The 6 Benefits of a Bespoke Franchise Resolution Mechanism

The recent Supreme Court of Canada's discussion the value mediation and the protection of confidential information exchanged during mediation, reminded me of the excellent program several years ago at the ABA Forum.

Mediators Peter Klarfeld, Michael K. Lewis, and Peter Silverman, collectively "KLS", discussed the advantages, disadvantages and benefits of mediation over litigation, for franchise disputes.

By popular vote, their program was selected as one of the best programs at the 32nd Annual Forum on Franchising.

6 Advantages of Mediation over Litigation

KLS argued that there were at least six (6) benefits of mediation over litigation:

2. Informed risk management;

3. Creative solutions;

4. Preservation of relationship;

5. Mutually advantageous, and;

6. high success rate.

Finally, KLS believe that in a number of disputes, parties are more likely to live with their agreed upon settlements than find satisfaction with a Court judgment which may not speak to their business priorities.

4 Benefits Even When Mediation Doesn't Produce a Settlement

They also point to four (4) benefits of mediation even if there is not a settlement: reduced trial preparation, possible future settlement, more tempered appreciation of strength and weakness of case, and an overall reduction in misunderstandings and clarification of priorities.

3 Considerations of When Mediation is Superior

But mediation is not without its risks. Some parties use the mediation for pure delay, and there are times in which one party needs to make a statement through the trial process that certain behaviors will not be tolerated.

In sum, mediation is likely to be more effective than litigation if:

a) the parties wish to preserve their relationship, what KLS called "in-term disputes",

b) the dispute depends on business judgments rather than simple contractual analysis, and;

c) there is either a unilateral or mutual misunderstanding about positions which a mediator can reasonably dissolve.

Creating the Mediation Process in Advance

No mediation process is constructed from thin air. People don't simply show up at the mediator's location and sit around the table trading offers back and forth.

KLS presented a thoughtful list of 4 issues to consider when drafting a mediation agreement for the franchise system.

1. Should the mediation be mandatory or not?

The stratetic point I really liked was from Peter Silverman. He pointed out one big advantage for the franchisor to mandatory mediation:

Settlements reached through mediation need not be disclosed under the new Section 3 of the FDD. Even confidential settlements reached as the result of litigation or arbitration have to have material terms disclosed.

This disclosure is not required for mediated settlements. This is a benefit also for franchisees as they are not obliged, even in a mandatory mediation process, to agree to a settlement.

2. How wide should the mediation clause be?

Should a specific mediation service provider be selected before hand? One difficult question is whether the mediator should have any specific franchise or industry experience.

Extensive franchise experience can be seen as a bias by either party and may result in the mediator simply substituting his or her judgment for the group's collective judgment.

3. Time, limitation period tolling, and costs should be dealt with in the mediation provision.

Open Questions

KLS raised other issues to consider, but one that they don't talk about is the possible effect of the Fair Arbitration Act on the availability and use of mediation. Is franchising moving away from both litigation and arbitration? Will the passage of the Fair Arbitration Act make mediation a more attractive option for franchisors?