One of the main reasons for drafting a contract is to prevent disputes between the parties by clearly establishing their rights and obligations.

However, with a few appropriate clauses, an agreement can also be used to prevent and properly manage a potential dispute.

In many franchise agreements, dispute prevention, management and resolution provisions are very limited and cursory. They often consist only of a choice of law clause, which is only really useful where the franchisor and franchisee (or the franchised business) are in different jurisdictions.

Another provision that should be included in all franchise agreements is the clause stating the place where any legal action arising out of the agreement is to be brought. By this clause, the franchisor will want to avoid being involved in a legal dispute instituted in a distant judicial district or having to institute legal proceedings in a distant judicial district.

To be valid and effective, however, such a clause must be drafted in very clear language and in accordance with the relevant case law.

It should also be noted that in jurisdictions (provinces, states and countries) where there is franchise legislation, the legislation often imposes limitations on clauses prescribing the law applicable to the agreement, as well as on clauses dealing with the courts before which any remedy arising out of a franchise agreement may be brought.

The foregoing represents only the elementary basis for dispute prevention and management clauses.

With a little thought and appropriate guidance from a professional in the field, it is possible to go much further and stipulate clauses that can :

  • Shorten the duration of a dispute or litigation and accelerate its outcome (which is becoming particularly important in a context where many courts are increasingly congested);
  • Enable parties to a dispute to seek themselves solutions to their disagreements before relying on external bodies (court or arbitrator) to do so;
  • Avoid having the outcome of the dispute decided by a third party who is not really familiar with the franchise network (and, sometimes, even with the particular characteristics of the franchisor-franchisee relationship);
  • Prevent a dispute from becoming public (in traditional or social media) to the detriment of all members of the franchise system (franchisor and franchisees); and
  • Reduce the costs of a dispute.

While there are a number of well-known dispute prevention, management and resolution tools (such as negotiation, mediation, arbitration and, more recently, med/arb), it is important to know that (i) each of these tools can be adapted to the needs and particularities of a franchise network (ii) that there are several other lesser-known tools that may be better suited to the needs of your network (in fact, the doctrine recognizes at least 25 dispute avoidance and resolution tools, each of which can also be adapted to suit your particular needs).

Selecting one or a few appropriate dispute prevention, management and resolution tools that are truly suited to your needs, and drafting the clauses to implement them in your network, are important issues that should be carefully considered with the assistance of a professional experienced in these tools and in drafting appropriate clauses.

The challenge with this type of clause is that it will only be at the time of use (i.e., when a dispute arises) that the franchisor and franchisee will really know if they are really useful and effective or if, on the contrary, they raise more problems than they solve.

It is therefore always preferable to call upon the services of lawyers who are experts in franchising and dispute prevention and resolution to draft these clauses (as well as, for that matter, any franchise agreement).

Fasken has all the expertise and resources necessary to help you draft agreements that are complete, appropriate and that properly protect your rights, while avoiding potential pitfalls.

We invite you to contact any of the authors of this newsletter with any questions. We will be happy to answer you promptly.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.