Litigation

The franchise agreement will usually include either a binding arbitration clause or a jurisdiction clause. The latter will determine the jurisdiction of the courts which will deal with litigation between the parties.

One of the main advantages of litigation is the ability to apply for injunctions thus providing an urgent remedy to a serious breach by a sub-franchisor/developer/franchisee. The main disadvantages of litigation are as follows :

(a) Arbitration may be preferred to litigation as it should maintain a continuing relationship between the franchisor and the franchisee at the conclusion of the arbitration whereas litigation will usually lead to a breakdown in relations between the parties.

(b) Litigation may be reported and can lead to adverse publicity for the franchisor. For example, McDonalds engaged in extensive litigation against its regional franchisee in Paris, complaining about non-compliance with standards of quality, service and cleanliness. Eventually the franchisor cancelled the franchise in 1982. The litigation led to negative publicity in the franchise area and caused considerable harm to McDonald's international franchise system. However, it should be borne in mind that, although arbitration proceedings will not be reported and will be heard privately, in the commercial community it is usually well known when arbitration is taking place.

(c) Costs of litigation are invariably substantial but it should be emphasised that arbitration will still involve the need to employ lawyers, which can be as expensive as litigation (particularly if the arbitrators fees are high). There may also be difficulties in obtaining a continuous hearing owing to unavailability of arbitrators for lengthy periods of time. This can lead to adjournments of the hearing.

In the absence of an arbitration clause in the franchise agreement it is necessary to have a jurisdiction clause to determine which country will deal with any litigation between the parties. In the absence of a jurisdiction clause the franchisor may be at the mercy of local courts in the franchisee's jurisdiction. Similarly, the parties should also choose the law of a particular state which will govern resolution of disputes between them.

Franchise agreements are full of covenants and various terms and conditions, the breach of which can result in the wronged party seeking rescission or termination of the contract and compensation in the form of damages. For instance, if the franchisee fails to pay the royalty to the franchisor for use of the goodwill the franchisor can terminate the contract and find another more suitable franchisee. If the franchisee does not follow the manual or business practice of the franchisor, the latter may seek to terminate and obtain damages for any goods produced differently from those produced by the franchisor.