Getting Ugly: Franchise Disputes

In a perfect world franchising agreements would always work to the mutual benefit of both franchisor and franchisee. Both the franchising company and the individual owners would all profit in an equitable manner with both sides being satisfied with the arrangement.
Truthfully, that ideal situation is the case far more often than not.
However, when the interests of the franchisor and the franchisee collide things can get very heated very quickly. A disgruntled franchisee can make a lot of waves and can potentially damage the franchising appeal of the franchising organization. On the other hand, the franchising organization usually has more recourse to greater legal resources than the franchisee, and thus enjoys the upper hand in most instances.

Mediation and Arbitration

Mediation and arbitration are the quickest means of resolving conflict between franchisor and franchisee. Obviously, in many cases the franchisor would prefer to have disputes handled as quickly and quietly as possible, so as to maintain its image in the eyes of investors. However, mediation and arbitration can be double-edged sword for franchisors.

Mediation and arbitration tend to favor franchisees more often than franchisors. If the franchisor perceives that mediation will most likely favor the franchising organization, they may push for it. However, if they feel that their position may be week, they may actually prefer litigation.

Litigation

Litigation, by virtue of being more public, may be somewhat damaging to the franchising organization regardless of outcome. The litigation will appear on the company's Financial Disclosure Document thereafter and may influence investor opinion. However, in certain instances this risk is deemed preferable to the advance the franchisor's position.
Litigation, though potential damaging, is more skewed in favor of the franchising organization. The franchisor, obviously, has greater financial resources and access to stronger legal counsel. In many cases, franchisees may drop a dispute when faced with the costs of doing battle with the franchisor in court.

Arbitration and Mediation Clauses

Some franchisors include a clause into the franchising agreement that requires that any dispute between a franchisee and the franchisor first be brought into mediation and arbitration. In some instances the contract may even stipulate that arbitration is the last recourse of the complainant, any final arbitration being binding on the franchisee and franchisor. This eliminates recourse to litigation and since litigation, as mentioned, favors the franchisor, these types of clauses are fairly uncommon in franchising agreements.

Most franchisors will prefer to keep their options open, remaining flexible in their ability to push mediation and arbitration in instances where it is deemed favorable to the franchisor and forcing litigation in instances where the mediation and arbitration would most likely work against the franchisor. This flexibility allows the franchising organization to maintain the upper hand in most franchisee disputes and, of course, works against the best interest of the franchise owners.
Though it means a limited ability on the part of the franchisee to pursue disputes with the franchisor, it is important that franchisees understand their position when pursuing complaints against their franchising companies to avoid costly disputes that are doomed before every being initiated.