1. Identifying the roots of the conflict is crucial
Franchise agreements usually provide for several instruments to deal with breaches of contract. These range from contractual penalties to extraordinary termination and are linked to varying degrees of severity. However, it is often forgotten to first ask whether a conflict can be resolved in such a way that the franchise partnership can continue.
a. It’s (only) about money
Ultimately, conflicts always involve economic interests, but certain situations can be reduced to this and make possible solutions easier. If a franchisee is temporarily experiencing financial difficulties and this is the reason for delayed or non-payment to the franchisor, any reasonable franchisor will try to find an amicable solution with the franchisee. This may involve, for example, granting temporary payment relief in order to ensure that the franchisee remains in the system in the long term, or negotiating an early termination of the contractual relationship that is economically acceptable to both parties. The same applies if the franchisee has simply overextended itself in the full knowledge of its financial obligations or has overestimated its own entrepreneurial strength. Nonetheless, the formal requirements must be observed and the contractual provisions regarding deadlines, warnings, and, if applicable, specific dispute resolution mechanisms must be complied with so that, in the event that an amicable solution cannot be reached, there is no need to start from scratch. If it is “only” about money, it is often easier to put oneself in the other party’s shoes, to try to meet eachother halfway and to work towards a quick solution in one’s own interest. In the end, every contentious dispute only makes it more expensive and more difficult for each party.
b. It’s not (just) about money – it’s about the system
However, many conflicts are not just about money, or at least not primarily about money—they are more about the “principle.” Or about one’s own ego. Or about regretting a decision—namely, the decision to enter into a long-term franchise agreement with the associated investments—and blaming the other party for one’s own failure or wrong decision. Realizing that a wrong decision has been made can occur on both the franchisor’s and the franchisee’s part, for different reasons. For the franchisor, this type of conflict can have devastating consequences, as it can affect the entire franchise system. This is even more true if other franchisees are turned against the franchise system and the franchisor.
2. Taking precautions
a. The franchisor holds many cards
The franchisor can and must actively prepare for conflicts where the causes lie exclusively within its sphere of influence by, among other things, ensuring
- Complete and truthful pre-contractual disclosure
- The transfer of the know-how necessary for the economic operation within the system
- Clear contractual provisions on rights and obligations and the consequences of breaches
- Protection and defense of trademark rights
- access to and further development of a system that is competitive in the market
- Punishment of any behaviour (within and outside the franchise system) that is detrimental to the reputation, brand name, or quality
- Support for franchise partners and
- Communication, communication, communication.
b. Franchisees also need to take precautions
Being a franchisee means first and foremost submitting to very specific requirements of the system as an entrepreneur. The much-vaunted partnership between equals does not really exist in franchising; on the other hand, franchisees are entrepreneurs and not salaried employees. In this respect, anyone interested in joining a franchise system is well advised to
- Realistically assess their own entrepreneurial strength and attitude
- Carefully examine the documents provided by the franchisor
- Gain their own impression of the franchise system and ask questions
- not to sign the franchise agreement if any of its provisions appear unacceptable.
3. Don’t be afraid of litigation
Mediation, arbitration, dispute resolution through the ordinary courts and multi-stage variants thereof, offer franchisors a wide range of options at their disposal for settling disputes in the contract.
Given the partnership-based nature of the contractual relationship in franchising, a provision in the franchise agreement stipulating that disputes shall be settled exclusively by the ordinary courts is sometimes perceived as confrontational. This is unjustified in light of the following: respectful and solution-oriented conflict management in the franchise system does not depend on whether the franchise agreement provides, for example, for mediation followed by settlement before the ordinary courts or whether arbitration is provided for. The decisive factor is whether processes are provided for within the system and responsibilities are assigned for how to deal with conflict situations that arise and who is responsible for doing so. If an amicable solution cannot be reached using ‘internal resources’, then the rose-tinted glasses must be taken off and the dispute must be fought out as such. Doing so is essential for the protection of the entire franchise system. Ordinary courts of law (among other institutions) are designed for this purpose.
Clear rules, communication, contractual compliance, managing expectations, empathizing with the other party, assigning responsibilities, developing de-escalation strategies, etc. help to manage conflicts that arise in a franchise partnership and make a franchisor less dependent on factors beyond its control.
