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Understanding the Disclosure Document: Dispute resolution

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By Peter Snell
Over the next several issues of Canadian Business Franchise, this column will continue to explore different aspects of franchise disclosure documents in Canada, to give you a better understanding. In this issue, it is time to look at the various alternative dispute resolution (ADR) provisions you might find in a franchise agreement and reflected in the disclosure document.

As always, it is extremely important to take the time to fully analyze the disclosure document and be ready to ask the franchisor any questions that arise from such reading. While the following information can serve as a general overview, prospective franchisees must also seek their own legal and accounting advice when reviewing the document and the associated franchise agreement. Only then can they obtain the specific information and advice relevant to their particular circumstances.

ADR provisions
In the world of franchising, it is common to hear ADR terms like ‘mediation,’ ‘arbitration’ and ‘informal dispute resolution’ bandied about, but it is not always obvious what these terms mean and whether one process is preferable to another.

Basically, ADR entails all processes for resolving disputes between a franchisee and a franchisor that avoid commencing a lawsuit or seeking injunctive relief through a court to solve a legal problem. The franchise agreement may call for one specific form of ADR, which is important for a new franchisee to understand before signing.

Mediation is an informal, voluntary and non-binding form of ADR. As the term suggests, the parties to a dispute appoint an independent mediator to work with them to see if a solution can be found. If this process is successful, then the parties resolve their dispute by entering a written settlement agreement. If no agreement can be reached, on the other hand, then the parties generally proceed to settle the matter by going to court or referring the matter to arbitration.

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Arbitration is a more formal ADR process than mediation. In this case, the parties appoint an arbitrator (or more than one), who then conducts the proceedings according to an agreed-upon set of rules and procedures. At the conclusion of the arbitration process, the arbitrator will make an award, which is typically final and binding. If necessary, one of the parties may enter this award to the appropriate court, so as to enjoy the force of a court order.

There are other informal ADR processes, too, beyond mediation or arbitration. By way of example, the franchise agreement and disclosure document might require parties to a dispute to meet in person or via telephone conference before beginning any other more formal process.

Advantages of ADR
You should check your franchise agreement and disclosure document to see which, if any, mechanisms for informal or formal ADR are contained within them.

One of the reasons these mechanisms may be favourable to both parties is they are perceived to be faster and less expensive than going to court—and they are more apt to allow the parties to continue to maintain a happy working relationship after the dispute has been settled.

In situations where the relationship between the franchisor and the franchisee deteriorates, there is often a breakdown in communications. An informal ADR process that requires the parties to speak with each other may be very beneficial in these cases. Indeed, the fact the parties are ‘forced’ to speak to each other may be all it takes to resolve the logjam and make both sides realize it is best to work together to resolve any differences. Communications, after all, are a key element in any successful franchise relationship.

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