In the event of a dispute between a franchisor and franchisee the main options open to a franchisor are as follows:

(a) discussion
(b) mediation
(c) termination
(d) arbitration
(d) litigation.

Each of these options is examined in turn.

Discussion

Before taking immediate enforcement action the franchisor should consider contacting the franchisee and discussing the issues involved to see if an amicable settlement can be reached. If initial discussions do not prove fruitful the franchisor may consider arranging for discussions to take place between both parties' legal representatives who will be able to assess the relative merits of each party's case and may negotiate a compromise. The involvement of legal representatives will not necessarily lead to litigation and can often lead to a speedy settlement thereby avoiding the costs of litigation and a breakdown in relations between the parties. A franchisor could also send in 'trouble shooters' to help sub-franchisors if a breach is the result of ignorance or inadvertence.

Mediation

Termination of a franchise can impose extreme difficulties for a franchisor. Bearing in mind the continuing relationship between the franchisor and franchisee, mediation of disputes may be seen as an attractive alternative to termination and/or litigation.

In a mediation system a dispute is submitted to a single impartial individual who will act as a referee in relatively informal proceedings. It is preferable for there to be a mediation clause in the franchise agreement and this should stipulate whether the findings of the mediator will be binding on the parties. In the absence of a mediation clause in the franchise agreement the parties will not have a contractual obligation to mediate but instead must voluntarily and mutually accept going to mediation. A mediation clause may be combined with an arbitration clause so that if mediation does not lead to a resolution of the dispute the parties will submit the dispute to formal arbitration.

The mediation clause should also designate a mediator or at least an arrangement whereby the parties will be able to agree mutually the nomination of a mediator. The main features of international mediation are usually as follows:

(a) Mediation sessions are held with all parties to review issues

(b) A summary of each side's case is presented to the mediator

(c) A mediation report containing findings on the merits of each side's case is provided to each party

(d) The parties hold negotiations to try to settle the dispute based on the report.

Mediation is conducted in confidence and, like arbitration, it should be possible for the parties to avoid any publicity. The franchisor will not wish sub-franchisors/developers/other franchisees to hear of the dispute. The main advantages of mediation are as follows :

(a) Private and flexible

(b) A mutually acceptable trained professional, selected by the parties, as referee

(c) Relatively low cost and, if litigation is avoided, it is a cost effective way of dealing with a dispute

(d) A mediator should be able to dissuade a party from pursuing an unreasonable claim or an excessive sum of money

(e) If there has been poor communication between the franchisor and the franchisee mediation can bring the parties together

(f) The parties are able to explore settlement options

(g) The franchisor and franchisee must work together after the dispute is settled

(h) Mediation sessions can be set up very quickly and can be held at convenient times and locations.

The main disadvantages are as follows:

(a) The mediators available may have little experience of franchising or the business involved

(b) Quick and effective action may be needed to remedy the breach

(c) Mediation (in the absence of a clause in the franchise agreement stipulating that the mediator's findings will be binding) will not produce an enforceable and binding decision. The parties must negotiate a settlement and time and effort may be wasted while the breach remains unremedied.

Mediation in commercial disputes in the UK is new but is likely to develop. The first mediation service in London, International Dispute Resolution Limited, has recently been established and has enlisted a variety of mediators with experience in many industries. Mediation has flourished in the US as high litigation costs have encouraged businessmen to explore alternative dispute resolutions.

Arbitration

Following the increase in international trade over the last decade there has been a vigorous upsurge in the use of arbitration as a method of resolving international commercial disputes. Both parties must agree to the use of arbitration as a means of resolving their dispute. Arbitration has many advantages over civil litigation, the traditional method of resolving commercial disputes. Some of the main advantages of arbitration are as follows:

(a) Flexible procedures

(b) No jurisdictional issues

(c) Neutral arbitrators

(d) Identification of arbitrators on the basis of technical and business expertise

(e) Awards which can be readily enforced through international treaties

(f) Privacy - since the arbitration hearing will not be reported the parties should be able to avoid the adverse publicity which often follows litigation

(g) An arbitration award is generally final whereas a court judgement is usually subject to rights of appeal to higher appeal courts.

