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Franchise Disputes: Does a franchisor and a franchisee have to attempt Alternative Dispute Resolution (“ADR”)?

Franchise Disputes: Does a franchisor and a franchisee have to attempt Alternative Dispute Resolution (“ADR”)?

Franchises, like any other business, have disputes with third parties and, of course, from time to time, with their franchisor.  There is nothing unique about a franchised business in that sense. 

Where a franchise dispute arises, whether with the franchisor or third party, the starting point is to talk.  A simple without prejudice conversation often resolves issues, but where it does not, then next steps need to be considered. 

With disputes between a franchisee and franchisor, the starting point is always the franchise agreement.  Often, there are dispute resolution mechanism within the agreement, which might set out, for example, various levels of resolution exercise, such as at the first level, a meeting between managers, at the second level a formal mediation between the parties and, perhaps a third level requiring the dispute to be dealt with by way of arbitration. 

If a franchise agreement contains a provision requiring the parties to it to enter into a form of ADR, a court is likely to enforce that and require the parties to the franchise dispute to attempt an ADR exercise in accordance with the contract.  In doing so, the court is really only doing requiring the parties to do that which they had agreed to do in the event of a franchise dispute arising, nothing more, nothing less, by enforcing the contract term.  It cannot force a settlement, of course, because whether the parties can agree to resolve the dispute is another issue altogether, it can only require the steps agreed to be undertaken in the event of a franchise dispute be addressed. 

The more interesting question and challenging question is whether a franchisor and franchisee can be forced to mediate by the other party when a franchise agreement is silent on the issue.

The courts have generally encouraged parties participate in ADR, in particular mediation, for a long time, with adverse costs penalties potentially being applied to parties who unreasonably refuse to engage that process even if they ultimately win their case at trial. 

Until recently, it was always thought that a court had no power to force a party to mediate. The Court of Appeal had previously concluded that the court had no jurisdiction to force parties to mediate due to Article 6 of the European Convention on Human Rights (“the ECHR”) as to compel ADR would be regarded as an “unacceptable constraint on the right of access to the court”.

However, in Churchill v Merthyr Tydfil CBC [2023] EWCA Civ 1416, the Court of Appeal’s took the view that parties could be forced to engage in ADR, without this being an unacceptable constraint on the right of access to the court and thus in breach of Article 6 of the ECHR.  This, however, is subject to a stay not:

  1. Impairing the essence of the claimant’s right to proceed to a judicial hearing; and
  1. that is proportionate to the legitimate aim of settling the dispute fairly, quickly and at a reasonable cost.

The Court of Appeal deliberately did not limit the factors to be considered when exercising its case management discretions to impose a stay of proceedings against the will of the parties.  It will always be a decision for a court on a case by case basis. 

Fundamentally, however, it is important that either party to a franchise dispute now has an additional lever to pull to seek to require the other to engage in some form of dispute resolution process where the other seems unwilling.  It might be a legitimate question as to whether there is much point in engaging in ADR against the other party’s will, because that other party could simply decide not to play ball and pay lip service to the entire process.  Curiously, however, in the writer’s experience, with an appropriately qualified and experienced mediator, the prospects often remain good for exploring issues in mediation and achieving a settlement.  Franchise disputes should not therefore be left to fester, but instead, the suite of ADR mechanisms available should be exploited to the benefit of the parties.