advisory Nov, 24 2010

Resolving Those Ever Rising Franchise Disputes

Differences of opinions are but obvious, in human relationships. Similarly, franchise relationships, are not free from disagreements and disputes. However, Forum Selection Clause in a franchise agreement defines the rule of resolving disputes. Find out mo

By Ramanjit Kaur
Feature Writer
Resolving Those Ever Rising Franchise Disputes

Disputes and differences are an intrinsic part of every franchise fraternity. As an entrepreneur aspires to take the franchise route to expand his business and zeroes down on a particular brand, occurrence of any dispute is the last thing on their mind. But differences of opinion are natural to any business. However, derogatory situations can be a source of failure for any franchise business. The disputes in franchising usually arise due to breach of contract or misrepresentation of the franchise agreement. So, in order to avoid such conflicts, Forum Selection Clause is a must for every franchise agreement. Let us find out about Forum Selection Clause and its role in resolving the disputes between the franchisor and his franchisees.

What is Forum Selection Clause?

The Forum Selection Clause in a franchise agreement allows both the franchisor and his franchisees to resolve their disputes in a specific forum. In other words, it sets out a process under which both the parties can seek resolution to their dispute/ conflict along with the venue where the conflict will be resolved. The franchise selection forum basically includes two clauses:

  • Choice of law clause: Choice of law basically tells both the parties, which law will actually apply to resolve the conflict. It says that the franchisor needs to be aware of any ‘mandatory laws’ which might apply and override any choice of law clause.
  • Jurisdiction clause: It decides the court and dispute resolution system that will hear and resolve the dispute litigation. According to Dawn Stallwood, Managing Director, Danetree Associates and Consultant Solicitor at Legal Services Consulting, UK, “It is risky to be silent on such issues as jurisdictional issues can be complex and providing for certainty in the franchise contract is preferable.”

Options for dispute resolution

When deciding the Forum Selection Clause, it is important that the clause fits the need of both the parties. It should be valid and applicable in that particular country or state. There are various methods opted by both the parties to resolve the dispute that arises between them. These methods include:

  • Court Jurisdiction: It is the most common form of dispute resolution, wherein one party (be it the franchisor or the franchisee) claims for the damages occured and seeks legal remedy. But before zeroing on this option, and deciding the court of particular country, it is necessary to check out the enforceability of the Forum Selection Clause in that country and recognition of the ruling. It is because the choice of law and place of jurisdiction directly affects the legal course of action as rules and regulations differ from country to country. For instance, some countries have bilateral reciprocal enforcement regimes that allow the respective courts to identify and impose each other’s judgment. On the other hand, there may be signatories of international conventions.
  • Arbitration: It is an alternative form of dispute resolution in which both the parties resolve their disputes outside the court with the help of an arbitrator. In this process, it is the arbitrator (neutral third party) who reviews the case and imposes a decision which is legally binding to both the parties. It is often used for international commercial transactions as it offers faster resolution and is much cheaper and flexible compared to court jurisdiction.
  • Mediation: It is another form of alternative dispute resolution, which is very cost-effective. In this, a third party acts as a mediator who seeks help of both the franchisor and the franchisee to develop a shared understanding and reach for a long lasting resolution. The best part of this resolution process is that it is private and highly confidential. 
  • Conciliation: This process utilises the service of a conciliator who possesses expertise of the particular industry and accordingly advice on the dispute matter and suggests settlement terms.

Ensuring the enforceability of the clause

When a dispute between parties in different jurisdictions arises under a commercial contract, the Forum Selection Clause will often be the first point of reference for parties and their solicitors looking to understand what rights and remedies are available to them, where and under what law. As Rod Young, ED, DC Strategy says, “The franchisor should consider the forum selection clause separately for each jurisdiction where he wishes to expand his business in, with reference to the local laws and any franchising regulations. While one cannot guarantee the enforceability of a forum clause, parties can generally take comfort from a clear well-constructed provision prepared by a specialist legal adviser.”

Usually, it is the legal rules of the country involved and the international conventions under which the ruling of the national court is submitted. But in case, none of the conventions apply, the internal rule of the specific nation decides the validity of the Forum Selection Clause.

In short, for the sake of commercial certainty, it is advisable to include a Forum Selection Clause in every franchise agreement, irrespective of the nationwide or international franchising business offering.

Related: Administer your finances for franchise success

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