Buying a franchise: how to agree dispute resolution terms

The dispute resolution clause is often left until last when reviewing a franchise agreement. Yet it can determine whether you will be able to enforce your rights at an acceptable cost. Before joining a franchise network, check not only what the franchisor promises, but also what procedure you would use to enforce those commitments if the relationship runs into difficulties.

1. Distinguish governing law from where disputes will be resolved

Governing law and jurisdiction are not the same thing. The former determines which legal rules are used to assess contractual rights and obligations. The latter determines which court or other agreed body will resolve a dispute. You should therefore not assess an agreement solely by the franchisor’s address or the language in which it is written.

Croatia has no specific franchise law, mandatory franchise register or mandatory standardised pre-contractual franchise disclosure document. A franchise agreement is treated as an innominate contract: one that is not specifically defined as a distinct contract type in legislation. Where Croatian law applies, the Civil Obligations Act is central to contractual relations, including the rules on performance of obligations and good faith and fair dealing. Depending on the subject of the dispute, other mandatory legislation may also be relevant, such as the Competition Act.

If the franchisor is based outside Croatia, ask a lawyer to review the choice of law and the agreed jurisdiction together. Choosing foreign law does not mean that all mandatory Croatian or EU rules can be excluded. Equally, do not assume that every dispute can be pursued in Croatia simply because your business operates there.

Record four points in your contract summary: the governing law, the body responsible for resolving disputes, the location of proceedings and the language of proceedings. If any of these is unclear, ask for clarification before signing.

2. Assess the true cost of court proceedings or arbitration

The agreement may provide for court proceedings or arbitration. Arbitration is not the same as amicable negotiation: arbitrators decide the dispute, and their decision may be binding. In Croatia, the framework for arbitration is set out in the Arbitration Act, while civil litigation before Croatian courts is governed by the Civil Procedure Act.

Neither method is automatically cheaper or more favourable to the franchisee. The assessment depends on the value of the dispute, the procedural rules, the evidence required and where the proceedings take place.

Before accepting an arbitration clause, check:

• whether the arbitration institution or the arrangements for conducting the proceedings are clearly specified;
• which rules apply and how arbitrators are appointed;
• how many arbitrators will decide the dispute and where the seat of arbitration is;
• which language will be used in the proceedings;
• how advance payments and costs are determined.

For court proceedings, also assess lawyers’ fees, court fees, translation costs, travel expenses and any expert evidence required. Ask for an indicative estimate for a dispute that your outlet could realistically face, such as a failure to provide agreed support. A clause that is acceptable to a large franchisor may make it considerably harder for a small franchisee to enforce their rights.

3. Agree a procedure to follow before formal proceedings

A good agreement allows a disagreement to be addressed first as a specific business problem. A general statement that the parties will resolve disputes amicably is not enough if no one knows whom to contact or when to expect a response.

Propose a written procedure specifying an address for submitting complaints, a responsible contact, a response deadline and a route for involving someone authorised to make a decision. Distinguish routine requests for support from formal notices of breach of contract. A message to a support employee may not meet the contractual requirements for serving a legal notice.

A complaint should identify the contractual obligation, describe the problem, set out the available evidence and state the remedy sought. For example, if agreed training has not taken place, include the scheduled date, previous correspondence and a proposed alternative date.

You can propose negotiations between the people responsible or mediation before further proceedings. However, this stage should have a clear endpoint. A lawyer should check that mandatory negotiations do not hinder timely access to court protection and assess how they affect relevant deadlines. Do not assume that simply submitting a complaint stops the limitation period from running.

4. Protect your business and evidence while the dispute is ongoing

A dispute does not mean that all contractual obligations automatically cease. Unilaterally stopping payments or refusing to fulfil other obligations may create further problems. Before taking such action, seek legal advice on your specific circumstances.

During negotiations, propose a clear distinction between disputed and undisputed amounts, and agree how undisputed obligations will be handled. Also consider access to urgent interim measures where these are needed to prevent serious harm, without waiting for the internal complaints procedure to end.

Keep the signed agreement, schedules, notices, proof of delivery, invoices and relevant correspondence. After an important conversation, send a brief written summary and ask for confirmation of what was agreed. Gather documentation lawfully, while protecting confidential information and personal data.

Practical takeaway: before signing, ask for a clear route from a written complaint to a final decision, along with an estimate of the cost involved. A contractual right is worth more when you can enforce it without placing a disproportionate burden on your business.