Gurmeet S Jakhu, Partner Hamilton Pratt Solicitors Birmingham, United Kingdom

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Gurmeet S Jakhu, Partner Hamilton Pratt
Solicitors Birmingham, United Kingdom

• Topic 8 The Relevance of Dispute Resolution
  Mechanisms in Franchising

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Dispute Resolution Mechanisms in Franchising

1. Introduction
2. Types of disputes
3. How to Approach disputes?
4. Termination Provisions
5. The relations comes to an end
6. Forms of Dispute Resolution
7. Court Action Restrictive Covenants and
   Injunctions
8. Mediation
9. Arbitration
10. Distinguishing Features
11. Other forms of ADR

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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
• Frsor obliged to take action

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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

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Types of Disputes (contd.)

• Disputes can arise
• Upon termination
• Validity of termination
• Enforceability of the termination provisions
• Post termination restrictive covenants
• Post termination obligations

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Approach to Disputes

• Guiding principles in franchise disputes
• Avoid heavy handed legal approach
• Dont bee seen as a soft touch and allow Frees
  to cherry pick
• In the UK the BFAs 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 Frsor should
  seek a dialogue and seek commercial resolution
  (mediation/arbitration).

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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

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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 frees
• Incorporate Minimum Performance clauses
• Failure to meet, reduce territory or visit on
  renewal
• Options link renewal to network performance or
  Free to use best endeavours to promote and
  extend the Frsors business

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Termination Provisions

• Breach by the Franchisee
• Right to terminate important since Frsor 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

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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

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The relationship ends

• When 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.

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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

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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

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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

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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 Free for misrepresentation and
  breach of contract

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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/Frsor

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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)

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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 Free keeps account of turnover and
  profits
• Pursue claim with speed/vigour

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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.

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Mediation

• What is it
• Mediation can offer a cost effective and flexible
  alternative to litigation as a dispute resolution
  mechanism
• Its 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)

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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.

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Mediation The Statistics

• Breakdown of case load by sector and quantum
• Reference PLC (1999) magazine and CEDR Centre
  for Dispute Resolution

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Mediation
Breakdown of commercial caseload by sector
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Mediation
Breakdown of caseload by quantum for commercial
cases
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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

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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

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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.

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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

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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

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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

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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

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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

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Arbitration v Mediation

• In mediation parties select a neutral party
• Mediators 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

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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)

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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

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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.

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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

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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

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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

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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

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In Conclusion

• There is an absolute need to preserve the
  business
• hence Frsors 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.

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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

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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 attendees reliance on the contents of
  this presentation.
• Gurmeet Jakhu
• Partner
• Hamilton Pratt, Birmingham, England