This article was originally published in the Massachusetts Bar Association’s ComCom Quarterly. The article is intended for franchisor counsel looking to advise clients about the benefits of mediation and how to draft an effective mediation clause for franchise disputes.

Among the questions asked as part of FranchiseGrade.com’s Franchise Expert Survey of 2015 was the following: “When reviewing alternative dispute resolution clauses[,] what do you feel is the most reasonable structure for a balanced relationship?” More than half of survey respondents answered that “[m]ediation followed by arbitration” supported such a relationship. In fact, 66% of respondents believed that mediation prior to the commencement of any type of legal action was the best path forward for a franchisor and its franchisee.

The importance of a “balanced relationship” cannot be overstated. The relationship between franchisor and franchisee stands apart from other commercial relationships because the success of one is reliant upon the success of the other.  A franchisor, for example, needs a franchisee to properly execute the established business concept; failure will not only impact the individual franchisee, but may negatively affect the franchise system.  Similarly, a franchisee needs a franchisor to provide proper guidance and oversight, and to be consistently finding innovative ways of growing the brand and meeting competitive challenges, as well as other external pressures.

It should come as no surprise, therefore, that “collaboration” is the name of the game in franchising.  Both franchisor and franchisee stand to gain if they “co-labor” for the betterment of the brand.  If one party refuses to engage, both may suffer.

From the franchisor’s perspective, there is good reason to include mandatory early mediation as part of a comprehensive dispute resolution process.  This is especially true where the relationship will continue after the dispute is settled. For starters, a franchisor that can resolve a conflict through early mediation is under no obligation to disclose the dispute and the outcome as part of its franchise disclosure document.  Such a disclosure could very well scare off potential franchisees from joining the system.  Additionally, by settling a dispute early, a franchisor is able to keep a conflict from reverberating throughout its franchise system and inhibiting brand success.

An effective mediation clause should, at a minimum, take into account the following factors to ensure a balanced relationship in mediation:

  • Cost: A franchisor that desires to engage in a “good faith” mediation should be willing to incur at least half of the mediator’s fees and expenses.
  • Venue: A franchisor will typically choose a site that is convenient for it, and not a franchisee.  However, a neutral and mutually convenient location has a better chance of having a productive mediation.
  • Mediator: A franchisor will often seek a mediator that is partial to “the words of the contract” over the shared interests of the parties.  In other words, a franchisor will often want to engage in an “evaluative mediation” that more narrowly assesses the merits of a case instead of a “facilitative mediation” that aims to find opportunities for mutual gain (growing the pie), particularly in a continuing relationship, rather than merely cutting up and dividing the pie.  For optimal results, a franchisor should look for a mediator who is able to help the parties find a “win-win” outcome.

Importantly, not every dispute between a franchisor and franchisee will be solved through mandatory early mediation.  The principles and/or interests held by a given party may be such that only a court or arbitrator can resolve the dispute.  But in the majority of instances, mandatory early mediation will allow a franchisor and franchisee to settle a dispute in a cost-effective, efficient, and relationship-preserving manner.  This is for the good of the franchisor, the franchisee, and the entire franchise system.

Eric H. Karp is a partner at Witmer, Karp, Warner & Ryan LLP, where he specializes in franchise law. Ari N. Stern is an attorney and mediator who is affiliated with both Witmer, Karp, Warner & Ryan LLP and MWI. Chuck Doran is a mediator and the Executive Director of MWI.