Resolve complaints and disputes in good faith
– Written notice of contractual breach, reasonable period of time to
remedy default.
• In “non-life threatening” disputes Fr’sor should seek a
dialogue and seek commercial resolution
(mediation/arbitration).
6
Termination Provisions - Generally
•
•
•
•
•
‘Tough provisions’
Set out grounds for immediate termination
‘Serial breaches’
Minor breaches – time to rectify
Be careful – not to be seen by a court to
act in haste
• Move onto Under Performance,
contractual breaches and termination
7
Termination Provisions
Under Performance
• ‘Comfort zone’ issue
• Exclusive territory - Body Shop experience
• Whether to grant exclusivity?
– retail it does not matter where your customers come from
• Avoid ‘comfort zone’
– do not grant exclusivity- impact on ability to recruit new fr’ees
• Incorporate Minimum Performance clauses
• Failure to meet, reduce territory or visit on renewal
• Options ; link renewal to network performance or Fr’ee to
“use best endeavours to promote and extend the Fr’sors
business”
8
Termination Provisions
Breach by the Franchisee
• Right to terminate – important since Fr’sor has
to protect his brand
• 3 Layers of breach as follows (UK)
– Automatic termination eg: for de-registeration for
VAT/competing business
– So serious entitles termination – only if
material/fundamental breaches
– Minor breaches
9
Termination Provisions
• F Agmnt set out provisions for immediate
termination:
– bankruptcy/insolvency
– Incurable breach of a material provision in the
contract
– Failure to rectify within a specified time
– Repetitive breaches
– Abandonment of business
10
The relationship ends
When the relationship comes to an end (Restrictive Covenants):
• FAgmnts contain both ‘in term’ and ‘post term’ non compete
covenants
• Against Corporate franchisee and individuals behind it
• Why have Restrictive Covenants?
– Protect the network and brand
– Know how and knowledge of system
– Local good will
• RC – are prima facie, in restraint of trade to be enforceable, must be
– a legitimate interest to protect and
– not to wide both in terms of geographical remit and duration.
11
Forms of Dispute Resolution
• Parties can meet with or without legal
representatives.
• Court Action (injunctions, claim for damages,
account of profits)
• ADR – Alternative Dispute Resolution
• In the UK ADR describes all forms of dispute
resolution methods other than court and
arbitration and includes
– Mediation (most common form of ADR)
– Early neutral evaluation
– Expert Determination
12
Court Action – Restrictive
Covenants & Injunctions
• Enforcing Restrictive Covenants
– Seek compliance via written undertakings
– Most FAgmnts contain a buy back provision on termination – consider
its use!
• Claim in court:
– for Interim or full Injunction
– for damages for breach
• Injunctions: - Order of the court:
– Negative Injunction - ‘refrain the franchisee from doing whatever he
should not do under the terms of the RC’
– Positive/Mandatory Injunction – compelling franchisee from delivering
up customer lists, artwork (print franchises); equipment, manuals etc
13
Court Action – RC & Injunctions
• Often used because of the difficulty in
quantifying damages & delay in damages claim
• Injunction – Court order which is discretionary
• UK courts – view FAgmnts akin to business sale
agreement as opposed to employment contract
• Persuade a court that the purchaser requires
protection from competition by seller/former
franchisee
14
Court Action – RC & Injunctions
• Need additional ground eg:
– dishonesty,
– continued use of trade marks or
– enticing the franchise network to follow.
• Reluctance since RC are prima facie restraint of trade:
– Have to show a legitimate business interest to protect
– Court not want to restrain a person from earning a living
– Cross claims by Fr’ee for misrepresentation and breach of
contract
15
Court Action – RC & Injunctions
• Questions of construction of the RC will be
determined at the interim injunction stage
• Too widely drawn – struck out for not being
enforceable
• Too narrow may not cover the mischief
and will be of no effect to the
employer/Fr’sor
16
Court Action – RC & Injunctions
• Key when drafting or reviewing a RC is
“the identification of some advantage or asset
inherent in the business which can properly be
regarded as, in a general sense, his property,
and which it would be unjust to allow the
employee to appropriate for his own purposes,
even though he, the employee, may have
contributed to its creation” (per Lord Wilberforce
in Stenhouse Australia Ltd v Philips [1974] 1All
ER 117)
17
Court Action – RC & Injunctions
• Urgency - interim injunctions;
– speed, clean hands and balance of convenience test
– Advantage of applying for an injunction - case heard quickly
(weeks rather than months) even if not granted an interim
injunction
• Israel – unable to enforce RC
• California – not enforceable if the franchise term has
expired
• Can seek damages claim instead of interim injunction
– No need to establish above grounds
– Request Fr’ee keeps account of turnover and profits
– Pursue claim with speed/vigour
18
Mediation
• Negotiations is the most common way of
resolving disputes.
