1

Gurmeet S Jakhu, Partner Hamilton Pratt Solicitors

Birmingham, United Kingdom

Topic 8: The Relevance of Dispute Resolution

Mechanisms in Franchising

2

Dispute Resolution Mechanisms in Franchising

1. Introduction 2. Types of disputes3. How to Approach disputes?4. Termination Provisions5. The relations comes to an end6. Forms of Dispute Resolution7. Court Action – Restrictive Covenants and Injunctions8. Mediation 9. Arbitration10. Distinguishing Features11. Other forms of ADR

3

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

4

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

5

Types of Disputes (contd.)

Disputes can arise:

• Upon termination– Validity of termination– Enforceability of the termination provisions

• Post termination restrictive covenants• Post termination obligations

6

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).

7

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

8

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”

9

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

10

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

11

The relationship endsWhen 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.

12

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

13

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

14

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

15

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

16

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

17

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)

18

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

19

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.

20

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)

21

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.

22

Mediation: The Statistics

• Breakdown of case load by sector and quantum

• Reference PLC (1999) magazine and CEDR – Centre for Dispute Resolution

23

Mediation

6% 15%

28%6%6%

22%

4%

4% 9%

Banking, finance

Commercial contract

Construction,engineering, property

Insurance, reinsurance

IT, telecommunications

Professional negligence

Medical negligence,personal injury

Shares

Other

Breakdown of commercial caseload by sector

24

Mediation

02

468

10

121416

18

Breakdown of caseload by quantum for commercial cases

25

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

26

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

27

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.

28

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

29

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

30

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

31

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

32

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

33

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

34

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)

35

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

36

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.

37

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

38

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

39

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

40

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

41

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.

42

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

43

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 JakhuPartner Hamilton Pratt, Birmingham, England