As much you may wish to avoid them, disputes and litigations sometimes happen in the franchising world. In this article, we examine the most common causes of franchise disputes and how to avoid them.

Sources of disputes

Disputes may arise at various stages of the franchise relationship, so you should be aware of the potential pitfalls in order to prevent them:

Before the agreement is made – avoid promises of success! Often franchise disputes relate to the pre-contractual stage when the parties exchange information. If the franchise business is not successful, the franchisee may wish to consider whether the business information and financial forecasts provided by the franchisor were accurate and not misleading. (Find out more about pre-contractual disclosure in franchise agreements.) The parties should make sure that facts and figures are representative and contain the necessary risk and accuracy warnings.

During the lifetime of the franchise agreement, disputes often relate to the non-performance of certain obligations, such as:

• Delays with payment of royalties
• Inaccurate or incomplete reporting
• Breach of non-competition agreement
• Failure to meet agreed targets

The termination or non-renewal of the franchise agreement can also lead to disputes in certain situations:

• Franchisor wishes to terminate or not renew the agreement
• Breach notices and verification of cure
• One party challenges the early termination of the agreement
• Damages claim for termination payments or loss of profits
• Enforcement of post-termination restrictions
• Injunctions and court orders

How to minimize the risk of disputes

A carefully drafted franchise agreement goes a long way in preventing unnecessary and costly litigation.  Ensure that your franchise agreement contains the following measures to prevent or resolve disputes:

• Precise listing of the parties’ post-termination rights and duties
• Guarantee or other forms of security supporting a smooth exit from the agreement
• Dispute resolution clauses, including the favorable applicable law and arbitration or choice of courts
• Mediation to resolve relationship issues

If the cooperation starts to be problematic, it is advisable to carefully document any breaches and react quickly the problem from escalating further if possible.  In case the matter escalates and ends up in court, such documentation will provide critical evidence.

Source: Dentons