Buying a franchise: how to agree dispute resolution terms

Good relationships within a franchise network do not mean disagreements will never arise. If the franchisor disputes whether you have fulfilled an obligation or demands an additional payment, a few lines at the end of the agreement could determine how much it costs you to protect your rights. Before buying a franchise, check the governing law, jurisdiction, procedural costs and requirements for sending formal legal notices.

1. Distinguish between governing law and where disputes are resolved

Governing law determines the rules used to interpret the agreement, while jurisdiction determines who decides a dispute. These are separate questions. An agreement may provide for the law of one country to apply and disputes to be resolved in another. The location of the franchisor’s registered office or your outlet does not, on its own, give you the full answer.

Croatia has no dedicated franchise law or specific statutory system of mandatory pre-contractual disclosure for franchises. Franchise agreements are not regulated as a distinct type of contract; they are subject to the general rules of the Croatian Obligations Act, including the principle of good faith and fair dealing. Depending on the issue, the Competition Act and intellectual property legislation may also be relevant. The Croatian Chamber of Economy’s (HGK) Franchise Register is an information resource, not state approval of an agreement or a guarantee of its legality.

For cross-border agreements within the European legal framework, the Rome I Regulation is important in determining the governing law. Where the parties have not chosen a law, its general rule for franchise agreements points to the law of the country in which the franchisee has their habitual residence, subject to specified exceptions. International court jurisdiction is addressed separately by the Brussels I Recast Regulation, where applicable.

Someone buying a franchise for business purposes will generally not be acting as a consumer. Do not therefore assume that you can simply withdraw from the agreement or insist on proceedings in your local court on the basis of consumer rights.

2. Compare court proceedings and arbitration before signing

A clause such as ‘all disputes shall be resolved by arbitration under the franchisor’s rules’ needs clarification before you accept it. It must be clear which rules apply, how arbitrators are appointed, where the legal seat of arbitration is and which language will be used in the proceedings.

Arbitration can offer specialist decision-making and a more flexible procedure, but it is not automatically cheaper or faster. Costs may include institutional and arbitrator fees, legal representation, translations and expert evidence. The grounds for challenging an arbitral award are more limited than the grounds for appealing a court judgment. The Croatian Arbitration Act is relevant to arbitration seated in Croatia.

Before signing, ask for a comparison of two scenarios: a modest financial claim and a dispute that threatens your ability to continue trading. Ask a lawyer to assess:

• where proceedings would take place and whether you would need to instruct a lawyer abroad;
• which language the documentation would need to be prepared in;
• which fees and advance payments you would have to pay before a decision is reached;
• where the other party holds assets against which the decision could be enforced.

A favourable decision is not the same as recovering the money owed. If you are contracting with a foreign company, also check the practical requirements for recognition and enforcement of a decision in the country where it holds assets.

3. Agree a settlement process that does not block legal protection

For everyday disagreements, it is useful to provide for a written complaint, discussions between the people responsible and the option of mediation before formal proceedings. In Croatia, mediation is governed by the Act on the Peaceful Resolution of Disputes. A mediator helps the parties reach an agreement but does not impose a decision on them.

The contractual process should have a clear beginning and end. Specify who should receive the complaint, what it must contain, the deadline for a response and the point at which the dissatisfied party may take further action. Do not accept an open-ended obligation to negotiate ‘until all options have been exhausted’.

For example, you could propose that a written complaint be followed by a meeting of authorised representatives within an agreed period, then mediation if both parties consent. This is a negotiating proposal, not a legally prescribed sequence for franchises.

Make express provision for attempts to reach a settlement not to prevent either party from seeking urgent interim measures. Also, do not assume that an ordinary exchange of messages or negotiations stops limitation periods from running. A lawyer must assess how each step affects the relevant time limits under the applicable law.

4. Keep reliable evidence and check whether legal protection is genuinely accessible

A right to raise a complaint is worth little if you cannot prove that you sent it on time. The agreement should specify addresses for service, permitted electronic channels, rules for updating contact details and when a notice is deemed to have been received.

Keep operational discussions separate from formal notices. A message to a field adviser may not meet the contractual requirements for notifying a breach. Keep the signed agreement, schedules, current versions of the rules, invoices and correspondence in a system you can access even if your access to the franchisor’s portal ends.

Before making your final decision, ask a lawyer to set out the route from complaint to enforcement of a decision on a single page. If that route involves an unclear choice of institution, expensive translations or proceedings you cannot afford, seek an amendment to the clause before signing.

Practical takeaway: choose a franchise only once you understand not just which rights you will have, but how you can enforce them. Clear, proportionate and accessible legal protection is an important foundation for trust within a franchise network.