Franchise face-off: When mediation saves the day

The first compulsory mediation order was awarded in the High Court earlier this year. For some time now, the courts have strongly encouraged parties to use alternative dispute resolution (ADR) to settle matters. However, we are moving into a new era in which the courts are likely to take an even more pro-active role in promoting and directing the use of ADR, in particular mediation.

Franchising disputes and the benefits of mediating

The franchising industry is already well-versed in mediation and most experienced franchisors understand its benefits. It has been commonplace for dispute resolution clauses in franchise agreements to have a structured dispute resolution process for some time. These clauses often provide for direct discussions between the parties and then mediation (including through the British Franchise Association’s (BFA) mediation scheme) before arbitration or court proceedings are contemplated.

A party which fails to comply with the contractual process or which unreasonably refuses to mediate could find itself on the wrong end of a costs penalty at the end of legal proceedings. Parties would therefore be well advised to seriously consider any offer of mediation and to bear in mind its potential benefits:

1. It works - research by the Centre for Effective Dispute Resolution suggests that around 92% of mediations result in settlement on the day or shortly afterwards[1]. Even allowing for a healthy margin of error, that is still strikingly successful.
2. Cost effective - whilst there is a cost to mediating, it can save a significant amount in the long-run.
3. Timesaving - mediation often leads to faster resolutions, reducing disruption to operations.
4. Preserves relationships - when carried out openly and in good faith, it can offer a more collaborative approach to resolution of disputes.
5. Flexible - the process can be tailored towards the specific needs and circumstances of the parties.
6. Confidential - helping to limit the risk of information spreading around a network.

The practicalities of mediating franchising disputes

Mediation is most impactful when there is a real chance of resolution. Mediate too early and you run the risk that the parties do not know enough about each other’s case to come to a view on settlement. Leave it too late and the parties can become too entrenched in their positions and more willing to roll the dice in court or before an arbitral tribunal.

The BFA promotes early mediation to its members, albeit after they have engaged in direct settlement discussions. This can have real benefits in a franchising context, particularly where the sums in dispute are disproportionate to the likely costs of litigating and/ or where there is still a chance of salvaging the relationship.

However, in considering whether to propose mediation, or how to respond to an offer from an opponent, there different factors to weigh up and the analysis will be different in each case. How much do you know about your opponent’s position? Have the arguments been sufficiently fleshed out? Are the factual and legal positions on both sides properly understood? Have allegations of wrongdoing been evidenced? How rationally are the parties behaving and how far apart do they appear to be on the issues? All of these questions will need to be considered and, if there are serious doubts, then that might indicate further time is needed for the issues in dispute to crystallise.

A party declining to mediate will need to exercise caution. Silence in the face of an offer is likely to be considered unreasonable in itself. A carefully crafted “no not yet, because of x, y and z” will be on much safer ground than a knee jerk, “no, you must be joking”.

If mediation does go ahead, then careful preparation is key. Thought needs to be given to the right attendees, the right mediator and right structure for the day. Position statements are generally a helpful way of lining up the key arguments and setting the tone for the day – both for the mediator and your opponent’s benefit. Parties would also be well advised to consider their best and worst case settlement positions beforehand. Once the parties are in the room the aim should ideally be to steer it towards a commercial negotiation rather than a mini trail of the issues – which can be difficult if positions are not clearly articulated beforehand.

Even if mediation does not deliver a result on the day, don’t despair. It often leads to further negotiations in the days and weeks afterwards and post mediation settlement is common. At the very least, it allows parties a chance to lay out their expectations and learn a lot more about their opponent’s position and mindset – all of which can be very useful in disputes.