Many franchisors include an arbitration clause in their franchise agreements to govern franchise dispute resolution. This requires both parties to take any disputes to arbitration instead of to court. Arbitration is a form of alternative franchise dispute resolution where a neutral third party, the arbitrator, has power to decide the case. An arbitrator's decision is final. The winning party can enforce the arbitrator's decision in court. Decisions regarding arbitration can be complicated and are best made with an experienced franchise attorney-but here are a few things to consider:
•1) Finality. One advantage of arbitration is you get a (mostly) final result. It can also be the greatest disadvantage. If a judge or jury makes a serious error you can appeal to a higher court. Not so with an arbitrator's decision.
•2) Selecting the Arbitrator. Franchise agreements often specify that the arbitrator will be selected from the panel of a national company that provides arbitration services. The parties make the final selection from that list at the time of the dispute. Arbitrators are generally private attorneys. Like everyone else, they can act based on biases that you may not identify until after the decision. It is important to carefully consider how to be sure you will have a qualified and fair arbitrator at the time of a dispute.
•3) Where to Arbitrate. Normally the arbitration clause specifies where franchise dispute resolution will take place. In some states, such location requirements may not be enforceable in franchise agreements unless they are made at the time of the dispute. If you are a franchisor, you may want the proceeding in your home city. But what if you later move your office to another city or state? If you are a franchisee, having to travel to the franchisor's headquarters city imposes a substantial additional burden.
Whether you are a franchisor or a franchisee, decisions about how to resolve disputes and whether to use arbitration are important. This gives you a few questions to consider. We will plan to address more from time to time in this Blog.