• Most litigations settled before trial
• Mediation can be distinguished from both
litigation & Arbitration (and from
negotiations) – see later.
19
Mediation
• What is it:
– Mediation can offer a cost effective and flexible alternative to litigation
as a dispute resolution mechanism;
– It’s the main form of ADR – alternative dispute resolution.
– Can be used pre-litigation and during litigation
• BFA & IFA encourage mediation
• BFA have a specified Dispute Resolution Procedure Mediation
Scheme – experienced franchise lawyer appointed by BFA
• USA – The Franchise Mediation Programme (endorsed by the IFA
and Asian Hotel Owners Association – AHOA)
20
Mediation
• Most Franchise Agreements do contain a
provision which requires a party to enter into
ADR – mediation prior to taking court action
• Civil Procedure rules in England and Wales now
actively encourage parties to mediate
– Its part of active case management
– Rules enable court or parties to direct one month stay
to allow ADR;
– costs sanctions if not.
21
Mediation: The Statistics
• Breakdown of case load by sector and quantum
• Reference PLC (1999) magazine and CEDR –
Centre for Dispute Resolution
22
Mediation
Breakdown of commercial caseload by sector
Banking, finance
Commercial contract
4%
9%
4%
6%
Construction,
engineering, property
15%
Insurance, reinsurance
IT, telecommunications
22%
6% 6%
28%
Professional negligence
Medical negligence,
personal injury
Shares
Other
23
Mediation
Breakdown of caseload by quantum for commercial cases
18
16
14
12
10
8
6
4
2
0
No
£2
£5
Up
£1
£2
£5
£1
£5
£1
0,0
0,0
00
00
00
0m
mi
mi
as
to
,00
,00
,00
0
00
llio
llio
se
£2
illi
0
000-£
-£
ss
on
0,0
n
n
-£
-£
50
10
ed
£2
£5
£1
00
+
,00
0,0
5
1
00
00
va
m
0
m
,
,
illi
0
00
mi
lue
00
00
illi
on
llio
0
0
on
n
24
Mediation
•
•
•
•
•
Mediator – not decide case, facilitate negotiations
Not binding until settlement agreement is signed
Mediation is often business driven and result orientated
Flexible and informal
Disclose sensitive information that parties not willing to
disclose in conventional litigation process
25
The Role of the Mediator
Is to facilitate settlement by
• Improve effectiveness of communication between parties
• Helping parties to clarify its business interest
• Probing strengths and weaknesses of respective parties
• Exploring commercial consequences of failing to reach
settlement
• Not binding until settlement agreement is signed
26
Mediation
• Mediation is often business driven and result orientated.
• Flexible and informal – can be used at any time, esp.
after interim injunction has been granted/refused.
• Disclose sensitive information that parties not willing to
disclose in conventional litigation process
• Most cases are suitable to mediation – only requirement
being that there be enough information and willingness
to negotiate.
27
Mediation
• Most disputes can with the help of a skilful mediator can
develop a business solution
• But need a willingness by the parties to resolve
• Advantages:
– Reduce costs (as cf to court action)
– Speed
– Confidentiality
– Voluntary
– Non binding
– Opportunity to air issues in person
– If not resolve may serve to refine issues in dispute
and bridge gaps
– gain a better understanding of the opponents case
• Ideal where parties want to foster continuing relations
28
Outline of a typical Mediation
• Preparing for Mediation
– Exchange of information
– Case Summary
– Mediation Agreement
•
•
•
•
•
Location
Initial Joint Session
Initial Separate Sessions
Subsequent Separate and Joint sessions
Completing the process
29
Arbitration
“Arbitration is a procedure in which a dispute is
submitted, by agreement of the parties, to one or
more arbitrators who make a binding decision on
a dispute.” *
(* WIPO Dispute Resolution for 21st Century Article)
•
•
•
•
•
Arbitration is consensual
Arbitration is neutral
Arbitrator holds formal hearings, hears evidence
Findings of the Arbitrator are binding
Challengeable in the UK on application to the High
Court
30
Arbitration – the Process
• Request for and submission of dispute to arbitration
• Parties agree on arbitrator/arbitrator is appointed
and accepts appointment
• Preliminary hearing – may be a joint session or
telephone conference
• Arrangements for arbitration
– Venue
– Travel arrangement
• Arbitrator issues directions
31
Arbitration – the Process, cont.
