Franchise disputes: set the ground rules before expanding

Before franchising a business, it is worth deciding how disagreements with future franchisees will be handled. A disputed charge or a different interpretation of an obligation can damage the relationship if there is no clear procedure. In franchising, preventing disputes does not mean eliminating disagreements: it means creating proportionate, predictable and documented ways to resolve them.

1. Map out potential disagreements before drafting clauses

Start with aspects of the business model that are open to different interpretations. In a company-owned operation, the founder will often resolve these questions informally. In a franchise, you will be dealing with independent business owners, their own investments and contractual obligations that everyone needs to understand in the same way.

Draw up a list of possible situations, such as:

• disagreement over the basis used to calculate a charge;
• questions about whether a promised item or service has been delivered;
• challenges to an operational requirement;
• disagreement over responsibility for correcting a failure;
• allegations of unequal treatment between outlets.

For each situation, record which documents can establish the facts, who can make decisions on behalf of the franchisor and what operational solution could limit losses while the matter is being reviewed.

For example, if a franchisee disputes a charge, the team should be able to reconstruct the calculation and identify the relevant contractual provision. Simply replying that ‘the system calculated it that way’ does not solve the problem.

The aim is to turn predictable points of friction into clear review procedures, without assuming that every complaint amounts to a breach of contract or bad faith.

2. Create an internal negotiation process

Set up an official channel for recording disagreements and assign someone to oversee each case. Telephone calls and messaging apps can help, but important decisions should be confirmed in writing, with context, supporting documents and next steps.

A simple process might have three stages:

1. Recording and clarification: identify the problem, the people involved and the documents needed.
2. Assessment and proposal: compare the facts with the contract and the commitments made.
3. Review by an authorised decision-maker: assess cases that were not resolved at the first stage.

Set realistic internal deadlines for acknowledging receipt and providing a response. Distinguish these from any contractual deadlines for remedying breaches: an acknowledgement does not replace formal notice.

Also decide who can grant reductions, adjust dates or negotiate other solutions. Without clear authority, staff may make commitments they are not authorised to fulfil.

Avoid making the person directly involved in the incident solely responsible for reviewing it. Where the organisation's structure allows, a second review helps separate the facts from personal tensions.

3. Choose mechanisms suited to your future network

In Brazil, Law No. 13,966/2019, known as the Franchise Law, regulates business franchising and repealed Law No. 8,955/1994. Article 7, paragraph 1, allows the parties to choose arbitration to resolve disputes relating to the contract.

This does not make arbitration compulsory, nor does it mean that it is the best choice for every network. The decision should take account of the amounts typically at stake, the complexity of the issues, the costs of the proceedings and the parties' financial resources.

It is important to distinguish between the mechanisms:

• Negotiation: the parties seek an agreement themselves.
• Mediation: an impartial third party facilitates dialogue without imposing a decision.
• Arbitration: one or more arbitrators decide the dispute in accordance with the arbitration agreement and applicable law.
• Court proceedings: the dispute is referred to the courts, subject to the applicable rules and any valid arbitration agreement.

Arbitration must also comply with Law No. 9,307/1996. For standard-form contracts offered on a take-it-or-leave-it basis, specific requirements apply to the enforceability of an arbitration clause. It is therefore not enough to copy a clause from another network: both its wording and the way it is accepted require specialist legal review.

A negotiation or mediation stage may be useful, but it should not be drafted in a way that prevents either party from seeking urgent relief where available.

4. Align your documents and test the procedure

Dispute resolution rules should be made clear before the agreement is entered into. Brazil's Franchise Law requires the franchise disclosure document, known as the Circular de Oferta de Franquia (COF), to include a copy of the standard franchise agreement and, where applicable, the preliminary agreement, together with their annexes.

The COF must be provided at least ten days before the contract or preliminary agreement is signed, or before any fee is paid to the franchisor or to a person or company connected with it. Do not leave important dispute resolution terms to be revealed only at signing.

Check that the contract, internal procedures and information given during the sales process are consistent. An operations manual should not unexpectedly introduce a compulsory dispute resolution mechanism that differs from the one agreed in the contract.

Before offering your first franchise, run through a simulated disputed charge. Check whether the team can find the documents, identify the person responsible and provide a reasoned response. If the process depends entirely on the founder stepping in, revise it.

In practice: prepare a short procedure, choose proportionate mechanisms and have the clauses reviewed by a legal specialist. A structured approach to resolving disagreements protects the relationship and helps build trust within the franchise community.