Q: What are the differences between mediation and arbitration?
Mediation and arbitration are the most frequently used alternative dispute resolution (ADR) methods, which can help franchisees and franchisors resolve their differences more quickly, less expensively and with more privacy than with traditional litigation.
Mediation is a process of negotiation facilitated by a neutral third person (i.e. the mediator), whose role is to help the parties communicate better and overcome obstacles to settling their differences. The mediator has no power to make any decisions or impose a settlement, so if the parties do not agree to settle, then the dispute must be resolved in another manner.
Arbitration involves a neutral third person (i.e. the arbitrator) who hears arguments and evidence from the disputing parties and imposes a binding decision upon them. This may sound similar to traditional litigation, but the parties may select their arbitrator (you cannot choose your judge in litigation) and the procedural rules are more relaxed than those governing litigation, which usually means arbitration is faster and cheaper than going to trial.
Also, traditional litigation is open to the public, whereas ADR can be conducted confidentially. Both the evidence produced during the process and the mediated settlement or arbitral decision will be kept private.
Q: What disputes with franchisors call for mediation or arbitration?
Mediation can be used to resolve virtually any type of dispute, but the following particularly lend themselves to it:
- Disputes where both franchisee and franchisor want to preserve their continuing relationship (e.g. disputes about royalties, advertising fund contributions, franchise term renewals, encroachments on territorial rights and changes to the franchise system).
- Disputes involving a genuine misunderstanding by one of the parties about the other’s position.
- Disputes where the decision-makers for both franchisee and franchisor are open-minded, reasonable and motivated to find a solution for the success of both of the parties.
- Disputes where both parties recognize the costs, risks and consequences associated with traditional litigation.
Mediation is also sometimes effectively used to resolve disputes relating to the franchisor’s termination of a franchise agreement and rescission claims under applicable franchise legislation, but typically only after traditional litigation or arbitration has already been commenced.
There are certain types of disputes that are not well-suited for mediation, including those regarding terminated franchisees’ use of trademarks or breaches of non-competition or non-solicitation covenants, where franchisors want immediate injunctive relief to be granted by a judge or arbitrator.
Arbitration, due to its similarity to litigation, can be used to resolve all manner of disputes, including those where maintaining an ongoing relationship between the parties is not a goal. Compared to litigation, it offers potentially significant time and cost savings and allows the parties to select a decision-maker who has experience with the issues in dispute.
Q: What other ADR methods have proven effective in recent scenarios?
One of the most effective ways to resolve disputes is to foster open communication between franchisee and franchisor and encourage negotiation of smaller disagreements before they become significant disputes. Indeed, negotiation is the most frequently used ADR method for franchisees and franchisors.
Many franchise agreements contain clauses that specify how disputes are to be resolved between the parties. Some of these provide for informal negotiation and then, if that fails within a certain amount of time, go on to prescribe mediation, followed by either arbitration or litigation.
Even if the franchise agreement does not specify a process, the parties can agree at any time to mediate or arbitrate their disputes. The key word is ‘agree’—one party cannot unilaterally force the other to participate in mediation or arbitration.
That said, many jurisdictions (including Ontario) require the parties in court actions to participate in a mandatory mediation session before going to trial.
Brad Hanna is a partner at Toronto-based McMillan LLP and co-chair of its dispute resolution, franchising, distribution and international arbitration groups. For more information, contact him via e-mail at firstname.lastname@example.org.