Arbitration in franchise agreements: what to assess before signing

Before buying a franchise, find out how any dispute with the franchisor would be resolved. The dispute resolution clause can affect costs, travel requirements and your ability to defend your rights. A well-structured franchise relationship also needs to address what happens when dialogue fails. This assessment should take place before you sign, not when the first disagreement arises.

1. Identify the agreed route for resolving disputes

Read the agreement, looking for terms such as court jurisdiction, mediation, arbitration and arbitration clause. They do not mean the same thing and may appear together.

A court jurisdiction clause specifies where court proceedings are to take place. Mediation seeks an agreement with the help of an impartial person, who does not impose a decision. In arbitration, one or more arbitrators decide the dispute, within the limits of the law and the arbitration agreement between the parties.

An arbitration clause is a contractual commitment to submit certain future disputes to arbitration. It is not simply an agreement to attend a conciliation meeting: a valid arbitration agreement can prevent the courts from deciding the merits of the matters it covers.

Draw up a summary answering four questions:

• Is an initial attempt at negotiation or mediation compulsory?
• Which disputes go to arbitration, and which remain with the courts?
• Which institution will administer the proceedings?
• Where will they take place, and which rules will apply?

If the agreement refers to external rules, obtain a copy. Do not assess the clause solely on the basis of the paragraph printed in the draft agreement.

2. Check what Brazilian law allows

Law No. 13,966/2019, Brazil’s Franchise Law, expressly allows parties to choose arbitration to resolve disputes relating to their agreement. This does not make arbitration compulsory for every franchise: the arbitration agreement and its validity must be examined.

Arbitration is also governed by Law No. 9,307/1996, which permits its use for disputes concerning economic rights that the parties are free to dispose of or settle. A domestic arbitral award does not require court approval to take effect in Brazil, and there is no ordinary court appeal simply to reconsider its merits. However, the law does provide for judicial oversight in certain circumstances, such as proceedings to set aside an award.

Extra care is needed where the agreement is classified as a contract of adhesion — a standard-form contract whose terms are not individually negotiated. Brazil’s Arbitration Law sets specific requirements for an arbitration clause to be effective in such contracts. Ask a lawyer to check the classification and formalities; the mere presence of the clause does not settle the issue.

The Franchise Law requires the complete model agreement, including its annexes, to accompany the Franchise Disclosure Document, known in Brazil as the Circular de Oferta de Franquia, or COF. The COF must be provided at least ten days before the agreement or preliminary agreement is signed, or before any fee is paid to the franchisor or a person or company connected with it. This is a minimum advance disclosure period, not a time limit for your review.

3. Estimate the actual cost of using the clause

Do not assume that arbitration will always be cheaper or faster than court proceedings. The outcome depends on the institution, the complexity of the dispute and the rules chosen.

Request the designated arbitration institution’s current fee schedule and work through the costs of a dispute proportionate to your planned investment. Break down the potential components:

• registration fees and administrative expenses;
• fees for a sole arbitrator or an arbitral tribunal;
• legal fees and any expert evidence;
• travel, accommodation and other procedural expenses.

Check who must pay each amount upfront and how costs may be allocated in the final award. Do not confuse an upfront payment obligation with ultimate responsibility for the cost.

Also check whether remote hearings, expedited proceedings or a sole arbitrator are available for certain disputes. These options depend on the agreement and the applicable rules; they are not automatic benefits.

Compare this budget with your financial resources. A clause may be legally sound yet create a significant financial obstacle to challenging charges or enforcing obligations.

4. Negotiate clear rules before committing

Put specific questions to the franchisor rather than simply asking for arbitration to be removed. Ask about the choice of institution, the number of arbitrators, the location and the scope of the clause.

Seek a legal review of contradictory provisions, such as a broad arbitration clause combined with a court jurisdiction clause whose purpose is unexplained. The two can legitimately coexist, including for court measures supporting arbitration, but their relationship needs to be clear.

Also clarify how to seek urgent relief and whether there is a preliminary negotiation stage with a defined deadline. Avoid mechanisms that leave one party waiting indefinitely for a response before it can seek protection.

In practice: before signing, have the clause reviewed, obtain the applicable rules and estimate the costs. Buying a franchise means understanding not only the obligations you are taking on, but also how you can enforce your rights.