Settlement of conflicts in franchise agreements. Arbitration and mediation

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The relationship between franchisor and franchisee in a franchise agreement has a certain complexity as we all know well. In Spain, it can also be deduced from our internal legislation (primarily the Retail Act and Royal Decree 201/2010).

In fact, we have not in Spain specific regulations on the content of the franchise agreements, so its elements (how to regulate supplies, trademarks, know-how transmitted, technical assistance, relations with other franchisees and the network, exclusivity and territory, non-compete clauses, promotion and advertising, sales via the Internet, amongst others) will find accommodation in rules dispersed. The main source of rights and obligations will be, therefore, the contract itself. And we will need it as well together with other contractual documents in order to try to prevent and solve conflicts.

The Act on Mediation in Civil and Commercial matters (5/2012) and the Arbitration Act (60/2003) grant us in Spain some clues for the solution of possible difficulties. In order to anticipate, to prevent and to solve potential conflicts we should use the franchise agreement since the beginning of its drafting and the following relationship between franchisor and franchisee with, in my opinion, three steps involved:

  1. the use of mediation for cases in which the conflict has raised but the parties want to solve it either for the continuity of the relationship or to terminate it by mutual agreement,
  2. establishing a proper communication system between franchisor and the network with the intent to avoid, as far as possible, the existence of the conflicts or the provision of an internal solution (in some brands it has been developed with success the “defender of the franchisee”);
  3. the use of arbitral resolution of conflicts formulas that can provide the parties more flexibility than ordinary courts.

But why mediation and arbitration can be useful in the franchise agreements? How to anticipate to the possible conflicts and take them into account?

First, in order to submit a franchise agreement to mediation and arbitration it would be just necessary that the matters are disposable by the parties. They are excluded, therefore, those cases considered as loi de police or public order (for instance, the compulsory disclosure information before the signature). The mediation is essentially a voluntary process and so are the submission to arbitration, the choice of the arbitration court and the procedure to regulate the procedure.

Second, mediation and arbitration will benefit from the absence of formalities. In mediation, because franchisor and franchisee establish the essential elements for finding a solution by themselves. In arbitration, because even if the covenant has to be accepted in writing, this requirement is accepted without excessive rigidity. Moreover, in both cases, publicity of the case is lower than that obtained through the courts but, in return, the possibility of appeal is very limited (although it can also be seen as an advantage in the short duration of the procedure).

Third, and since in a franchise agreement abound elements of different nature, the solution agreed by the parties (mediation) can be highly recommended. In the same way, the special knowledge of the particularity of these contracts may probably find a better follow-up and a greater commitment with an arbitrator, than with an ordinary judge with very different issues and excessive workload.

Given these elements, we can summarise some recommendations when dealing with conflicts in a franchise agreement. Obviously there will be adapted to each case but, at least, it seems essential to be considered as a possibility for these agreements.

  1. The use of arbitration may be advisable in those cases where the technical knowledge of the franchise is essential. The faster and greater specialization of the arbitrators may benefit of cost reduction. In this case it should be chosen arbitrators, institutions and procedures that are appropriate to franchise, avoiding any suspicion of lack of independence and ensuring adequate representation of the parties.
  2. A good starting point might be a mechanism that favours the internal communication within the network allowing the flowing of information, the knowledge of the positions of the franchisees and the appropriate answering from the Franchisor. Even the creation of a department or a representative channelling internal conflicts could be considered.
  3. The use of mediation as a way to solve possible conflicts may be advisable due to its flexibility. In this case it is advisable to provide it expressly in the contract with its essential elements such as the nomination of the mediator, the place, the language and the basics of the procedure. To leave these elements to be defined when the conflict arises does not seem a good idea.
  4. Finally, the pre-contractual information disclosed to the franchisee should include the essential elements of the system chosen, in particular to avoid that its contractual provision could be considered as abusive.
Ignacio Alonso

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