The upsurge in the popularity of international arbitration has been recognised by institutions around the world. It has resulted in an increasing number of arbitration centres to meet the demand. National legislatures have responded by establishing improved, streamlined arbitration laws and procedures and national courts usually demonstrate a willingness to provide a hospitable climate for arbitration and to require the parties to comply with contractual obligations to resolve disputes by arbitration. National courts generally interpret arbitration clauses widely so that they cover a greater number of disputes and will usually make it more difficult for parties to challenge arbitration awards in the courts.

Arbitration may be 'institutional' whereby disputing parties may turn to an established institution specialising in arbitration proceedings, or ad hoc whereby the parties may have established their own jurisdiction and rules for the conduct of the arbitrations.

Arbitration systems

There are a multitude of different institutional arbitration systems throughout the world as well as established rules which provide the basis for ad hoc arbitration.

Enforcement of awards

Enforcement of arbitration awards in countries other than the location of the arbitration hearing is now comparatively straightforward following the United Nations Convention on the Recognition and Enforcement of Foreign Arbitrational Awards ('the New York Convention'). Enforcement proceedings are usually taken in states in which the property and assets of the losing party are located. It is unlikely that an arbitration award will be made in the defendant's place of residence/business precisely because the parties to arbitration usually choose a neutral forum.

It may well be that the losing party has assets and property situated in more than one jurisdiction, and this will mean parties seeking to enforce the award will go 'forum shopping'. Factors which should be borne in mind when choosing the appropriate forum are whether the local courts have an international or parochial attitude to foreign awards and whether the forum has a link to the state where the award was made. The question of state immunity is also relevant if enforcement is sought against a foreign government.

The New York Convention is the main treaty on enforcement. There are severe restrictions on any party seeking to resist the enforcement of the award. The formalities of enforcement are simple: the party seeking to enforce the award must go to the court of the forum he has chosen and present the award and the agreement under which it was made. The court will then generally have to enforce the award unless one of the grounds for refusal is satisfied. These grounds include incapacity of the parties or invalidity of the arbitration agreement, denial of a fair hearing, lack of jurisdiction, invalid award, procedural irregularities and public policy.

Enforcement will depend upon whether the parties are signatories to the Convention. An arbitrational award made in any country in the world can be enforced in any state which is a party to the Convention. However, the scope of the enforcement may be limited by article 1(3) of the Convention which provides that states can make two reservations. The first of these reservations is the reciprocity reservation under which contracting states can choose to apply the Convention only to the recognition of awards made in the territory of other contracting states. Out of the 69 state parties to the Convention, 44 use this reservation. It has the effect that only an award made to the contracting state can be enforced in any other contracting state.

The second reservation further limits the applicability of the Convention by providing that a state can agree to apply the Convention only to those disputes considered as commercial under the national law of the state making the award. 25 states have taken advantage of this reservation.

If a party is seeking recognition or enforcement of any award which was not made in a contracting state it will need to establish whether the state, where enforcement is sought, has entered into any other international treaty

In principle, a valid award should be recognised as an enforceable obligation by any country which recognises arbitration as a legitimate means of resolving disputes. In practice, however, this does not always work as enforcement is being sought in local courts, in the defendant's home state, and these courts are more likely to be critical of the award. Commercial pressure can, however, achieve settlements and enforcements even if a local court procedure fails.

Arbitration clauses

Parties can avoid problems at the time of arbitration by stating their choice of law, place of arbitration and an applicable language in a carefully drafted arbitration clause. A standard arbitration clause suggested by the ICC states:

'All disputes arising in connection with the present contract shall be finally settled under the Rules of Conciliation and Arbitration of the International Chamber of Commerce by one or more arbitrators appointed in accordance with the said rules.'

As this clause may lead to various problems it is suggested that a more comprehensive clause be used to prevent disputes over arbitration details.