•
•
•
•
•
•
•
Preliminary hearings and interim awards
Submissions of pleadings
Disclosure of agreed documents
Preparation of expert reports
Hearing with all parties and representatives
Award – decision and costs
In case of non-compliance – an action for
enforcement of challenge of or to award
32
Arbitration v Mediation
• In mediation parties select a neutral party
• Mediator’s task is to facilitate an attempt to
settle a dispute by voluntary agreement of
the parties
• Unlike an arbitrator, a mediator has no
authority to decide the facts or make
rulings
33
WIPO Arbitration and Mediation
Centre
• Promote resolution of intellectual property
disputes through ADR
• The only international provider of
specialised intellectual property ADR
services
• Centre deals with both contractual (e.g.
patent and software licences, trademark coexistence
agreements, distribution agreements for pharmaceutical
products) and non-contractual disputes
(patent infringement)
34
WIPO Procedures
• Mediation – a non-binding procedure in which a neutral
intermediary assists the parties in reaching a settlement
• Arbitration – a neutral procedure in which dispute is
submitted to one or more arbitrators who make a binding decision
on the dispute
• Expedited Arbitration – an arbitration procedure that is
carried out in a short time and at reduced cost
• Mediation followed, in the absence of
settlement, by arbitration – procedure that combines
mediation and arbitration
35
Distinguishing features:
• Litigation: mediation is different in that:
– It is consensual not an adjudicative process
– Hence no unpredictability of outcome which in
inherent when a third party settles a claim
– In 85% of mediations parties are willing to
accept and be bound by solution.
36
Distinguishing features (litigation &
mediation)
• Costs are less than if litigation takes its
normal course
• Mediation, focuses on current and future
problems rather than who is to blame for
past problems
• Serves to move emphasis from strict legal
rights to commercial interests
• Flexible and adaptable
37
Distinguishing features
• Negotiations: features which distinguish it from
mediations
• It is a distinct process agreed beforehand by adoption of
a model procedure – sometimes described as a
structured negotiation
• The creation of a best possible negotiation scenario –
mediation should put together the best possible people
needed with authority to settle
• Involvement of mediator is the crucial difference
• Mediator – neutral not decide case, facilitate negotiations
38
Other forms of ADR
• Expert Determination:
– Binding, inquisitorial process
– Used as means to settle technical disputes
– May be provided for in the agreement
• Adjudication:
– Hybrid procedure, which provides for adj
decision to be binding but only for a limited
period eg: until the project or review
– Mainly used in the construction field
39
Other forms of ADR
•
•
•
•
Early Neutral Evaluation:
Non Binding
Neutral is often a retired judge or QC
Hears each parties submissions and then
states his views on likely outcome at trial
• This is a without prejudice view
40
In Conclusion
• There is an absolute need to preserve the
business:
– hence Fr’sors really do not have a choice
other than to enforce its RC
• Consider whether urgent interim
injunctions are required:
– Are the RC enforceable (construction issues)
– if granted that may be an end to the
competing activity (this involves court action);
if not is a claim in Dm available.
41
Conclusion (contd.)
• Also bear in mind that there are other
alternatives to court action;
– Does the F Agmnt bind you to use ADR
– The main one being, mediation –
informal, flexible and driven by
commercial objections and not always
be reference to the parties strict legal
positions
42
THANK YOU
• The contents of this presentation are not
meant to be legal or professional advice. The
presenter and/or Hamilton Pratt do not
accept any responsibility for any loss or
damage arising out of any attendee’s
reliance on the contents of this presentation.
Gurmeet Jakhu
Partner
Hamilton Pratt, Birmingham, England
43